Posted on 04/03/2010 2:23:23 PM PDT by Lorianne
Joseph Stiglitz should win a second Nobel Prize, this time for fiction. ___ Book review of ___ Freefall: America, Free Markets, and the Sinking of the World Economy, by Joseph E. Stiglitz
Stiglitz makes bizarre recommendations: the U.S. should look to the example of Trinidad, which tends to the well-being of its people without becoming obsessed by the quantitative measure of its GDP. He praises Ethiopia, one of the poorest countries on earth, for its new freeways, which he hopes will inspire public infrastructure programs in the United States.
Freefall is of no help in understanding the origins of the current crisis or in determining how to remedy it. When Stiglitz attacks market fundamentalism as the cause of all evil, he does not stop to consider how such a regime led the world into unprecedented economic growth from 1983 to 2008. He overlooks the 2007 oil and commodity price spikes, which may have started the recession. Most free-market economists today perceive the 2008 financial crisis as a consequence of the recession and not the cause of it. Inflated real-estate prices, and the financial derivatives based on them, made the crisis global and severe. But such complexity would not fit with Stiglitz’s black-and-white plot.
To build his case, such as it is, he mixes up causes and consequences. When he lays responsibility for the 2008 crash on “deregulators,” he fails to explain why some heavily regulated banks had to be bailed out, while others were able to evaluate their financial risk responsibly and avoid bankruptcy. Perhaps some were better managed than others? Stiglitz shows no interest in such mundane considerations. Some regulated banks did not take excessive risks; others did and had to be bailed out
(Excerpt) Read more at city-journal.org ...
The problem was not bank regulation. The problem was that anytime you have a real estate bubble, you’re going to ultimately have a real estate collapse, and with it, a banking crisis. The bank regulation or lack thereof did not cause the real estate bubble, or the real estate collapse. The affordable housing policies did. And it is no escape from that logic to say that the banks loaned into the bubble. Of course they did. That’s what Congress wanted them to do, in order to facilitate the affordable housing policies. Do you think that more regulations would have prevented that? If so, you’re not listening. If regulators had told banks not to loan to home buyers, Barney Frank would have had a fit. He made sure that they did not stop banks from making real estate loans. In fact, he made sure that there were plenty of real estate loans, and punished banks who were not loaning enough to low income borrowers. So regulation is not the solution. This time, regulation caused the bubble, and the collapse, as well as the financial crisis.
Financial bubbles are as old as financial capitalism. Nothing ever has or ever will prevent them. They are caused by human folly and men making poor investment decisions, that work for a while then blow up. No blame game or political measure for or against them will prevent the next one.
The idiotic pretense that anything bad that ever happens can be outlawed by fiat is childish nonsense. Conservatism used to mean, precisely, seeing through such nonsense; having a more robust, realistic view of the human condition and the limits of utopian minded reform.
It isn't worth sacrificing one particle of economic freedom for all the utopian drivel ever dreamed up. But that doesn't mean all economic problems are the result of utopian drivel. Plenty of it is simply the ordinary course of human events at all times and in all places.
You can't abolish war with a law or one victory. You can't abolish scarcity by not liking it or by "caring" about it. You can't make all men good by wishing they were. And you can't prevent economic ups and downs, with political blame games.
Utopianism is the disease. Not economic ups and downs.
I just look at the two real estate bubbles that caused financial collapses since the Great Depression. The first was the one in the 80’s and the second is the one we’re in now. Both were caused by government. In the 80’s, the S&L expansion and real estate tax subsidies were the cause. The collapse started when they repealed the real estate tax subsidies. And you know what happened this time.
You might get booms and busts without government interference, but you apparently don’t get the kind of bubbles and collapse that brings down the entire financial system without government meddling.
The cause in both instances was human behavior motivated by profit, which eventually morphed into irrational greed. Happens again and again.
Wrongheaded governmental actions aggravated the problem and even prolonged it, but such actions were not the cause. They were more of a symptom.
I don’t agree. As I commonly say, “When one or two banks fail, that is the bankers’ fault. When 130 banks fail, that is Congress’s fault.”
We always have greed. But the creation of the real estate bubble requires planning and coordination, and individuals making economic or investment decisions because of their greed do not coordinate their moves with others who are doing the same. In fact, if anything, they compete against each other. That’s why a bubble of the magnitude needed to bring down the financial system requires Congressional participation.
Well, maybe we’re saying the same thing. Yes, people invested in real estate in order to take advantage of the government subsidies, and I guess you could call that greed. But that is as you say, just human behavior. The guys in Congress knew very well when they passed those subsidies that people would try to take advantage of them, and that would cause a bubble. In fact, that was what they were hoping would happen. That was the whole purpose of the subsidies. If they’d passed the subsidies, and it wasn’t enough, then they would have just increased the subsidies until it generated the desired effect. You can’t repeal human nature, but without the subsidies, human nature would not have created a bubble of the magnitude needed to cause this collapse.
There’s nothing inherently wrong about seeking to profit. The means of obtaining that profit can be wrong. The consequences of it can become detrimental to the economic system as a whole.
To resort to a truism, subsidize something and get more of it, penalize it and get less. You’re attributing far more foresight and even malice to governmental authorities and the regulations they impose, modify and even rescind in a kneejerk fashion with less apparent foresight than the average high schooler.
Is there some insidious group or groups, that plays the system and lobbies their way into influencing laws? There have been in the past, and likely still are. Are there foreign nationals and transnationals, who might see some benefit, to causing a crash, of currency or some other economic measure? There are.
I’m just not buying that the residential real estate crashes, post 1987 and post 2007 were the result of deliberate manipulation to that end.
Only the dead have seen the end of war, and of asset bubbles. They are a side effect of human freedom and the ability to trade capital amounts (credit simply).
Utopias and ideological blame games aren't any more attractive when you do them...
It’s a matter of degree. You can find stock bubbles, gold bubbles, etc., that are not created by government. But it really takes a big bubble to bring down the entire financial system, and you’re not going to find that in the modern economy, with hundreds of millions of investors competing against each other for a gain with the speed of modern computers, except where it is created by Congress.
Men can "herd" all on their own, because credit flocking to a trendy asset class is a positive feedback initially. Exactly the same behavior is seen in every driven oscillator system imaginable, from an electronic circuit to basic mechanics to credit. There is nothing removable about it. It is simply part of the price of economic liberty.
When people are told instead that it is a removable mistake, they damn any arrangement of anything in which it recurs. That way lies perpetual revolution and endless intervention and stridency and extremism and eventually horror, for exactly the reasons Burke explained in the political sphere.
There is nothing fundamentally wrong with capitalism, markets, American finance, modern monetary arrangements, Wall Street, banking, any of it. The attempt to damn any of them because recessions happen or markets go down, is flat crazy. And does not need to be redirected into hatred of this or that minor government program, it needs to be eradicated root and branch as utopian drivel.
Nothing you can propose, say or do, can or ever will eradicate financial crises. You can no more prevent them with any reform or ideological prescription than outlaw gravity by an act of congress. Give it up already.
I guess it’s a moot point because Congress is never going to stop interfering. But if you’ve got to go back to the 19th Century to find an example of a spontaneous bubble causing a financial collapse, I claim victory in the debate. The market system that prevails today is nothing like the market system that prevailed in the 19th Century.
There have been financial crises of all magnitudes as long as there has been economic liberty. You can't eradicate one without eradicating the other and that game it not worth the candle.
The entire exercise of blaming any institution or practice for financial crises, and therefore calling for its abolition, is about as sensible as demanding that anything you please be abolished because men continue to die.
Man is mortal. Men will die whatever you do.
Man in fallible. Free men will occasionally make large mistakes in economic decisions, whatever you do.
Give. It. Up. Already.
Why is this so frickin hard? It used to be the definition of a conservative that they knew this, cold. In their bones.
“Free men will occasionally make large mistakes in economic decisions.”
That’s not what we are talking about here, though. I pointed that out in my opening post. The issue is not whether you make mistakes, but whether everyone makes the same mistake at the same time, and for a number of years needed to cause a bubble the size of the one we just experienced. I maintain that it was not just irrationality. You can stick to your view that men are inherently irrational if you like, but capitalism and the free market system are based on the assumption that they are not. And when you look at this bubble honestly, you can’t say that it was just a bunch of people who happened to make mistakes. It was 535 people who got together and coordinated the mistakes for a whole nation.
This is mere history, and denial of it is utopian nonsense, and has nothing to do with conservatism.
Nobody in congress put a gun to anyone's head and told them to sign mortgages on California houses for 4 times the price of the same house in any other part of the country, and four to five times what it cost to build. Nobody in congress put a gun to anyone's head and told them to buy New Century Financial stock. Idiots at every level did it all on their own, because as long as house prices were rising 14% a year it looked safe, in a rear view mirror a couple of years long, only. Everyone who had just done it had gotten away with it, some making a bundle on it after flipping to the next lot. Monkeys saw, and monkeys did, and hell was paid in consequence.
Just like tulips or cotton or canal bonds or any of the thousand previous episodes.
There is nothing infalliable about markets and there is nothing new under the sun. This isn't a reason to abolish markets. It is a reason not to expect perfection of anything men touch. Men are fallible, fallen creatures and flies of a summer. Used to be, every conservative knew it. Now we are instead surrounded by strident radical ideologues who think their utopian nonsense is "conservative" if they want to fry a different set of institutions from the out and out commies (and in point of fact, half of them want to fry the same bankers either way).
It's a load of crap and I'm not buying it.
“Nobody in congress put a gun to anyone’s head and told them to sign mortgages on California houses for 4 times the price of the same house in any other part of the country...”
No. What they did was they made it profitable in the short term to invest in real estate, to make real estate loans, to build homes. Some people got rich buying and selling homes, some banks made money, and some home builders made a mint, and that drew in even more suckers. But in the end, supply and demand caught up because like tulips, the supply of homes is not limited, and it’s impossible to keep that growth going without forever increasing the subsidy at exponential rates. Sure, there is an oscillatory aspect to it, but it’s more than that. There is such thing as a driven or forced oscillator in which you apply a force in order to assist the oscillatory movement. The sustained force increases the amplitude to absurd levels. That’s what we had. In this case, the subsidies and other pro-housing policies were the force.
As for irrationality, Isaac Newton lost 10000 pounds on the South Sea bubble while he was master of the British mint. He said he could calculate the motions of the heavens but not the madness of men.
Spare me just so stories about how it was all Barney Frank. It is a crock of horse manure.
Don’t confuse a general increase in prices with a bubble. Oil and metal prices reflect global demand and supply pressures more than speculation. True, there was a short time when the price of oil was at $140, and that probably added $40-$50 largely by speculation, but that is not really a bubble of the same magnitude as the housing bubble we just experienced, when the price is at $140—particularly when you are only talking about a few weeks or even days. Now, the price of oil is better than $80, and headed higher. And that is obviously not due to irrational herd mentality. It simply reflects normal supply and demand.
I would suggest, in fact, that the experience with oil proves my point. Yes, there was a period of a few days when the price of oil got up to $140. But that did not last long—not long enough to do lasting damage to the economy. Few people invested at that level, and the ones who did failed to make a profit. Also, some markets are more volatile than others.
Real estate is not that volatile under normal conditions. The guys who make money on real estate in normal times are not the guys who buy and then sell at the top of a bubble. They are the guys who buy a particular property, and then get lucky. The highway is built alongside, the mall goes in across the street, or a factory opens up down the road. When you see that Fannie and Freddie ended up owning trillions of dollars of zombie mortgages, you should be able to see where the problem was. Their mission was to make housing affordable. As you said, they could have simply said “no.” But that would not have satisfied Barney Frank. Barney Frank would have adjusted and did adjust the rules of the game until they did not say “no.”
Notice also that for the most part the problem was in residential real estate. It’s not just coincidence that commercial real estate did not experience as much of a bubble. Fannie and Freddie don’t finance commercial real estate. There was some spillover onto commercial real estate, but if residential had gone up only as much as commercial, we would not be having this discussion. And if we had not had a massive bubble in residential, we probably would not have had any kind of a bubble in commercial.
Property taxes, and a piece of the action whenever real estate changed hands. Not only that, the government was scoring on the income & bonuses generated by the involved parties.
That’s why a bubble of the magnitude needed to bring down the financial system requires Congressional participation.
Right. I see that an Insolvency Denier is on this thread, and says "nay" to your statement "it really takes a big bubble to bring down the entire financial system".
April 3, 2009 - The Financial Accounting Standards Board (FASB) succumbed today to intense pressure from the banking industry and Congress, by relaxing the rules surrounding mark to market accounting.
The banks are STILL insolvent - but they don't have to mark their trash to market. Extend & pretend, kick the can, call it what you want. They need to blow another bubble to get themselves out of this one. Ain't happening.
Now, the price of oil is better than $80, and headed higher. And that is obviously not due to irrational herd mentality. It simply reflects normal supply and demand.
This is liquidity pumped in by the Fed, chasing speculatory dollars in oil - another bubble. California had another drop in demand for gasoline this last year, and fuel usage is down across the country.
Another thing - when the price start REALLY going up again - the consumers (who are cash-strapped from unemployment & flat wages anyway!) are going to remember the ways they cut back last time, which is a hard-learned response, and not so quickly forgotten.
They're going to jam the brakes on their consumption so hard it'll blow your mind. They had a hard time LEARNING to cut back, but now they know how.
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