| Our friends in the financial sector have given capitalism a black eye.
|
Posted on 06/16/2008 9:32:10 AM PDT by JerseyHighlander
U.S. FINANCIAL CRISIS HAS GIVEN CAPITALISM BLACK EYE
Every year the Milken Global Conference hosts a roundtable of Nobel laureates in economics, chaired by the financier Michael Milken. This year's discussion, held in Los Angeles April 29, includes Gary Becker (1992), Myron Scholes (1997), Michael Spence (2001) and Ed Phelps (2006). In this excerpt, the Nobel laureates discuss the depth of the U.S. financial crisis, its effect on the rest of the world and the commodity price rises for oil and food.
By Gary Becker, Myron Scholes, Michael Spence and Ed Phelps Michael Milken: Almost 50 percent of the world's growth in the period 1981-1995 came from the United States and Japan. Japan and Germany together in those years accounted for about 25 percent of growth. In the last decade, however, while U.S. growth has remained about one quarter of the world growth, Japan's growth has contributed less than 1 percent of world growth and Germany 3 percent. The growth in China, India and Brazil have taken up that slack.
This raises the question of whether the new phenomenon of "decoupling" is taking hold -- the notion that world growth is less and less dependent on the Western economies. In particular, one wonders what effect, if any, the current U.S. financial turmoil will have on these new, strongly growing countries.
Michael Spence: Decoupling is too strong of a word for now. What is different is that the countries that grew quickly 10 or 20 years ago had small mass in terms of GDP or trade. Now, to take the case of China, its 10 percent annual growth, at current exchange rates, equals a 2 percent increment of growth in the United States. So we are indeed in a transition period. But I'm sure my grandchildren will live in world where economic distribution is different. We are seeing a snapshot of that in process.
It is true there are more growth poles that are important in the world now than ever before, but at the same time the rapid growth in developing countries, especially the poorer ones, is export-led. So those countries are not going to decouple from the major Western economies
Myron Scholes: Because of comparative advantage, countries are idiosyncratic. Policy trajectories and investments sometimes turn out to be profitable, in which case they have a larger share of global GDP, and sometimes not. Japan, for example, was a major competitor with the U.S. in patents and innovation until after the 1990 crisis when their real estate and securities bubble burst. Since then, they have had to retrench and recapitalize, contributing little to growth.
Milken: Confidence in Japanese financial institutions has fallen dramatically around the world and at home. You can see the consequences today: Sixty-six percent of all assets in Japan today are in government securities or bank deposits. In short, they have elected not to invest.
Gary Becker: There are two aspects of decoupling. One is the effect of the U.S. on others. How will our financial turmoil affect others in terms of being more cautious about deregulation in their own markets? I do think current U.S. problems will lead to less attractiveness abroad to the low-regulated aspect of American financial markets. The U.S. will also see more regulation. Others countries will say, "See, the U.S. is not so great; now it has slipped badly." That would be a mistake, but I do think that is one consequence.
The other aspect is the effect of the rest of the world on the U.S. China, India and Brazil will continue with rapid growth, and that will be beneficial for the U.S. because we can still sell to them.
Ed Phelps: Our friends in the financial sector have given capitalism a black eye. Suddenly capitalism is held in less awe around the world. That is a very serious impact.
Coupling and decoupling works through two channels, and it works differently in each. When the U.S. goes into a slump, that is tough for exporters in the rest of the world. So, production of goods for export tends to fall. At the same time, when the U.S. goes into a slump, that tends to reduce real interest rates in the United States -- which to some extent pushed down real rates around the world. That can send up asset prices globally and actually stimulate investment because investors are looking for higher returns.
So there are these two opposite effects, one through trade and one through asset prices.
Up until the 1980s, my conviction was that the asset prices were the dominant channel. Fiscal stimulus in the U.S. did more damage to the rest of the world by raising world interest rates and lowering overseas asset prices than it did good by raising the demand for exports. Because trade has become a much larger proportion of economic activity in the last 20 years, I now think it is a horse race between the two.
Milken: Another Nobel Laureate, Joseph Stiglitz, has said recently that the U.S. is facing one the worst downturns since the Great Depression. Does anyone agree with that?
Spence: That is very unlikely. It would take mistakes in policy in a number of areas to cause that outcome. The American economy is functioning remarkably well in view of the financial turmoil. The rest of the world has not been directly affected in financial terms by our problems. There is a lot of steam out there in the rest of the world.
China has an enormous set of fiscal resources they will use if there is a downturn in exports to stimulate their domestic economy. That is a good thing because they need to shift more focus to stimulating consumption at home.
China's debt/GDP ration is under 20 percent -- that is way low by global standards. Their savings rate is absurdly high, which has led to the controversial and ridiculous current surplus, which they need to get rid of. When you add that up, they have tremendous capacity.
We may be going through the bumpy process of returning to equilibrium in our economic relationship with China.
Becker: The unemployment rate in the U.S. now is 5.1 percent. Unemployment was 25 percent in the Great Depression. We are so far from that, it is ridiculous. We won't even get close. Things may get worse than at present. But at the outside, the only issue is whether unemployment might rise somewhere between 6 and 9 percent.
Phelps: I'm surprised at how slow unemployment has been rising. So far, this downturn barely qualifies as an official recession, let alone a Great Depression.
Scholes: It is erroneous to compare this to the Great Depression. But there is more unraveling to come. We have to worry about effects on the housing market and where it is going to end. Will the housing shock lead to consumption fallout, which leads to more unemployment and further consumption fallout?
There has to be new learning about the affordability of a home. Banks have already written off $250 billion in losses. Some say that could reach a trillion. Housing prices in some places like Southern California might have to fall 40 percent from their peak to clear markets. We have a ways to go in this adjustment.
Becker: In the end, we would do best to look back on how the U.S. had dealt with past crises. The U.S. has responded to so many shocks in recent times -- the bursting of the Internet bubble, 9/11, the Iraq war, the twin deficits (the current account deficit with China and the huge budget deficit) -- yet we've done well. As I read history, we have a flexible economy. Just like in the past, the U.S. has a great capacity to absorb shocks. Europe or Japan doesn’t have that kind of flexibility. From this perspective, it is hard to be pessimistic about America's economic prospects.
There is one other area of concern globally, and that is the price rises in oil and food. Oil price increases are driven by increased demand, including from China and India. Food price increases, though, are in large measure supply-driven; there has been a reduction in supply due to the shift of acreage from food crops to corn for biofuels. That means more corn is grown and less soybeans. As corn and soy prices increase, the consumer shifts to rice, which causes the price of rice to go up.
So, supply-and-demand-driven rises are merging. Oil supply can't be increased without sufficiently high prices, which will spur further exploration and investment. To get food prices down, you can increase acreage and improve productivity with technology. The food crisis will be solved by supply adjustments.
Spence: The poorest spend 60 percent of their income on food. For now, we need a rapid response to malnutrition whatever the long-term solutions. Over time, productivity can increase, as was the case with the Green Revolution. Yet, 50 percent of Chinese still work in rural agriculture and 70 percent of Indians. Capital-intensive agriculture and higher productivity would displace them from their living. It’s a double-edged sword.
Scholes: If you move too fast to improve productivity in food, you create a surplus population that is forced to move to the already over-urbanized cities. That is a huge cost. There are 1.25 billion people in agriculture in India and China. Where will they go?
(C) MILKEN GLOBAL CONFERENCE/GLOBAL ECONOMIC VIEWPOINT DISTRIBUTED BY TRIBUNE MEDIA SERVICES (JUNE 5, 2008)
I remember when the stock market fell in 1987, the media made it sound like we were going to see the bodies of CEO's flying out of their office windows. Folks were horrified that the Japanese were buying up real estate all over the country and were worried that Japan was going to clean our clocks, economically. We began to recover from that, only to see a real estate downturn in the early 90's that saw values fall almost as much, in proportion, as they've fallen this time. By the mid 90's those losses had been recovered, and values were up more than 50% over the 1988 prices. There was another small real estate downturn in the late 90's, then it began surging again.
I guess the financial media has to have something to write about, and taking dramatic license seems to be the norm for what passes for journalism nowadays.
Obviously the title was written to provoke the reader. The economists do not see the situation as grimly as the journalist’s sensationalist title.
What financial crisis?
Some rich democrats lost a little money making unsound gambles?
This has been a daily event for 350 years on this continent.
Yada, Yada, Yada. You know hot I feel about things generally and CNN in particular.
Reuters reported yesterday that $ 4 Trillion has been lost by U.S. homes buyers since 2006. Mortgages were repackaged and sold as exotic derivatives. Many of these garbage investments are worth about 20 cent on the dollar. Total value of these exotic derivatives is alleged to be about 'One Quadrillion.' (Reports linked here. Scroll down).
That is a whole lot of funny money floating out there. Shiploads of it. 'SOS' to coin a term. But Benny can fix it. He knows how to fix everything by giving Wall Street more money to lend out. Does this seem strange to anybody else ? I mean -- the idea of fixing a worldwide financial crisis by lending more money _______ ?
Benny Bilderberger has the answers. He sure does. 'Nuff said.
In actuality, we haven't even had one quarter of negative growth in the US despite the "crisis" we've been going thru for months..
Sheesh. What a load of bunk this whole thing is.
This current generation has NO IDEA what a real financial crisis is....our parents and grandparents who lived through the 1930’s Depression and then WW2 know what sacrifice and challenging times were all about. America and it’s citizens
survived and then thrived after that REAL crisis. We are now in a period of financial strain not crisis...although it could progress to that....immoral sewage is corrupting our land within....God will withhold blessings if necessary to grab our attention.
If most people understood the risk inherent in exotic investments and/or knew the degree to which such highly-leveraged derivatives now act as the support structure for our global economy, they would be scared (bleep)less. The notional value of these instruments now exceeds the gross national product of the planet. Some analysts tell me that this is a meaningless comparison; perhaps because they trust their mathematical models to work perfectly more than I fear the impact of an inadvertently inverted denominator.
Yeah, times are a little tough right now, but last time I went to the gas station they were still in business and the gas station down the street that was selling gas for 10 cents less had a line back to the streets. Somebody should inform those poor fools waiting in line for cheap gas that capitalism has failed.
If anything, this latest "crises" show how well it stands up to extreme events. But hey, maybe I'm wrong and we should all look to Zimbabwe to see how much better a society can become if we just get rid of capitalism.
In many ways, the trouble in looking at economics is the assumption that it is a stable thing. In fact, it is a dynamic and vital system, reflecting the actions of the people who propel it.
A good analogy is to compare it to a complex martial art.
A student can only learn basic principles in cooperation with their teachers and peers. But then they must use those basic principles in real time competition against opponents who are also skilled. Simultaneous offense and defense. Constantly looking for an edge, some modification, some weakness, some innovation. Having tricks up one’s sleeves. Even having the ability to bend the rules, or outright cheat, without getting caught.
Importantly, talent is just as important in economics as it is in martial arts. Some people will just be better fighters, no matter if it is boxing or Kung-fu. And a lot of people can’t fight their way out of a paper bag.
The failure of Marxism was that it is, and still does, assume that economics today is the same as it was in the 19th Century. That is why, for example, in the old Soviet Union, for a long time, they judged productivity based on *weight*. A company that produced 3 additional bridge bolts in a month was considered far more productive than a company that made tens of thousands more eyeglass screws than normal.
And that is why bridge bolts were a lot easier to get than eyeglass screws.
So how does this translate to modern economics?
The assumption for regulators *has* to be that someone has thought up a new get-rich-quick scheme, and that all the big money men are going to want to get involved.
For example, as soon as the subprime mess collapsed, most of the hedge funds, and banks, still looking for double digit profits, started speculating heavily in crude oil. And when the oil bubble bursts, they will all stampede to the next opportunity to get rich quick.
So while the regulators can’t really police all eventual outcomes, they need to learn to bust up such bubbles when they are still small, by limiting who can invest in them and with how much.
In past, they have been willing to accept bubbles bursting and their concomitant pain, in exchange for the pleasures and profits of creating the bubbles in the first place.
However, the regulators have to approach it as they would an attempt to corner a market. Be willing to intervene and say that those who have made it with the new trick get over, but there are no more rooms in the inn.
This will still encourage market innovation, but will keep too many passengers from climbing aboard the rowboat.
(editorial note: let’s have a cheer for mixed metaphors)
I think that if you look at the financial industry itself, you will find people who are out of work:
Last One Left, Please Turn Out the Lights
Wall Street is in the midst of its biggest, ugliest, worst round of layoffs in decades.
* By James J. Cramer
* Published Jun 15, 2008In 25 years on Wall Street, I have never seen things this bad. We’ve had some tough times: the 1987 stock-market crash, the collapse of the once-all-powerful Drexel Burnham Lambert, the immolation of Long Term Capital, the post-9/11 calamity, and the dot-com implosion. Every one of these events rocked the Street, causing pay cuts and layoffs and creating a sense of doom. But this time is different; it’s doom itself.
Wall Street closely guards its layoff numbers, but piece together the evidence and a grim picture appears: an estimated worldwide total of 4,000 dismissals at Morgan Stanley, 5,000 at Merrill Lynch, 7,000 at UBS, and 16,000 at Citigroup. Even the extremely profitable Goldman Sachs is letting people go in some departments. Then there’s Bear Stearns. A year ago, Bear was the firm to work at. People talked of the Era of Bear. Now it’s gone. Vanished. With more than 10,000 of its 14,000 former employees either looking for work or soon to be laid off by its new owner, JPMorgan. Right, JPMorgan—the firm that seemed to pants the Fed and Treasury when it snapped up Bear Stearns for a pittance. Well, it now appears possible that Morgan may have grossly underestimated how terrible the Bear bond portfolio may be.
...
( http://nymag.com/news/businessfinance/bottomline/47823/)
Here's Bernanke's testimony in October of 2005 - at the very height of the speculative and criminal madness of the Late Great Housing Bubble:
"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas. * * *"
What he should have said:
"The US and world housing markets are caught up in a speculative and fraud-filled madness, one that will come crashing down in a historic way, with many markets falling 30%, 40%, 50% and more. Housing's historic fundamentals led by the price-to-income and price-to-rent ratios have become significantly and obviously distorted by massive criminal mortgage fraud and rampant speculation. This will all end soon, and in tears."
>> I am not so egotistical as to add comments to these Nobel Laureates opinions, they speak for themselves.
So, these communists are hot stuff, and untouchable, because they’re “nobel laureates”?
Say... aren’t Algore and Peanut Farmer Carter also bigshot Nobel Laureates?
You don't even have to go back to the depression. Today's situation isn't even as bad as the 70's stagflation.
| Our friends in the financial sector have given capitalism a black eye.
|
Funny not one word on how the DEMOCRATS and their Marxist views and regulations is responsible for the current downturn.And never'll be heard, a discouraging word. (About the democrats.)
Stupid beyond belief.
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You should see the other guy. It was so bad — how bad was it? — it was so bad, they call it, "The collapse of the Soviet Union."