Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Questions for Bernanke (Simon Johnson)There is somewhat suddenly some opposition to Ben Bernanke's reconfirmation as Fed chair, as reported at the New York Times, Roll Call, and elsewhere, with Barbara Boxer, Russ Feingold, and Bernie Sanders coming out against reconfirmation. On the economics blogs there's some turmoil regarding Bernanke, too, with Calculated Risk saying "we can do better," Brad DeLong saying "Don't Block Ben!" and Paul Krugman saying he's torn.One comment I liked was from Yves Smith at Naked Capitalism, who took issue with the Times article's references to "populist anger" (Krugman, in his blog, also connected Bernanke's changing fortunes with the Mass. special election): The real issue is that the Fed did a horrid job in the run-up to the crisis (although not Chairman at the time, Fed records show that Bernanke was a major architect of the super-low interest rates earlier in this decade that super-charged the credit bubbles, and has long been manifestly uninterested in regulation). So the issue is competence. The public's anger is warranted, and reflects lack of sufficient action on real, festering problems. Here's an interesting piece by Simon Johnson at HuffPo: Ben Bernanke's reconfirmation as chair of the Federal Reserve is in disarray. With President Obama having launched, on Thursday morning, a major new initiative to rein in the power of—and danger posed by—our leading banks, key Senators rightly begin to wonder: Where does Ben Bernanke stand on the central issue of the day? I can't remember whether I posted this piece by David Leonhardt from earlier this month, which counts against Ben, as does the article we ran back in July by Jerry Friedman, Bernanke's Bad Teachers. It will be interesting to see what happens. Labels: Ben Bernanke, Brad DeLong, Christopher Dodd, Paul Krugman, Simon Johnson, The Fed, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Off the HookTwo good items on the Financial Crisis Inquiry Commission; hat-tip to LF. The first is from Newsweek Online:Off the Hook Read the rest of the article. And this is from Paul Krugman's column in yesterday's Times: Bankers Without a Clue Read the rest of the column. Labels: bailout, financial crisis, Financial Crisis Inquiry Commission, investment banks, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Krugman vs. Hudson on SamuelsonI was alerted by this post on Naked Capitalism to a back-and-forth between Paul Krugman and Michael Hudson on Paul Samuelson.It started when, on Dec. 14th, the day after Samuelson died, Counterpunch re-published a paper by Michael Hudson from back in 1970, shortly after Samuelson was awarded the recently-established Nobel Prize in Economics. Here's a tidbit: This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual—Paul Samuelson—described in the words of a jubilant New York Times editorial as "the world's greatest pure economic theorist." And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation's colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject. Krugman responded to Hudson on his NYT blog. (As one commenter ("attempter") on Naked Capitalism pointed out, Krugman doesn't even mention Hudson by name: "Krugman couldn't even bring himself to write Hudson's name, but just linked to the anonymous post. (Of course K is always very respectful of anyone properly ensconsed in the Establishment, even where he disagrees with them.) Quite the contrast with his protests over how he and others who were correct on Iraq remain marginalized on that subject.") Here is all of Krugman's post: A number of people are linking to this reprinted critique of the work of the late Paul Samuelson. I could point out that the critique thoroughly misunderstands what Samuelson was saying about international trade, factor prices, and all that. But there is, I think, an interesting point to be made if we start from this complaint:Can it be "scientific" to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied?Actually, there was a time when many people thought that institutional economics, which was very much focused on historical context, the complexity of human behavior, and all that, would be the wave of the future. So why didn't that happen? Why did the model-builders, led by Samuelson, take over instead? L. Randall Wray of the University of Missouri at Kansas City (where Hudson teaches, along with lots of other great heterodox economists, responded on behalf of Hudson at the UMKC econ blog. Wray says that Krugman's claim that "Samuelson-type economics" won the day because it had something useful to say in response to the Depression is "bizarre, to say the least," and he gives six reasons for thinking so. Here are the first four: First, Roosevelt's New Deal was in place before Keynes published his General Theory, and it was mostly formulated by the American institutional economists that Krugman claims to have been clueless. (There certainly were clueless economists—those following the neoclassical approach, traced to English "political economy".)Read the rest of the post. And last but not least, here's Michael Hudson's response to Krugman, also at the UMKC econ blog. Labels: Counterpunch, Great Depression, institutional economics, Keynesianism, L. Randall Wray, Michael Hudson, Paul Krugman, Paul Samuelson, UMKC Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Copenhagen Climate TalksThe long-awaited talks start today, with progressives mostly pessimistic about the outcome. Bill McKibben makes a case for pessimism at TomDispatch—sobering and well worth reading. Paul Krugman claims to be optimistic in his New York Times op-ed today, but based on a remarkably apolitical analysis of the situation (cutting carbon is affordable and makes sense, so it will happen??!!).As Copenhagen begins, it’s also worth looking back at this post on Slate from last February by a fellow at the Shorenstein Center at Harvard (and Bloomberg News columnist) who looked at media coverage of climate change. He lays out the high degree of consensus among economists of most stripes on the economics of climate change: that the benefits of prompt strong action far outweigh the costs. Then he looks at how wrong most media coverage of the economics has been. Not the only factor that explains why public pressure is lacking in the United States on this issue, but no doubt one of them. Labels: Bill McKibben, climate change, Copenhagen Climate Conference, Eric Pooley, Paul Krugman, Slate Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On the StimulusPaul Krugman's column in today's New York Times is on the stimulus and the deficit, and how Wall Street is scaring the Obama administration into not doing the right thing with a second stimulus to create jobs.This article from Saturday's Times indicates that there's now a consensus among economists that the stimulus was a good idea (and that more would be better). (Today's Times, however, has an article that worries about U.S. government debt repayments.) And the lead article on our website, John Miller's "Up Against the Wall Street Journal" column, argues that the deficit isn't as worrisome as the alternatives. And here is a piece on these topics by Edward Harrison, guest-blogging at Naked Capitalism, arguing for a focus on job-creation--direct if possible. Labels: deficit, Edward Harrison, John Miller, Naked Capitalism, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on Krugman on JobsFrom the fantastic Yves Smith at Naked Capitalism:Krugman on the Need for Jobs Policies Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June (unfortunately in heavy book writing mode, and so did not get to see as much as I would have liked) and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy (although I had no idea of what norms there might be). Krugman holds Germany up as an example of the merits of employment oriented policies (which had been the norm in America prior to the shift to "markets know best" posture (and more aggressive anti-union policies) inaugurated by Reagan: Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result—but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.Yves here. Krugman does Germany an injustice by failing to contest US prejudices about European (particularly German) labor practices. If German labor practices are so terrible, then how was Germany an export powerhouse, able to punch above its weight versus Japan and China, while the US, with our supposedly great advantage of more flexible (and therefore cheaper) labor, has run chronic and large current account deficits? And why is Germany a hotbed of successful entrepreneurial companies, its famed Mittelstand? If Germany was such a terrible place to do business, wouldn't they have hollowed out manufacturing just as the US has done? Might it be that there are unrecognized pluses of not being able to fire workers at will, that the company and the employees recognize that they are in the same boat, and the company has more reason to invest in its employees (ignore the US nonsense "employees are our asset," another line from the corporate Ministry of Truth). A different example. A US colleague was sent to Paris to turn around a medical database business (spanning 11 timezones). She succeeded. Now American managers don't know how to turn around businesses without firing people, which was not an option for her. I submit that no one is willing to consider that the vaunted US labor market flexibility has produced lower skilled managers, one who resort to the simple expedient of expanding or contracting the workforce (which is actually pretty disruptive and results in the loss of skills and know-how) rather than learning how to manage a business with more foresight and in a more organic fashion because the business is defined to a large degree around its employees. Read the original post. Labels: fiscal stimulus, Germany, jobs, Paul Krugman, unemployment, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How Did Economists Get It So Wrong?From tomorrow's NYT magazine, apparently (though the dateline on the web version says Sept. 2nd); hat-tip to Arpita B.How Did Economists Get It So Wrong? By Paul Krugman I. MISTAKING BEAUTY FOR TRUTH It's hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes—or so they believed—were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled "The State of Macro" (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that "the state of macro is good." The battles of yesteryear, he said, were over, and there had been a "broad convergence of vision." And in the real world, economists believed they had things under control: the "central problem of depression-prevention has been solved," declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making. Last year, everything came apart. Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable—indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed's best efforts. And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration's stimulus plans are "schlock economics," and his Chicago colleague John Cochrane says they're based on discredited "fairy tales." In response, Brad DeLong of the University of California, Berkeley, writes of the "intellectual collapse" of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten. What happened to the economics profession? And where does it go from here? As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn't sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession's failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets—especially financial markets—that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation. It's much harder to say where the economics profession goes from here. But what's almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic "theory of everything" is a long way off. In practical terms, this will translate into more cautious policy advice—and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems. II. FROM SMITH TO KEYNES AND BACK The birth of economics as a discipline is usually credited to Adam Smith, who published "The Wealth of Nations" in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of "externalities"—costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of "neoclassical" economics (named after the late-19th-century theorists who elaborated on the concepts of their "classical" predecessors) was that we should have faith in the market system. This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: "Depressions are not simply evils," declared Joseph Schumpeter in 1934—1934! They are, he added, "forms of something which has to be done." But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions. Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, "The General Theory of Employment, Interest and Money," as "moderately conservative in its implications." He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention—printing more money and, if necessary, spending heavily on public works—to fight unemployment during slumps. Read the rest of the article. Labels: Adam Smith, depression, economics profession, Keynes, Paul Krugman, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Latest Inequality Figures (To 2007)From Paul Krugman's blog. For perspective, here's a chart showing corporate profits from 1996 (and another, going back to 1947--scroll down about 2/3 of the page).Labels: Emmanuel Saez, financial crisis, income inequality, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Quote of the dayFrom Paul Krugman's blog:... And just as an illustration: a number of people have pointed this out, but here's the latest in the "Obama's health reform will kill people" news: Investor's Business Daily--which poses as a reputable source of financial information--opines that People such as scientist Stephen Hawking wouldn't have a chance in the U.K., where the National Health Service would say the life of this brilliant man, because of his physical handicaps, is essentially worthless. That would be Stephen Hawking, British professor, who was born in the UK and has lived there for his whole life. Labels: Barack Obama, health care reform, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lose Money Get RaiseThe New York Times has a nice chart showing how CEOs from public companies are making out like bandits with massive pay raises even while their bottom lines plummet.Some tidbits: ArcherDanielsMidland CEO Patricia A. Woertz saw her compensation jump 397% to $15 million from 2007 to 2008 while profits fell 17%. Data giant EMC's CEO Joseph M. Tucci a 148% raise in 2008 to $11.7 million while the company lost money. On a similar note, Paul Krugman laments that compensation for investment bankers is zooming back up to levels from pre-meltdown days. As he notes: there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks. --d.f. Labels: ceo pay, compensation, Corporate Swindles, Daniel Fireside, executive pay, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Quiet Coup (Simon Johnson)This article, which hypothesizes that an "American financial oligarchy" has (re)emerged and is turning the United States into a Banana Republic, is getting a lot of attention. (See our Jan/Feb 2009 cover story for a related argument, though the meat of this one is the financial elite part.) Krugman mentioned it in his March 29th column. And Brad DeLong has a post about it on his blog, with many comments, some of them interesting. The excerpt I'm giving below is not from the beginning of the article, fyi.The Quiet Coup By Simon Johnson | The Atlantic | May 2009 ... Becoming a Banana Republic In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people. But there's a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a "buck stops somewhere else" sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel. But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits—such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside. The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry's ascent. Paul Volcker's monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services. Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent. Read the full article. Labels: Brad DeLong, financial crisis, oligopoly, Paul Krugman, recession, Simon Johnson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hey Paul Krugman (A Song, A Plea)Catchy tune from YouTube. Hat-tip to Bryan S.Labels: bailout, financial crisis, Paul Krugman, Timothy Geithner, YouTube Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Market Up Krugman DownThe Dow Jones Industrials soared nearly 500 points today (about 6%) on news of the Geithner plan to buy up toxic bank assets. The stocks of troubled banks did particularly well, Citibank up 17%, Bank of America 18%, JPMorgan Chase up 18%, and Wells Fargo up 17%.As usual, if Wall Street is happy about a bailout plan, taxpayers should be worried. From Krugman: Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy - specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. Read the rest of the column here. In short, it won't work, it will enrich private investors at public expense, and it will close the door to other solutions that could work. Labels: bailout, Dow Jones Industrial Average, financial crisis bailout, Paul Krugman, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Europe Defended Against KrugmanIn a New York Times op-ed Monday, Paul Krugman criticized European governments for under-reacting to the financial crisis:The clear and present danger to Europe right now comes from a different direction—the continent’s failure to respond effectively to the financial crisis.A strong rebuttal appears on the Models & Agents blog (also posted on RGE Monitor). Here's an excerpt: Krugman’s latest “prey” are European policymakers, in an op-ed piece that is so shallow and uncorroborated in its assertions, and so one-size-fits-all in its prescriptions, that it might have well been written by an American freshman student of European studies in a rush to finish his midterm exam.Read the whole piece here. Labels: Europe, european central bank, financial crisis bailout, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Couple of Items on the Bank BailoutHere are a couple of items on the bank bailout that I've been meaning to post. First is a post from back in late February (seems like years!) on Megan McArdle's blog at the Atlantic (whose spiffy redesign I admire, if not the politics of its columnists). It is a response to this post on Paul Krugman's blog at the New York Times, but it relates to Fred Moseley's cover article in the March/April issue of D&S. Here's McAdle's post in full:Lost I asked Fred Moseley (who, again, wrote our current cover article on bank nationalization) how he would respond to McArdle. Here's what he wrote back to me: My main response to McArdle is this: if it is true that the only way to avoid an economic catastrophe is to bail out the banks and their bondholders with taxpayer money, then I would say that this strengthens the case for the nationalization of systematically significant banks. If taxpayers have to pay for their losses this time, then surely we want to make sure that we never have to pay again, that we are never put in this situation again. And the best way to ensure that it never happens again is to nationalize the systemically significant banks. Then we would never again be forced to decide between bailing out the bondholders or economic armageddon. When Fred says "the only way to avoid this is real nationalization," he's including under the rubric of "nationalization" the possibility that the gubm't could set up "good banks," and I'm assuming that in that scenario the "too big to fail" banks could be allowed to whither and die (i.e. enter into bankruptcy, and let the good assets be sorted from the bad in court). This is what Joseph Stiglitz seemed to be saying in his presidential address to the Eastern Economics Association meetings a few weeks ago (about which I blogged here; his article in the current issue of The Nation seems to be more of a proposal for pseudo-(i.e., temporary) nationalization, however). Something like a "whither and die" proposal also seems to be Dave Lindorff's position in a recent piece over at Counterpunch: The futility and stupidity of the Fed's and the Obama administration's policy of pumping ever more money into failing banks and insurance companies in a vain effort to get them lending again was demonstrated—if anyone was paying attention—by the collapse in auto sales this past month, with all the leading companies, Ford, GM and Toyota, reporting sales down by about 40%. Read the rest of the article. Labels: bank nationalization, credit crisis, Dave Lindorff, financial crisis, Fred Moseley, Joseph Stiglitz, Megan McArdle, nationalization, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Revenge of the Glut (Krugman)Today's column from Paul Krugman is quite helpful. The connection he draws at the end with the paradox of thrift is particularly interesting. Plus the point that many of the economies that are in the most dire straits (Iceland, Ireland, Baltic states) are the very ones that the neoliberals praised as being the most "free" (because loosey-goosey and deregulated). The United States falls into that category too, of course, but is better off because of the dollar's reserve currency status. And the quote of Bernanke calling the U.S. financial sector "sophisticated" four years ago is priceless.By Paul Krugman Remember the good old days, when we used to talk about the "subprime crisis"—and some even thought that this crisis could be "contained"? Oh, the nostalgia! Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We're living in a world of troubled borrowers, ranging from shopping mall developers to European "miracle" economies. And new kinds of debt trouble just keep emerging. How did this global debt crisis happen? Why is it so widespread? The answer, I'd suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come. The speech, titled "The Global Saving Glut and the U.S. Current Account Deficit," offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia. In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what's happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world. The result was a world awash in cheap money, looking for somewhere to go. Most of that money went to the United States—hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies. Still, much of the global saving glut did end up in America. Why? Mr. Bernanke cited "the depth and sophistication of the country's financial markets (which, among other things, have allowed households easy access to housing wealth)." Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors. And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. "Reforms have made Iceland a Nordic tiger," declared a paper from the Cato Institute. "How Ireland Became the Celtic Tiger" was the title of one Heritage Foundation article; "The Estonian Economic Miracle" was the title of another. All three nations are in deep crisis now. For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday's miracle economies have become today's basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries' currencies. Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed—and that has taken a terrible toll on the industrial heartland. Similarly, Europe's bubbles were mainly around the continent's periphery, yet industrial production in Germany—which never had a financial bubble but is Europe's manufacturing core—is falling rapidly, thanks to a plunge in exports. If you want to know where the global crisis came from, then, think of it this way: we're looking at the revenge of the glut. And the saving glut is still out there. In fact, it's bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust. One way to look at the international situation right now is that we're suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off. So that's how we got into this mess. And we're still looking for the way out. Labels: Baltic states, Ben Bernanke, dollar, Estonia, financial crisis, Iceland, Ireland, paradox of thrift, Paul Krugman, subprime crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Stiglitz Criticizes O.'s Speech, Favors Single-PayerThis seems pretty explosive to me: Nobel-Prize-winning economist Joseph Stiglitz came put in favor of a single-payer universal health program as "the only alternative" in an interview with Amy Goodman on Democracy Now!. Hat-tip to Dr. Christine Adams of Health Care for All Texas. Very interesting also that he also criticizes Obama as having "confused saving the banks with saving the bankers." (Amy Goodman's phrase, but Stiglitz responded: "Exactly.")There's also a discussion of nationalization, and from what I can tell Stiglitz calls for a Swedish-style "nationalization," which is really just temporary receivership (or what Krugman usefully calls "preprivatization"—though this is what Krugman favors too). This puts him barely to the left (on this issue at least) of Alan Greenspan, who as we've reported here, has said that "nationalization" will probably be necessary. Wish Amy had asked him about full, permanent nationalization... Click here for Fred Moseley's argument for it in the March/April issue of D&S. We'll have an article about single-payer in that issue too. Here is the beginning of the DN! transcript: AMY GOODMAN: Your first assessment of the speech last night? JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say—give confidence about where we're going, and yet the reality of our economy—country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we're doing the short run, here are three very fundamental long-run problems that we have to deal. The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn't give a clear view of what he was going to do. AMY GOODMAN: Let's go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation's banks would be needed, but didn't directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America. PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy. AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable? JOSEPH STIGLITZ: Well, so far, it hasn't happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed—provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn't looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other—the bankers' retirement fund, we would have easily been able to generate the lending that he says we need. So the question isn't just whether we hold them accountable; the question is: what do we get in return for the money that we're giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don't do things right—and we haven't been doing them right—the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you're spending money well in the bank recapitalization, it's important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we've been spending the money on the bank recovery, has not been giving bang for the buck. We haven't gotten anything out. What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don't know is that—whether we will continue to get cheated. And that's really at the core of much of what we're talking about. Are we going to continue to get cheated? Now, why that's so important is, one way of thinking about this—end of the speech, he starts talking about a need of reforms in Social Security, put it—you know, there's a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the—put on sound financial basis our Social Security system. We wouldn't have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That's less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it's that kind of tradeoff that seems to me that we ought to begin to talk about. AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers. JOSEPH STIGLITZ: Exactly. AMY GOODMAN: Should they all have been fired? JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it's not just the level of pay; it's the form of the pay. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it's a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave. Read or listen to the rest of the interview. Labels: Amy Goodman, bailout, bank nationalization, Barack Obama, financial crisis, Joseph Stiglitz, Paul Krugman, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Nationalization (P. Krugman, F. Moseley)Paul Krugman, in his NYT column today, joins the chorus of people calling for "nationalization" of the big banks. As we have noted here, that chorus includes even the so-called Maestro himself, Alan Greenspan, who told the Financial Times last week that nationalization may be the "least bad" option: "I understand that once in a hundred years this is what you do." Krugman is at least clear on what he understands by "nationalization"; here are the last three paragraphs of his column:
We wonder whom Krugman includes in his statement, "So do we all." We just posted an article from our March/April issue (to be printed soon) in which economist Fred Moseley argues for permanent nationalization of the "too big to fail" banks. If banks are too big to fail, they should be public, and run in the public interest. Read the article here. Labels: Alan Greenspan, bank nationalization, Fred Moseley, Paul Krugman, privatization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Krugman on Resistance to NationalizationPretty good summary of the situation many banks find themselves in, and an interesting conclusion regarding resistance to full nationalization by the Nobel prize-winner in today's New York Times:January 19, 2009 Op-Ed Columnist Wall Street Voodoo By PAUL KRUGMAN New York Times Old-fashioned voodoo economics--the belief in tax-cut magic--has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans. But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking. To explain the issue, let me describe the position of a hypothetical bank that I'll call Gothamgroup, or Gotham for short. On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets--say, $400 billion worth--are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion. So Gotham is a zombie bank: it's still operating, but the reality is that it has already gone bust. Its stock isn't totally worthless--it still has a market capitalization of $20 billion--but that value is entirely based on the hope that shareholders will be rescued by a government bailout. Read the rest of the piece Labels: bailout, banking system, credit crisis, financia crisis, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Krugman Sees End of US Auto IndustryPaul Krugman, in Stockholm (here's a link to the live webcast of Monday's Nobel lecture, which is entitled "Increasing Returns"--hat tip to Brad De Long) to pick up his Nobel prize, is not impressed with the incipient plan to bail out US auto industry, Die Presse of Vienna (article in German) notes. Krugman believes the plan, as it stands now, will only buy the industry two months of time, and wouldn't tackle any of the serious structural problems afflicting the industry. A more constructive approach, according to Krugman, would focus on the macro level, and consist of counter-cyclical stimulus packages of the sort proposed by President-elect Obama and already implemented by the Swedish government, rather than attempting to save a doomed industry. Clearly, Krugman doesn't believe the collapse of the industry would itself have a devastating macroeconomic impact on the economy.Larry Peterson Labels: auto industry, bailout, Brad DeLong, financial crisis, Larry Peterson, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
