Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Matt Taibbi on Class Welfare and the Crime of a New American Century

I encourage people to read Matt’s full blog post. Below I have reproduced what I think to be the most insightful elements: or when Matt hits high dough. Particularly when he argues that the causes of the great financial crisis were in fact legally sanctioned fraud carried out under the watchful eye of a bought and paid for state. And that really is the truth that dare not speak its name.

After the start of the GFC I wrote:

Hedge fund managers were before congress justifying their pay packages and arguing against regulation while pointing the finger of blame at the ratings companies for the crisis; aka scam, aka market failure. So which is it? Everyone agrees that crisis surely fits the bill, but the characterization of the crisis as originating in a scam or a market failure of epic proportions is being ruled out of court.

Here is the dilemma: characterize the crisis as a scam and then people will have to go to jail. The problem is that if this be a scam it involves almost every single major player in the financial and political establishment in the US. In short, call it scam and a huge swath of the US ruling class would be on the hook.

However, if the crisis is characterized as a massive market failure (and massive is no mere hyperbole, perhaps understatement) then 30 years of patient theoretical innovation in the dismal science not to mention the ideological underwriting service it played for the institutional restructuring of the past thirty years will have to be re-thought.

Here is the core of Taibbi’s recent take on the GFC:

What’s so ironic about this is that Brooks, in arguing against class warfare, and trying to present himself as someone who is above making class distinctions, is making an argument based entirely on the notion that there is an lower class and an upper class and that the one should go easy on the other because the best hope for collective prosperity is the rich creating wealth for all. This is the same Randian bullshit that we’ve been hearing from people like Brooks for ages and its entire premise is really revolting and insulting — this idea that the way society works is that the productive ” rich” feed the needy “poor,” and that any attempt by the latter to punish the former for “excesses” might inspire Atlas to Shrug his way out of town and leave the helpless poor on their own to starve.

That’s basically Brooks’s entire argument here. Yes, the rich and powerful do rig the game in their own favor, and yes, they are guilty of “excesses” — but fucking deal with it, if you want to eat.

And the really funny thing about Brooks’s take on populists… I mean, I’m a member of the same Yuppie upper class that Brooks belongs to. I can’t speak for the other “populists” that Brooks might be referring to, but in my case for sure, my attitude toward the likes of Lloyd Blankfein and Hank Paulson has nothing to do with class anger.

I don’t hate these guys because they’re rich and went to fancy private schools. Hell, I’m rich and went to a fancy private school. I look at these people as my cultural peers and what angers me about them is that, with many coming from backgrounds similar to mine, these guys chose to go into a life of crime and did so in a way that is going to fuck things up for everyone, rich and poor, for a generation.

Their decision to rig the markets for their own benefit is going to cause other countries to completely lose confidence in the American economy, it will impact the dollar, and ultimately will make all of us involuntary debtors to whichever state we end up having to borrow from to bail these crimes out.

And from my perspective, what makes these guys more compelling as a journalistic subject than, say, the individual homeowner who took on too much debt is a thing that has nothing to do with class, not directly, anyway. It’s that their “excesses” exist in a nexus of political and economic connections that makes them very difficult to police.

We have at least some way of dealing with the average guy who doesn’t pay his debts — in fact our government has shown remarkable efficiency in passing laws like the bankruptcy bill that attack that particular problem, and of course certain banks always have the option of not lending that money (and I won’t even get into the many different ways that the banks themselves bear responsibility for all the easy credit that was handed out in recent years).

But the kinds of things that went on at Goldman and other investment banks, in many cases there are not even laws on the books to deal with these things. In some cases what we’re talking about is the highly complicated merger of crime and policy, of stealing and government, which is both fascinating from a journalistic point of view and ought to be terrifying from the point of view of any citizen, rich or poor.

Krugman should talk to the CD Howe about Canadian Banking policy

Canadians’ need to be mentioned south of the border will probably find some glee in Krugman’s musings on the Canadian policy conversation. But as edifying as it is to be talked about in such a positive light by such a luminary as Paul Krugman and under the New York Times flagstaff no less; is Krugman right to characterize the policy conversation as “defying conventional wisdom” especially when it comes to the conversation about financial regulation in Canada?

Unfortunately the answer is no. Since the latter half of the 1990s, the Major Canadian banks (MCBs) have been pushing for deregulation that would allow them to, besides become bigger, go global and get into global financial markets. Indeed in the run-up to the Great Financial Crisis (GFC) there was mounting pressure to allow just the kinds of mortgages that were being offered to the south, and for awhile at least, a zero down, teaser rate, 30 year mortgage was allowed. That the product came late market in Canada and was cut short by the GFC is sure luck (or perhaps laggard nature of Canadian financial deregulation).

But if Mr. Krugman would like an indication of not only the intense lobbying that was going on in Canada to allow the MCBs to be more like his banks he need only peruse the CD Howe web site. In 2007 it released a Commentary titled: Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It. Inter alia it was argued that mergers should be allowed to go forward and not just among the big five themselves but that the MCBs should be allowed to merge with big insurance companies as well. Allowing banks to become this big would enable them to become significant international players that would be able to behave and mitigate risk like the other big international banks:

Size is also important for a bank in dealing efficiently with financial risk. Larger banks have more ready access to modern risk management techniques that allow them to achieve better diversification and, hence, lower risk. Modern ways of managing bank risk rely increasingly on direct access to international capital markets. Credit risk derivatives, loan syndication and especially securitizing asset positions have become the prevalent tools to reduce the risk that banks take on . However, in order to effectively securitize assets, banks have to offer pools of assets that are well diversified and of sufficient size in order to ensure enough liquidity in the market.

Hmm pretty standard pre GFC thinking here. All that liquidity. Remind me again Paul what is the US in right now (and Canada also looked to be in)? A liquidity trap…how can that be? What with all the risk reduction which comes from diversification into credit derivatives, magic turtles and the goose that lays golden eggs. What indeed could possibly go wrong?

Banks clearly benefit from operating broadly across different segments in their core business of taking deposits and granting loans. But banks can also benefit from diversifying geographically and across different financial products. Historical evidence shows that when banks were able to operate across various regions (such as in Canada and Europe) failure rates were lower than when banks faced geographical branching restrictions (such as until recently in the US). Similarly, as fee revenue has been steadily increasing for banks over the last 15 years relative to interest revenue, the product mix a bank can offer has become an important instrument to hedge general business risk and ensure stable profitability.

Yah those fees… think of all those fees! Originate to distribute; that is Mosses and the prophets. What a model. Especially if it comes with a tax payer funded rescue when it all goes pop.

Maybe Paul is right, size does not matter all that much, what matters is what banks intend and are allowed to do with their size. But whatever the case may be, as the commentary by the CD Howe makes clear, circa 2007 the policy conversation was very much one of follow the leader. As the economists advising for the CD Howe and thus must be considered some of the sharpest tools in the economics shed illustrate, this had nothing to do with the enlightened nature of the policy conversation going on in Canada prior to the GFC.

It is good thing Canada suffers from policy lag and a populist suspicion of the MCBs and bankers and had the good luck of successive minority parliaments in which giving the economists and the banks they were shilling for what they wanted would have been the death blow.