Stiglitz on the Economy

[nerdgirl 0]

Joe Stiglitz has commented on the causes of the current financial downturn in “How to prevent the next Wall Street crisis.”

Excerpts:

“There is ample blame to be shared; but the purpose of parsing out blame is to figure out how to make a recurrence less likely.

“President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?

“One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.

“For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme. The new ‘innovations’ simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises. But one needs to push further: Why did the Fed fail?

“First, key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.

“Second, the macro-economy was in bad shape with the collapse of the tech bubble. The tax cut of 2001 was not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century.

“The coup d'grace was the Iraq War, which contributed to soaring oil prices. Money that used to be spent on American goods now got diverted abroad. The Fed took seriously its responsibility to keep the economy going. It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.

“Finally, at the center of blame must be the financial institutions themselves. They -- and even more their executives -- had incentives that were not well aligned with the needs of our economy and our society. They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk -- they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.”

So in the opinion of dz.com’s expert and/or unauthorized armchair economists, what’s wrong with his assessment of direct causal and contributing factors?

If one does agree -- even marginally -- with his assessment, what kind of incentives or disincentives do you think are needed to change the incentive structure that led to excessive risk-taking? Alternatively, if you don't think that incentives &/or disincentives are approporiate, how do you explain that the market did not prevent this excessive risk-taking behavior?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[lawrocket 3]

I think he is correct in a number of ways. The desire for short-term profits and long-term risk was idiotic. They'd just seen it on the tech side when that bubble burst.

Those that sat out the early portions felt like they were missing out, so they went along with what everyone else was doing.

the market did not prevent this risky behavior because they spread the risk throughout the economy. They bundled these instruments and sold them as lots (which was common practice). When these new instruments were making a lot of money, they went with more of them to make more money and sold them throughout.

It was the spreading of risk that caused so much trouble. The financial institutions could experience the domino effect, instead of just a few going belly up.

My wife is hotter than your wife.

[billvon 3,006]

>If one does agree -- even marginally -- with his assessment, what kind
>of incentives or disincentives do you think are needed to change the
>incentive structure that led to excessive risk-taking?

A few things. First, of course, aggressive enforcement of the reporting requirements of the Sarbanes-Oxley act.

Second, and perhaps most importantly, consequences for failure. The most ominous thing I have seen recently are the sequential bailouts of large corporations by the government. This effectively removes much of the risk for very aggressive leveraging - indeed, the bigger the risk (and thus the more extreme the potential loss) the more likely the government is to get involved.

Not sure how to deal with that, though. Perhaps make corporate executives personally responsible for the debts of the company? The ideal solution would be (of course) no bailouts, but that horse has left the barn already.

Third is a suggestion he had, which is to link executive bonuses to long term performance. I don't like that one (too much meddling in the internal operations of a company) but I could see it having a restraining effect on the more egregious pyramid schemes.

A fourth would be consumer education on risk and investment. We recently passed the point where most US families have negative savings; they owe more than they are worth. While such a state of affairs increases short term liquidity in the consumer economy, it is a very bad long term policy (as we're seeing now.)

[likearock 2]

Here's my favorite excerpt:

Quote

6. We need better competition laws. The financial institutions have been able to prey on consumers through credit cards partly because of the absence of competition. But even more importantly, we should not be in situations where a firm is "too big to fail." If it is that big, it should be broken up.

[happythoughts 0]

Quote

The Fed took seriously its responsibility to keep the economy going. It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.

Long ago, our economy was driven by the creation of goods. Manufacturing of a product and selling it.

Then, we switched to a market economy. As long as people buy things, then that money will be spent by others, and so on... Basically, the turnover of the dollar.

At the bottom level, the lower and middle classes need to have jobs to have something to spend. It used to come from manufacturing jobs.

People could make long-term financial plans (like house purchases) based on job security.

Industries that have left the US - electronics, steel, textiles...

So, there is no one at the bottom with money to buy.
The market dies.

Govt could be supporting industry, instead of supporting the prices of the stocks. The govt is artificially supporting the value of the stocks by these stopgap measures, but that eventually ends.

Our local set of idiots spent $300 million on a football stadium.
Spending $300 M on a large industrial park would have provided hundreds of jobs for the middle class, not just 22 millionaires.

What are we manufacturing now?

[kallend 2,027]

Quote

Quote

The Fed took seriously its responsibility to keep the economy going. It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.

Long ago, our economy was driven by the creation of goods. Manufacturing of a product and selling it.

Then, we switched to a market economy. As long as people buy things, then that money will be spent by others, and so on... Basically, the turnover of the dollar.

At the bottom level, the lower and middle classes need to have jobs to have something to spend. It used to come from manufacturing jobs.

People could make long-term financial plans (like house purchases) based on job security.

Industries that have left the US - electronics, steel, textiles...

So, there is no one at the bottom with money to buy.
The market dies.

Govt could be supporting industry, instead of supporting the prices of the stocks. The govt is artificially supporting the value of the stocks by these stopgap measures, but that eventually ends.

Our local set of idiots spent $300 million on a football stadium.
Spending $300 M on a large industrial park would have provided hundreds of jobs for the middle class, not just 22 millionaires.

What are we manufacturing now?

You mean - we don't create wealth by playing ball, taking in washing and shining shoes? Heresy!

...

The only sure way to survive a canopy collision is not to have one.

[marks2065 0]

the reason that the lower end of the work force is suffering is because they don't want to change with the times. The economy and job markets are always changing and people need to change with it or get left behind.

My buisiness is changing every year and i have to change with it or go out of buisiness. When a job is lost you need to get a new job not sit and wait for the government to get one for you. The training is available (mostly free for lower income people) throughout the country to get the skills needed to retool your brain and move on, all you need is the desire to not be a looser.

[AWL71 0]

“Finally, at the center of blame must be the financial institutions themselves. They -- and even more their executives -- had incentives that were not well aligned with the needs of our economy and our society. They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk -- they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.”

For me the main reason is above. The greed of these companies is the driving factor behind their failures.

The most terrifying words in the English language are: I'm from the government and I'm here to help.

[marks2065 0]

It is kinda funny that the companies that got bailed out gave the most money to democrats running for office. Fredie and fanny's top 5 were all democrats #4 & #3 being clinton and Obama. (from CNN a few days ago) From 1989 to 2008
Obama got $105,849.00 and hillary got $75,550.
Christopher Dodd got $133,900.

http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

They go belly up under a democrat controlled congress, donate hundreds off thousands dollars to the democrats, then they get bailed out by the democrat controll congress. McCain and Palin looking better every day>

[kallend 2,027]

Quote

It is kinda funny that the companies that got bailed out gave the most money to democrats running for office. Fredie and fanny's top 5 were all democrats #4 & #3 being clinton and Obama. (from CNN a few days ago) From 1989 to 2008
Obama got $105,849.00 and hillary got $75,550.
Christopher Dodd got $133,900.

http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

They go belly up under a democrat controlled congress, donate hundreds off thousands dollars to the democrats, then they get bailed out by the democrat controll congress. McCain and Palin looking better every day>

Treasury Secretary Paulson is a Democrat? What are you smoking, Mark?

...

The only sure way to survive a canopy collision is not to have one.

[marks2065 0]

Quote

Quote

It is kinda funny that the companies that got bailed out gave the most money to democrats running for office. Fredie and fanny's top 5 were all democrats #4 & #3 being clinton and Obama. (from CNN a few days ago) From 1989 to 2008
Obama got $105,849.00 and hillary got $75,550.
Christopher Dodd got $133,900.

http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

They go belly up under a democrat controlled congress, donate hundreds off thousands dollars to the democrats, then they get bailed out by the democrat controll congress. McCain and Palin looking better every day>

Treasury Secretary Paulson is a Democrat? What are you smoking, Mark?

------------------------------------------------------
who said anything about Paulson? just because he was put in charge of handling the mess doesn't mean he caused the mess. he is just trying to help clean it up and that doesn't take away the fact the democrats got money from them to work in their interests.

[billvon 3,006]

Spin on democrats:

>they go belly up under a democrat controlled congress, donate hundreds
>off thousands dollars to the democrats, then they get bailed out by the
>democrat controll congress.

Spin on politicians once you discover they are republicans:

>he is just trying to help clean it up

[marks2065 0]

Quote

Spin on democrats:

>they go belly up under a democrat controlled congress, donate hundreds
>off thousands dollars to the democrats, then they get bailed out by the
>democrat controll congress.

Spin on politicians once you discover they are republicans:

>he is just trying to help clean it up

----------------------------------------------------------

no spin the dems did start the bail out as it says in this paragragh from the washington times article

"Mr. Bush didn't like the version emerging from Congress and initially said he would veto it, particularly over a provision containing $3.9 billion in neighborhood grants. He contended the money would benefit lenders who helped cause the mortgage meltdown, encouraging them to foreclose rather than work with borrowers."

The bail out started months ago when the housing bill was put though congress. but like it said Bush didn't like it but had to work with the crap congress gave him.

[billvon 3,006]

>Mr. Bush didn't like the version emerging from Congress . . .

====================================
US: Bush defends Fed's decision to bail out AIG

* Daniel Nasaw in Washington
* guardian.co.uk,
* Thursday September 18 2008 15:58 BST

George Bush today defended the US central bank's decision to bail out giant insurer AIG and sought to reassure markets that his administration was intent on confronting the growing crisis.
====================================

[marks2065 0]

just because Bush defended it doesn't mean he likes it. sometimes you just have no choice but to do things.

[billvon 3,006]

>just because Bush defended it doesn't mean he likes it.

Ah! Well, then, just because someone contributes to someone doesn't mean the candidate supports them.

[SkyDekker 1,465]

Quote

A few things. First, of course, aggressive enforcement of the reporting requirements of the Sarbanes-Oxley act.

Actually Sarbanes-Oxley may well have created a significant part of this mess the financial markets find themselves in. Specially some of the accounting rules and regulations that followed it. Mark-to-market accounting rules probably didn't help here.....

A combination of things drove AIG towards bankruptcy, more specifically what happened in AIG's financial servoices division, which is by all accounts a very small part of the company. Its the part of the company that was dealing with credit default swaps. New rules and regulations force the company to provide a value to these swaps. Problem is, they are impossible to valuate.

As those swaps started to lose value due to the mortgage crisis, new accounting rules forced AIG to make pure judgement calls and start write assests down, even though there is no market to really base those values on.

That leads to a lobsided balance sheet....to the negative side, which means the company has to make cash injections to keep the balance. Then the all powerful credit agencies downgraded AIG, making it next to impossible for them to raise that capital...

There is lots of blame to go around, and there is most certainly not one issue that caused this collapse, but more likely a whole string of issues that led to it. To me, Sarbanes-Oxley and the accounting rules and regulations that followed it had a significnt negative impact on it.

[kallend 2,027]

Quote

just because Bush defended it doesn't mean he likes it. sometimes you just have no choice but to do things.

Well, apparently Bush and Paulson believe it's the right thing to do, but don't like it.

That figures, the GOP is generally opposed to doing the right thing.

...

The only sure way to survive a canopy collision is not to have one.

[marks2065 0]

Quote

Quote

just because Bush defended it doesn't mean he likes it. sometimes you just have no choice but to do things.

Well, apparently Bush and Paulson believe it's the right thing to do, but don't like it.

That figures, the GOP is generally opposed to doing the right thing.

------------------------------------------------------------
government control of freddie and fanny mae
was given to the private sector 30-40 years ago because it was deemed not proper to have independant companies competing with the federal government. little companies had a disadvantage. and today this is still true. so the take over is the wrong thing to do for those reasons but needed to stabilize the situation.

[billvon 3,006]

>so the take over is the wrong thing to do for those reasons but needed
>to stabilize the situation.

Sort of like taxation to fix our debt problems, eh?

[kallend 2,027]

Quote

Quote

Quote

just because Bush defended it doesn't mean he likes it. sometimes you just have no choice but to do things.

Well, apparently Bush and Paulson believe it's the right thing to do, but don't like it.

That figures, the GOP is generally opposed to doing the right thing.

------------------------------------------------------------
government control of freddie and fanny mae
was given to the private sector 30-40 years ago because it was deemed not proper to have independant companies competing with the federal government. little companies had a disadvantage. and today this is still true. so the take over is the wrong thing to do for those reasons but needed to stabilize the situation.

So now you're saying the GOP is opposed to doing what's needed.

Kinda like Bush, "Brownie" and Katrina, eh?

...

The only sure way to survive a canopy collision is not to have one.

[happythoughts 0]

Quote

the reason that the lower end of the work force is suffering is because they don't want to change with the times. The economy and job markets are always changing and people need to change with it or get left behind.

My buisiness is changing every year and i have to change with it or go out of buisiness. When a job is lost you need to get a new job not sit and wait for the government to get one for you. The training is available (mostly free for lower income people) throughout the country to get the skills needed to retool your brain and move on, all you need is the desire to not be a looser.

Yeah... I get so tired of hearing that BS argument that I could puke.

Really? Just where are these great new jobs to get retrained for?

Steel industry? Electronics? TVs, Radios, Stereos?
Textiles?

Maybe they could work in call centers? Ummm... AOL sent their Tampa center there. While I was at JPMorgan, they moved part of their operations to India.

Call center in the US? $10 an hour
Call center in India $1.85 an hour

Someone will say, "Oh, they are so trained..."
Not really.

CISCO is moving there, but they announced a special initiative to train them. In Calif, they already have a trained company.

CISCO

Quote

Cisco Launches Talent-Development Strategy for India
IIHT and NIIT Become Cisco Certified Learning Solutions Partners

BANGALORE, India - February 4, 2008 - Furthering its goals to enhance the development of information technology (IT) talent in India, Cisco® today announced a series of country-specific initiatives aimed at expanding India's capacity to train, employ and retain highly qualified networking and systems engineers. By establishing partnerships and opening testing facilities, Cisco aims to expand India's networking workforce capacity to 360,000 engineers in the next five years, a six-fold increase over present employment levels.

JPMorgan opened its second facility. The 2007 plan was to hire 500 people a month, all year.

Truckers? Mexico
Airplane pilots? From everywhere.

When a Senator receives $3 million in donations from an outsourcing company, where are their loyalties?

Tell me, what is that new skill to train for?

[skydyvr 0]

Quote

Steel industry? Electronics? TVs, Radios, Stereos? Textiles?

IT is hot.

. . =(_8^(1)