by Deb Cupples | While he was still alive, as opposed to dropping in on a seance, my late brother Bill (1961-2004) said something like this during one of our political chats:
I agreed then, and I agree now. Nobel Prize winning economist Paul Krugman seems to see it similarly, compelling him to plead for our nation's "leaders" to hunker down and start working on financial reforms now in order to prevent crises in the future. Dr. Krugman writes:
"A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, 'Why didn’t we see this coming?'
"There was, of course, only one thing to say in reply, so I said it: 'What do you mean "we," white man?'
"Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how 'we' failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.
"About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?
Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?
"Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?
"One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme? (New York Times)
Amen, Brother Krugman! The reason the crises occurred is that the human beings running our nation's financial institutions (i.e., corporate executives) were personally pocketing masses of money from making reckless decisions that made their companies appear more profitable than they really were.
Said execs were building of a house on a foundation of sand -- a metaphor that I lifted out of the Book of Matthew (or from somewhere else in the New Testament, I don't remember).
The worst part: the executives making the reckless decisions were savvy enough to know that the house would eventually slide off its foundation, causing the walls to start crumbling.
The story of ex-Fannie Mae CEO Daniel Mudd is a pretty good illustration. Dr. Krugman continues:
"There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.
"Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.
"Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.
"In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.
"Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. Will the Fed’s ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere? Will the Obama administration’s fiscal stimulus turn output and employment around? (I’m still not sure, by the way, whether the economic team is thinking big enough.)
"And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.
"For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.
"So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now." (New York Times)
I remember Dr. Krugman's stern warnings about interest rates and the housing bubble a few years back. I remember his stern warnings about the Bush Administration's dogged (and successful) attempts to deregulate everything but the ownership of household pets.Many of us remember Krugman's various warnings, explanations, and predictions -- precisely because he doesn't speak merely to classrooms with small numbers of Ivy League students. He doesn't write for some obscure blog.
Dr. Krugman writes for the New York Times. He writes best-selling books (like The Great Unraveling, which is the first of his books that I read -- and I recommend it). He also makes oodles of TV appearances.
In short, most of our politicians likely have, over the years, heard Dr. Krugman's various warnings, explanations, and predictions. Yet, most of our politicians have simply ignored them.
At this point, I'm feeling audacious enough to hope that our politicians will actually start listening to Dr. Krugman this time around (though Congress's and the Bush Administration's handling of the Bailouts thus far makes me wonder if I'm eying pie in the sky).
Memeorandum has commentary.
Other Buck Naked Politics Posts:
* Wall Street Execs Paid $3 Billion While Driving Economy Toward Cliff
* Swiss Bankers Evince Shame, American Counterparts Have None
* Another Bailout for Another Company Run by Reckless Execs
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* Save Jobs by Cutting Executive Pay
* AIG Execs Re-Distributed Shareholder Wealth to Themselves
* Lehman Execs Re-Distributed Billions in Shareholder Wealth to Themselves
* Executives Took Home Millions While Driving Companies into Ditch
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