I frequently disagree with Tyler Cowen — our world economic views are quite different, as are, I assume, our politics. But his column in the Sunday Times today, I can find at least one major area where we are sympatico:
“But there is a big hole in these proposals, as there has already been in the government’s approach to bailing out failing financial companies. Even as they focus on firms deemed too big to fail, the new proposals immunize the creditors and counterparties of such firms by protecting them from their own lending and trading mistakes.
This pattern has been evident for months, with the government aiding creditors and counterparties every step of the way. Yet this has not been explained openly to the American public.
In truth, it’s not the shareholders of the American International Group who benefited most from its bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of A.I.G.’s derivatives deals — firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Société Générale, Barclays and UBS.
These firms engaged in deals that A.I.G. could not make good on. The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury secretary, would give firms like these every incentive to make similar deals down the road.
That is a huge flaw in the Paulson plan, now adopted by Geithner.
Tyler’s suggestion? Worry less about executive pay, and more creditor bailouts:
“Restricting compensation at these creditor firms would have more force — if it is done transparently, in advance and in accordance with the rule of law. A simple rule would be that some percentage of bailout funds should be extracted from the bonuses of executives on the credit or counterparty side of transactions.”
Interesting stuff. As to the disagreements:
• “A simple but unworkable alternative is to let major creditors make their claims in the bankruptcy courts”
I totally disagree; That’s what bankruptcy courts are for. Anything else replaces the capitalist system with the worst form of Moral Hazard — a direct guarantee of all credit.
• “This suggests a scary possibility — that the next regulatory regime could end up even worse than the last.”
Um, what regulation? Half of the current problems derive from an absence of any prior regulatory regime. No derivative regulation, no limits on leverage, no separation of commercial and investing banking.
• “Much went awry at A.I.G., but in the context of a bailout, the company should be thought of as the conduit for helping an entire market that went bust.”
No, it shouldn’t. If we say that, then the Taxpayer is implicitly guaranteeing all credit and speculation.
One last thing: Obama administration rightly deserves criticism for this policy — but nowhere in Cowen’s article does he mention that this absurd policy is a continuation of the stupidity put forth by Hank Paulson, the Treasury Secretary under George W. Bush. That is a very unfortunate oversight in an otherwise good article.
Change we can believe in? Hardly.
>
Previously:
Haircuts for Bond Holders (March 11th, 2009)
http://www.ritholtz.com/blog/2009/03/haircuts-for-bond-holders/
Solvent Insurer / Insolvent Insurer (March 4th, 2009)
http://www.ritholtz.com/blog/2009/03/solvent-insurer-insolvent-insurer/
Source:
Why Creditors Should Suffer, Too
TYLER COWEN
NYT, April 4, 2009
http://www.nytimes.com/2009/04/05/business/economy/05view.html
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
This is NOT a bailout of AIG’s counterparties. It is a bailout of AIG’s bondholders (and of those companies that wrote CDS on those bonds, obviously). It is very likely that AIG’s bonds could absorb all the derivative losses. Hussman has written about all this, for example in this recent commentary:
http://www.hussman.net/wmc/wmc090323.htm
When you see the $120 billion of money that have passed thru AIG to Goldman Sachs, Deutsche Bank, its hard to conclude otherwise
“One last thing: Obama administration rightly deserves criticism for this policy — but nowhere in Cowen’s article does he mention that this absurd policy is a continuation of the stupidity put forth by Hank Paulson, the Treasury Secretary under George W. Bush. That is a very unfortunate oversight in an otherwise good article.”
Paulson’s plan was not stupid. He knew exactly what he is doing. It is the Congress and the rest of us that are stupid for going along with his plan to accelerate the transfer of wealth from the tax payer to GS and friends.
~~~
BR: Is “criminal” a better word . . . ?
Barry,
You seem to have missed the idea of “Change We Can Believe In.” The slogan never meant that we would have change for the sake of change. “Change We Can Believe In” means that we will have government that works for all the people. If the President determines that the bilge rats have to be enriched to save the ship, then so be it. I’m all for it.
Another thing: I think you’re missing the true problem we’re facing. The depression we’re in now is not a result of the financial gyrations everyone has focused on. The depression and the gyrations are symptoms of a deeper, long term illness that began in 1980 when we bought into Reagan’s Voodoo Economics that held that a nation could produce nothing of value and still prosper. This meant we could cut spending on education, ignore social security and health care, and let companies send all our jobs overseas–all in the name of tax cuts for the rich.
That ideology reached full flower under George W. Bush, but he didn’t invent it. The President is not going to subvert his agenda to fix the true systemic risk to the United States, which is the fact that our economy is fundamentally unsound. Any nation that has 70% of its economy based on producing nothing while consuming everything made in China on a Chinese credit card is an insolvent nation.
The irony is that the only way we can get out of this mess is by borrowing money from China and spending like crazy to make up for the consequences of 30 years of failed Republican ideology. Thankfully, they still need us enough to lend us the money.
Franklin411:
I don’t buy any of what your saying. I think Obama wanted real change, but the guys pushing for bankruptcy/receivership — Rahm Emmauel and David Axelrod were — over ruled by Summers/Geithner.
Second, I don’t know if this is a depression. In fact, I don’t know what depression is. (Anyone have any good definitions?)
Third, you are misstating Reagan’s ideology: It was simply “Government bad, free market good.” It wasn’t that he didn’t want the nation producing anything of value, its that he wanted very little taxes on the wealthiest — the capitalists and entrepreneurs.
Where we agree is that the entire deregulatory mess has RR as its ideological father. . .
Instead of “creditors MUST suffer” and “haircuts for bondholders” what really should happen is that creditors be given ownership of the firms. Whipe out the shareholders and the preferred stock (that means you US Treasury) and the whole ownership of these firms goes to bondholders. This is the way it works with any other bankruptcy and financial firms should be no different. If the US Treasury wants a recovery, it should provide the DIP lending, which allows the lender to move most of its claims to the front of the line.
While we are at it the FDIC should be allowed to fail and instead of depositors coming out whole they should have the same claim as bondholders. All this giving preference to one creditor versus another (unless it is plainly spelled out in the indenture/lending agreement) needs to stop. You put your money in a weak/bankrupt institution in deposit form (no different from other creditors), you lose.
BR @ 2:53
“…the guys pushing for bankruptcy/receivership – Rahm Emmanuel and David Axelrod – were overruled by Summers/Geithner”
That’s interesting if true. And if true, I would be disposed towards a much more favorable opinion of Rahm Emmanuel (than is currently the case).
I agree, DL. I’d be surprised if it were true that Emmanuel, as a former I-banker, were not in the banks’ corner here.
franklin, and BR,
I think you’re Both wrong. To think this started w/ RWR, is to be, too conveniently, Ignorant of recent U.S. History.
You might have better luck throwing the Millstone around RMN’s neck, w/ his ’71 ‘closing of the Gold Window’–that lit the brushfires stoked by the Petro$. and began the Evisceration of U.S. Industry..
RWR’s policies amounted to little more than salvaging the Keynesian State, from destroying itself before it, otherwise, would have. Even 39, JEC Jr., saw that happening, and it was he that kicked-off the ‘de-regulatory’ movement..
No idea where Emmanuel stands, but just cause he cashed in for a few years by no means ensures he’s out to carry the Ibank water…
jritzema Says: While we are at it the FDIC should be allowed to fail and instead of depositors coming out whole they should have the same claim as bondholders.
if we allow that to happen the banks will collapse as their will be runs on the banks, every bank no matter who it is or how well it is run. that will be the mass psychology that you will be face with. and no tools to resolve it
and we would have repeated one of the major contractions that happened in the great depression.
if depositors don’t feel their bank with their money isn’t save, that bank is gone. and you are not dealing with rational people at that point. in the court of public opinion there is no appeal. and it takes decades to over come it.
and why should creditors be granted ownership any more tan any other group? they also bet on the viability of that debtor. and lost. in bankruptcy that is how creditors get dealt with. they end up with pennies on the dollar if that. they do get a say it whether that company can continue. but its also a choice of total loss or minor losses and hope the company turns around. and that decision can take decades to get there.
not sure that those who revere Reagan really understood what he was saying.
it wasn’t that government was bad.
it was that the individual or business depending on government was bad.
that means that the rich who were dependent on the government to save them or business depending on it to aren’t following what he was saying.
and business was dependent on the government for the last 8 years to keep itself running by loosening standards to it just ignoring the rules all together.
and for those who think it will get fixed by going to the gold standard consider this. in the 1930s Britain went back to the gold standard . guess how that worked out for them? they had the worse economy the world over and had tanked long before the depression came along and made it even worse. millions were unemployed. their trade with other collapsed. sounds like a really good thing to do huh?
BR,
I can’t see Emanuel favoring nationalization because Emanuel is the administration’s legislative general. There’s no way nationalization is getting through the Senate, period. Too many Conservative Democratic Senators. The Senate is split 50/50 imo.
The time for nationalization (and I’m speaking politically, without regard for economics) was September, when the world was literally quaking in its boots–and even then TARP just barely passed. Absent a major crisis exceeding the one we had in September, there will not be the political will needed to accomplish nationalization. It just ain’t 1933, Barry. I have an account from one Senator in my dissertation on the 1933 Emergency Banking Act–they were given a copy of the bill at 4:45 PM, and they voted on it at 7:00 PM. I have another example where people were calling for FDR to be given dictatorial powers to solve the crisis. It’s just not 1933.
I won’t argue the historical point about what Reagan wanted too much, but I do think that the ideology of disinvesting in the future I’m accusing Reagan of putting into practice was done through code. One of the phrases was “government does too much.” Intentionally or not, though, we get to the same place.
Mark,
I would give Nixon a piece of it too, but mainly because he devised the “Southern Strategy” of using racism to divide the Democratic coalition. Nixon was able to get white union workers to vote against their own self-interest and support Republicans because they were afraid of black equality. Republicans learned their lesson: stupid people will vote against their own interests on the basis of silly social issues.
Can’t blame Nixon too much–Politicians and parties exist to win office. But the rise of social issue politics pushed the real conservatives (Barry Goldwater types) out of the Republican Party. The Party became a master of winning elections based on the lowest common denominator and also completely devoid of any ability to govern.
Barry, nice work on Summers this weekend.
You would have thought his comment about women and science might have been enough.
Apologies in advance but I am forced to correct your spelling.
In Iitalian – it is simpatico, not symaptico. it’s inwestor, not investor. :-)
On the subject of banks and creditors, one of your Founding Fathers was on the ball.
Mr Jefferson made some astute observations in 1816. Paul Kedrosky posted this back in October.
http://paul.kedrosky.com/archives/2008/10/15/thomas_jefferso.html
I am still betting Summers and Geithner are gone in 2010, if not 2009. That’s the optimist in me.
Having spent the week looking at the credit markets I suggest we may need to batten down the hatches.
When Ben says the credit markets are improving, yet Geithner requests special powers to unwind?
The latest vintages of prime RMBS are going down fast, and some think a big default is coming.
Things that make you go… hmm.
franklin,
w/ the ‘Southern Strategy’, you’re going to have to go, then, further back, and see:
http://www.archives.state.al.us/govs_list/g_wallac.html
they weren’t called ‘Dixie-crats’ w/o Reason, they were Democrats..’dividing the Democratic coalition’–one, in the South, anyway, that was more than Happy to keep the ‘Deep South’ mired, since the FDR-era, in a quasi-3rd-World stasis–could, actuality, be seen as a positive for those oppressed by that structure..
and, remember, you’re referring to ’68, not ’60
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Nixon+Southern+Strategy
lb,
old sport, TJ was right-on about more than, just, yon’ ‘Bankers’..
see: http://etext.virginia.edu/jefferson/quotations/
“I have sworn upon the altar of God, eternal hostility against every
form of tyranny over the mind of man.” –Thomas Jefferson*
“The principles of Jefferson are the axioms of a free society.” –Abraham Lincoln
http://etext.virginia.edu/jefferson/quotations/jeffcont.htm
http://www.washingtontimes.com/news/2009/apr/05/treasury-chief-put-bank-ceos-notice/
Geithner puts bank CEOs on notice – Washington Times Geithner on “Face the Nation” today
“The government may require new faces in executive suites at banks requiring “exceptional assistance” in the future, Treasury Secretary Geithner said Sunday.”
Maybe something will happen yet.
Only folks being covered are holders of debt. It is current policy. So Geithner and Summers. Paulsen straight up handed the Money Centers cash and G and S are protecting creditors. Paulsen was clear about this and nobody understood, so we got Geithner and garbled explanations which some now seem to think they understand.
Paulsen stated: no money to individual home owners. Now, the new policy is to pretend we’re gonna. Check out the results. The Money Centers rule, and I see no possibility of any change.
“One last thing: Obama administration rightly deserves criticism for this policy — but nowhere in Cowen’s article does he mention that this absurd policy is a continuation of the stupidity put forth by Hank Paulson, the Treasury Secretary under George W. Bush. That is a very unfortunate oversight in an otherwise good article.”
Not sure I understand your thinking thingy here, Barry. Unfortunate because 1. it was stupid, but they continued it, therefore they deserve criticism 2. Paulson didn’t get criticized, and should have, and deserved criticism…
Although I am not a fan of either treasury secretary, I will say this…Paulson and Bernanke told us the world as they knew it would end starting in September 2008. Paulson only had 4 months after his epiphany to be stupid. If Geithner doesn’t change his policies and lasts 4 years, he’ll be crazier than a shithouse rat…
dunnage,
to this: The Money Centers rule
see: http://video.google.com/videoplay?docid=-4245169480003136735
it’s been obvious for long time..video from ’88
Changing a few faces. It’s the “exceptional assistance” that is the problem.
First. if the definition for “depression” is that it is anything like what happened 1929-1940, this is not yet it. Unemployment is not yet even as bad as that reached in the last serious economic dislocation, which occurred in 1980/81.
It’s humorous to see folks try to lay the current problems at the feet of Ronald Reagan. Never mind that there were two intervening decades of American presidencies, including eight years of a man from Hope, during which time the country could have lurched left or right as it pleased.
Which is why it’s facile to say that Reagan, or Bush 41, or Clinton, or Bush 43 or any other politician imposed their will on the American people such that we the people were led to do what we the people did not wish to do. Unless I am mistaken, there were still elections being held. The people got what they wanted. Remember that for every subprime mortgage written, there was a ready and willing subprime mortgagor and mortgagee.
It is true, however, that much of the management of the economy has been, starting with the latter part of the Carter Administration and the dollar crisis, delegated to the Federal Reserve, which claims itself independent of politics, yet is only just somewhat insulated from politics by the structure and appointment of its Board of Governors.
Starting with Paul Volcker at least, we the people have allowed decisions regarding economic direction and performance to be concentrated in an unelected Federal Reserve Board of Governors, and particularly an uber-powerful chairman. It worked well for many years, until it didn’t. The seeds of this crisis were sown in 1998 when Greenspan’s Fed engineered the rescued a buch of idiot gamblers with Nobel prizes and Ph.D’s (LTCM).
It was only a decade later until the dangers of such concentration of power flowered into the cock-eyed notion that anything or anyone is too big and powerful to fail (if something is too big and powerful to fail then it shouldn’t, unless it wants to, n’cest pas?), and in the “rescue” of AIG, which as the article points out, was really the rescue of Goldman Sachs, et.al.
Now this same concentration of economic power has the Federal Reserve, without any vote by an elected representative of the people, increasing its balance sheet to roughly three trillion dollars, a bit less than a quarter of a year’s output. It must be true that the Federal Reserve is, as it claims, politically independent, because it does whatever it wishes.
Nobody voted on whether it would be wise for the Fed to print dollars to buy $1.25 Trillion of MBS’s, yet that is the latest tranche of money-printing. We will one day realize that allowing a secretive and “independent” central bank to control without recourse the most important infrastructure we have–a currency that acts as both a medium of exchange and a store of value–is maybe not such a good idea.
But viewing this whole mess through the prism of political biases is undoubtedly what the Fed hopes we do. It allows them to keep manipulating the economic levers, like a wizard behind the curtain, for the benefit of everyone but we the people.
@Curmudgeon: I agree with your summation. Very well put. Viewing these events purely through a political lens (“right”, “left”) merely distracts us all from the bigger picture, which I think has probably been the intention all along.
U.S. watchdog calls for bank executives to be sacked – Guardian
http://www.guardian.co.uk/business/2009/apr/05/useconomy-regulators
“Elizabeth Warren, chief watchdog of America’s $700bn bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and the institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.”
All empires end when the empire overextends itself. See “Wealth of Nations”. Some form of this crisis was all predicted years ago. Reagan, Clinton, et al extended the game for a while, that’s all.
America grew by extending credit to Europe as its empire declined, China grew by its extension of credit to us. China will take over as the new financial center. This can happen quickly or slowly, that was our choice. Bush’s mistakes and the mistakes of financial regulation sped up the game. Onama is trying to slow it back down a bit, but it will happen.
Obama isn’t stupid, he knows what’s going on. But, we have to unwind this mess as gently as we can. Eventually there will be major changes, but they don’t happen overnight. It’s tough to go from being the world’s only superpower to something less. It’s tough for our current creditors to accept that we fucked up big time, finally. But there it is. The banksters will get their share, the European banks can’t be allowed to fail either. But it’s going to cost us the leadership of the financial world.
M.E. Hoffer:
Paul in the link you provided makes a distinction that’s significant: Banks that will be helped and the banks that will be harmed. Our commercial banks did not get into the leverage game, the so-called Investment Banks ask for, got, and used extraordinary leverage. So today it is not the commercial banks being helped — hell they are being brought down as we pour money into the Investment Banks thereby extending the mess. I wonder if the government will take them down, keep the bad news, and give deposit bases to our money centers?
dunnage,
that’s, basically, what happened in Economy Ramp n’Crash v.1.0 c. 1930′s, though, then, it was the Federal Reserve connected ‘Banks’ that, miraculously, made it through the fall-out, as if shielded by leaden ramparts..
or, as C. Whalen put it, so succinctly, for this go ’round: “Tough tootsies, Little Banks”
IOW, it isn’t a ‘Banker bail-out’, it’s a ‘”Banker” Take-over’
Curmudgeon,
I agree, and honestly, I wish the big D happens tomorrow so we can start mucking2 ASAP.
French correction: n’est-ce pas ?
This is just silly.
Reasonable people can disagree on whether a bailout to prevent systemic collapse was or is the right thing to do. Having accepted that a bailout was or is needed though, protection of creditors and counterparties is not only an inevitable outcome, it’s the whole point of the bailout in the first place.
this is pretty: “Writing about the prospects for a future where capitalism would be unnecessary, John Maynard Keynes said: “We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for 200 years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues.”
But isn’t greed essential to the system? Many argue that all that is needed is strong rules and regulation that will ensure self-interest doesn’t become greed. What if the problem is more deep-rooted and what if the system encourages greed? What would happen to profits if new wants and needs were not created every day and people encouraged to consume more and more? What if the reason why the Wall Street model became dominant was because globalization and financialization was the only way for capitalism to reinvent itself after the Keynesian solution had stopped working? Which Wall Street firm would have grown and prospered if it didn’t peddle the latest in financial “innovation”?
Gekko had a point. Greed may be a necessity.
As Keynes put it so admirably, “For at least another 100 years, we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.”
To be sure, he seems incredibly naive in believing we could change these gods in 100 years. The spirit of Christmas is nothing but a pre-capitalist relic.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
http://www.livemint.com/2008/12/23235523/Capitalism-and-the-spirit-of-C.html
note: that author, above, Chakravarty, is stuck trying to rationalize the, inevitable, geometric progression necessary for an ‘Economy’ when its unit of account is lent into circulation at interest. (like ours)
and this little ad hoc # http://www.youtube.com/watch?v=WnUUMs9WIC0
John Maynard Keynes and Economic Fascism ~5 min.
The key question is how much does criminal behavior get a pass? From the shadow banking system to the mega banks down to fraudulent home buyers, appraisers, mortgage outfits that colluded in the fraud, to the bundlers who acted as cut outs transforming and distributing bad paper, to the slice and dicers who obscured the real nature / risk of what was purveyed we have widespread participation in fraudulent transactions. It is a Fidelity case that is beyond measure.
What can we expect of gov’t? As in all large organized crimes it can go after the people at the top who benefitted most and had the key roles. That’s why top management should go… away.
We still don’t know what they are sitting on so it’s time to dig, not stress test. Whether creditors or counterparties deserve consideratio we do not know.
When the credit system began to falter action had to be taken but we are now further down the line. Plans like the PIPP are a furtherance of illegitimate actions as it is a round around the legislature. What the Best and the Brightest” are doing at the helm mystifies me.
Finance has to be reduced in its role in the economy. And this is a good time to start. I hope Obama’s Presidency is successful, very successful, but it’s time to toss the questionable folks from his financial team. I’m sure tall Paul can suggest some replacements…….. and it’s time to roust the banksters.
Was it not the failure of Lehman and the accompanying specter of credit default throughout the system that led to the panic and near collapse of the Global economic system?
The problem as I see it is that we do not know who actually has a legitimate credit claim on these financial institutions. Is a CDS a legitimate claim when not used as a legitimate hedge? How would one quantify the fallout from making all creditors suffer?
I imagine that GM’s bankruptcy will be an experiment, in a more limited and controlled way, in this very exercise. The question with that will be if GMAC is included.
this, an interview w/ Max Keiser is more on topic:
http://www.youtube.com/watch?v=wTZr0PgAdYQ
also calls for UK Pound to go the way Icelandic Krona
and, see: Ritholtz on evidence of fraud at AIG
he’s a fan of TBP.
http://maxkeiser.com/
Max is a sharp dude, willing to speak it as he sees it.
But after the US Government became a subsidiary of Goldman Sachs, such largesse is probabaly inevitable?
Froglips Says:
April 5th, 2009 at 6:09 pm
Curmudgeon,
I agree, and honestly, I wish the big D happens tomorrow so we can start mucking2 ASAP.
French correction: n’est-ce pas ?
(Thanks for the correction. French was a long time ago. I use it nowadays at my own peril.)
“But there is a big hole in these proposals, as there has already been in the government’s approach to bailing out failing financial companies. Even as they focus on firms deemed too big to fail, the new proposals immunize the creditors and counterparties of such firms by protecting them from their own lending and trading mistakes.
100% untrue…….
Treasury’s proposals specifically included a proposed resolution authority for systematically significant finanancial companies like AIG, modelled on the FDIC’s resolution authority. And like the FDIC’s resolution authority for insured banks and thrifts, the Treasury’s proposal gives the FDIC the power to impose pain on creditors—which is exactly what Cowen criticizes the Obama administration for failing to propose! Specifically, the FDIC would have its traditional powers of avoidance, as well as the power to repudiate “burdensome” contracts.
This undercuts Cowen’s entire column. I honestly don’t know how he could have missed this—the proposed resolution authority was the most talked about aspect of Treasury’s proposed financial regulations. What’s even more amazing is that the NYT’s editors let Cowen’s column go to press. I guess they don’t read their own paper.
A fantastic quote from “The Daily Reckoning” on the tension between economic theory and “pragmatism”:
“Everyone wants to be Chinese. Because the Chinese have money. And because they don’t have free markets. It is widely believed that the Middle Kingdom can more effectively fight a downturn without democratic, consensus-driven institutions staying its hand.
But here is where we gasp for air. What theory holds that central planning – whether by Chinese communists or American Democrats – can do a better job of allocating capital than the people who own it?
There is none. That is why the world’s leaders – and most of its economists too – permit themselves a luscious fib; they say they don’t need theory at all. “Pragmatism” was the word on every pair of lips in London this week. Free from chains to dead economists, they say they will try “whatever works.” Oh, the loveable lunkheads! Naïve enough to believe anything; receptive as a trashcan. “Pragmatism” in economics is as phony as the men who preach it. Every one of them has a dog-eared copy of Keynes’ General Theory of Employment, Interest and Money in his briefcase and an ace up his sleeve. And every supposedly new, pragmatic idea they come up with is merely a version of the same quack cures that kept the economy in the hospital last time.
Perhaps you can paint a bridge pragmatically. If you don’t like the color, you can change it quickly. But if you’re building a bridge, an airplane or an economic system, you can’t make it up as you go along. You have to have an idea of how it works before you start. Besides, results from fiscal, monetary and regulatory policies don’t happen overnight. The feedback loop takes years. It took the Bolsheviks seven decades before they realized they’d been had. Friedman’s critique of America’s Great Depression policies didn’t appear until 30 years after the event. In Japan, they still don’t know what they did wrong. And by the time the feds catch on this time, they will have turned an ordinary depression into a great one.”
I thought creditor and counterparty losses were, in aggregate, the systemic risk we were trying to avoid.
Graphite-
What theory holds that central planning – whether by Chinese communists or American Democrats – can do a better job of allocating capital than the people who own it?
Reply-
The capital was hijacked by the bankters and others. This mis-allocation is what has caused the mess.
Efficient use of capital is what market based Capitalism relies on. This basic failure of efficient allocation of capital is what lies at the core of the debate.
I agree that creditors need to bear some of the burden here. Otherwise, we’re encouraging the very behavior that got us in this mess. It’s too bad “too big to fail” has nothing to do with “impossible to fail.” Companies that are too big to fail makes me think of books like The Power of Small – http://tinyurl.com/ddttsp . Nothing is too small to fail, so shouldn’t we be taking a smaller view on things?