Economics Nobel laureate and Columbia University professor Joseph E. Stiglitz has what very well be the best year end piece I have seen to date;
“The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity – costs that were unnecessarily high given that we should already have learned them.”
What were those 6 “harsh” lessons?
1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.
2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses. .
3. When information is imperfect, markets often do not work well – and information imperfections are central in finance.
4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster
5. There is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.
6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation.
Why this was published in the China Daily, and not in the US is beyond my understanding . . .
>
Source:
Harsh lessons we may need to learn again
Joseph E. Stiglitz
China Daily, 2009-12-31 07:51
http://www.chinadaily.com.cn/opinion/2009-12/31/content_9249981.htm
Category: Bailouts, Politics, Really, really bad calls, Regulation
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.
“Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation.”
duh
“Keynesian policies do work.”
well . . .let’s analyze . . .assuming a country was not debt-ridden already and took on more spending to help during a contraction . . .maybe-
another thing entirely when you have a debt ridden nation doubling, tripling down on a contraction jeopardizing its very solvency
It wasn’t posted in the US because it’s lame.
1. Nobody ever claimed that markets aren’t prone to excesses. With Lesson #1, Stiglitz sets up his own Strawman.
2. “There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses.”
Stiglitz considers this to be a failure–not of Policy–but of the Market?!?!?!
3. “When information is imperfect, markets often do not work well…” What does that even mean…”markets often do not work well”???
Oh, OK. And here I was actually thinking that Market worked to a degree that’s “fair to middlin’”. I had no idea that it was so bad that “they didn’t work well”. Hopefully we can set up a system that works “pretty good”.
4. “Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster”
So the crisis is over? Damn, then what in the hell are we reading these blogs for? Case closed! All’s well again. Hip Hip Hooray! For Keynes is a Jolly Good Fellow.
Hell, why doesn’t Stiglitz go a step further and state:
“Keynesian policies really do work! Just consider Japan: Keynesian policies kept the Land of the Setting Sun in such a state of deadening ennui, that it went through–not lost years—but Lost Decades. And these Lost Decades kept Japan from engaging in the leveraged excesses of the past several years. Ergo, Keynesian policies really do work!”
~~~
BR: A prevalent belief amongst Greenspan and other policy makers was that self regulation would work, as banks would not blow themselves up against their own self interest.
As to Japan, they allowed insolvent banks to hold bad loans on their books at mark-to-make-believe prices. (sound familiar?)
Their decade long debacle had nothing to do with Keynesian stimulus, it had to do with TBTF bailouts . . .
hmmm, not really in agreement
1. coulda fooled me, i was under the impression we did correct, and we have no regulation
2. that’s standar operating procedure, it’s just the first time it got national play with the internet taking the baton and explaining the particulars with facts versus national media……………..40-1 leverage insanity………….jeeze, that is the X marks the spot of everything
3, really disagree, the information was all there in black and white, can’t help if folks deny realities
4, keynesian, hmmmmmmmmmmm, we shall see, yet, australia, lol, it’s the king of commodities, where’d all the stim money go????????????????? emerging markets are still emerging, demographics don’t lie, seems more like there demand came back first
5. asset bubbles, common part of history, what get’s repealed is simple math
6. can’t believe he said this, could this really be true, oh me oh my
talk about obvious
While this critique is coherent and honest many will refute the points that do not align with ones existing biases.
2010 better? Why? Because we’re still fooling ourselves by accounting tricks? Because Barney Frank is anticipating an additional $4T in liquidity to the banks via the Fed? That GMAC needs another $4B? That employment will pick up (in real terms, not by people falling off the far end of the economic picture), and that that employment will be sufficient to maintain a large middle class? Because the SEC, FBI, and Special Prosecutors will begin investigating and prosecuting those responsible?
Bullshit.
As for the points (they are not lessons, they are observations) enumerated, above, here are the corrected versions:
1: Markets are not self-correcting, and without adequate regulation, they are prone to criminal exploitation.
2: There are many reasons for market failures. Too-big-to-fail financial institutions are a perversion of the natural and self-leveling business cycle as well as being antithetical to a reasonably well-functioning economy. Incentives are marked to insanity. We now live in a corporatist system.
3: When information is intentionally corrupted, withheld, misstated and/or manipulated by those in control of the economy, markets often do not work well – and information manipulations and misstatements are ubiquitous in finance. No one knows WTF is going on, because you can’t swing a dead cat without hitting a lying banker/ratings agency/corporate or governmental economist/corporate officer/government official.
4: Australia has forestalled it’s decline by emulating the US in attempting to be the most indebted nation, per capita, on earth. This is now a good thing?
5: There is more to monetary policy than just fighting inflation. Right. Like creating enough cash to actually pay the debt. Fractional reserve banking is the highway to inflation hell (are we there yet?).
6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Whenever someone says “financial innovation,” or, “we have some new financial ‘products’,” hide your wallet and break out the K-Y jelly. The lesson here is that fiscal conservatism is essential, and dead.
Let’s try something different and equally plausible:
1. Governments are not self-correcting, and without adequate limitations, they are prone to giant mistakes.
2. There are many reasons for government failures. Too-fat politicians had perverse incentives: Privatized gains, socialized losses, no accountability.
3. When information is imperfect or too demanding to follow, governments do not work well – and information imperfections are central in politics.
4. Countries, like Australia, that have commodities depended economies emerged from the crisis faster.
5. There is more to monetary policy than just fighting unemployment and external shocks. Excessive focus on unemployment and external shocks meant that some central banks ignored what was happening to their financial markets due to excessive monetary easing. Short term gains from such policy are miniscule compared to the costs imposed on economies when central banks cause asset bubbles to grow.
6. Not all regulation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are distorted by badly written and implemented regulation, the result can be muted growth, structural imbalance in the economy, and distorted innovation.
BR,
How can you say Japan’s lost decade had nothing to do with Keynesian stimulus when they in fact have been doing massive Keynesian pump priming for two decades and it hasn’t worked (there are plenty of bridges to nowhere in Japan and their government debt is massive).
~~~
BR: I am nore concerned with the issue of causation.
Insolvent banks and fantasy book keeping, not taking the writedown or being allowed to fall into bankruptcy — that’s what did Japan in.
The Stimulus wasn’t the cause, it was the response . . .
Good observations but IMO this is Stiglitz’s best one !
“The question then is who is going to finance the U.S. government,” Stiglitz said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYdgQkXu9eBg
Another spot on obseration by Joseph Stiglitz was this “The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice”
Simon Johnson the former chief economist at the International Monetary Fund, is the co-author with James Kwak of “13 Bankers,” forthcoming in April 2010 weights in here with some great some great points.
Lessons Learned but Not Applied
http://economix.blogs.nytimes.com/2009/12/31/by-simon-johnson-lessons-lea/#preview
@Marcus: You’re right about Australia. They’re crazier than we are when it comes to debt. But, I think we can defend our title on this one. Just give us a few more rounds in 2010.
http://www.abc.net.au/news/stories/2009/12/27/2781111.htm
“The Australian Council of Social Service says there is already a debt crisis and it will only get worse unless the Federal Government steps in, with the numbers of new families asking charities for help set to increase next year.”
The way I see it, Keynes worked before when we were a country of net-savers–even at the middle class level. That savings represented a pool or resources for government action. Now that we are Austrian School net-debtors, Keynesianism must rely on more debt–since it won’t tap into the wealth of the rich, who are the only net-savers in our economy. So, it’s just government running up debt rather than individual, middle class citizens. It seems like BR has been railing against this, which makes me surprised at his approval of Stiglitz’s commentary.
#1 & #2 does not recognized the central planning that comes from having a central bank and the power they have to set interest rates and regulate banks. See Von Mises & Rothbard. Rothbard was critical of Greenspan in 1987!
http://mises.org/story/359
“As an alleged “laissez-faire pragmatist,” at no time in his prominent twenty-year career in politics has he ever advocated anything that even remotely smacks of laissez-faire, or even any approach toward it. For Greenspan, laissez-faire is not a lodestar, a standard, and a guide by which to set one’s course; instead, it is simply a curiosity kept in the closet, totally divorced from his concrete policy conclusions.”
#3 if private markets have imperfect information won’t public policy makers face the same problem? Again see Von Mises and his Nobel Laureate student Hayek for what in previous generations was know as the calculation debate.
#4 Look at Japan for a large country were Keynesian policy has not worked. Australia bounced with the China stimulus is my short rebut (both in time and prose) to this point. What is the size of China’s stimulus compared to Australia’s GDP? Also, as an aside, if in the next few years Australia has an economic downturn then came we proclaim Keynesian failure?
#5 Again, see #1 of the reply above. Also look at the BOE decision to sell gold and yet we “trust” these bankers to set the correct interest rate and now also manage other “assets”.
#6 See Rothbard on power elites and how businesses through out American history have used government policy to stifle their competition and seek protection for their mistakes.
As a small private trader I only trade on exchanges, my P&L is marked to market every day. Not so for banks’ balance sheets, where bonds can be held to maturity, available for sale, or in the trading account, there is pretend and extend for loans, and all of this occurs under government over-site. End the asymmetry of accounting rules and government mandated “deposit insurance” , which is public policy and not private, with FASB caving to political pressure last March.
Also who decides what proper alignment is and how it is enforced? Will not public bureaucrats also have “… shortsighted behavior, and distorted innovation” in order to further their power and prestige?
@hume
well said
Looks like Prof. Stiglitz is making no bones about appearing centrist. Crank up the stimulus. More sub-committees please…
@Dan:
It seems lame, because a guy like Stiglitz always tries to be as least controversial as possible.
Here is my vote for best year-end piece:
http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html
Excerpt:
“There’s a rather complex “prisoner’s dilemma” going on at the present time, with none of the banks wanting to liquidate either securities or inventory lest they trigger an avalanche. Yet each is eying the door, fully-aware that the first one through will be the only one who gets through should anyone bolt. One of the more-interesting identities for the man yelling “FIRE!” could be a lawsuit – or state prosecution – over the myriad misrepresentation in this space during the bubble years.
Last year (2009) there was almost no net debt issuance between corporates and Treasuries, adjusted for Quantitative Easing. Indeed, it was only about $200 billion. That this sort of extreme measure was required to prevent a bond market implosion is rather telling. But what’s worse is what’s on the calendar for 2010 – nearly $2 trillion of net issue, duration-adjusted. A huge part of this is Treasury debt, and there the news is even worse, as there’s a serious duration problem in this regard – nearly half (about 40%) has a maturity of one year or less. This means that Treasury must roll over that debt – about $3 trillion worth – “or else.”
Ask the asset-backed commercial paper market and auction-rate securities folks what happened to them when their short-duration paper couldn’t be rolled on commercially-reasonable terms. Then extrapolate that to what happens to Treasury if (or possibly when) they’re unable to roll $3 trillion plus issue another $2 trillion on top of it to fund the deficit. Do you really think that $5 trillion and change of Treasury paper is going to be “all ok” sans “monetization” – or will “they” foment an intentionally-engineered stock market crash to scare people into Treasury debt? I wish Timmy the best of luck with this – he’s going to need it.”
What does it tell you when, true story, I am watching SpongeBob with my daughter and they are running gold commercials?
The gold higher, dollar lower, rates lower trade must be near its end.
Credit deflation is coming and rates will be rocketing as credit deteriorates. Gold down, dollar up. Only a matter of WHEN.
SB:
I assume the commercials are offering to buy gold, not sell it?
I also think he was rather premature in his assessment of Australia. For some odd reason, fans of Keynesian stimulus seem to be unreasoning zealots who see only what they want to see in all sorts of situations.
~~~
BR: heh heh You just described fans of ALL ideologies . ..
#1
Markets do correct. Markets are not perfect, there is a difference between perfection and self-correcting.
A recession is the method by which a market corrects itself. A recession should be called a market correction.
The more intervention there is in the economy the longer and harsher the correction will be.
#2
Let’s not forget the two big government failures: monetary policy and fiscal policy. One of the big lessons of the 20th century was that central planning does not work. Washington is a bit slow learning this lesson.
Too-big-to-fail is a interventionist policy. An interventionist policy fails and Stiglitz blames markets and declares the solution to more interventionism.
True free market types oppose the TBTF intervention that deepened the current recession.
#3
Yet Stiglitz assumes the regulators are omniscient. They will always be behind the curve. Let the markets work and things will be vastly superior to our current regulatory/interventionist system.
#4
Keynes is dead. He failed. End of story. Trying the same failed policies is insanity, not progress.
#5
Central banking is a failure much like central planning.
#6
Not every Nobel Prize winner deserves it.
Porterhouse — your definition of failure is not achieving immortality?
So much to disagree with here. Keynesian policies work? More tripe from a leading interventionist. The reason we are in this current shit hole is from the interventionists. Stiglitz and the Krugs of the world use this as their mantra for ever larger government. Blaming our current fiasco on “free markets” is a hoot. We have not had free markets for 50 years. Among other things what we have are a series of GSE’s posing as free market entities which slowly undermine the last vestiges of a free market. One can only hope that when we have our final collapse Keynes and his followers will finally be run out of town. There is nothing worse for the economy than political hacks posing as economists joining forces with actual politicians to screw up what little is left of capitalism. The tax code is their guiding whip.
Keynes would not be bad if we followed both of his tenets—spend during recessions and save during booms. Government does the first but has not done the second in fifty years. And please, spare me the Clinton surpluses. We had no such thing. What we had was creative book keeping.
That is only partially true. No doubt, Greenspan sending rates to 1% plays a key role — but so many other things went wrong, that blaming it exclusively on the interventionists misses 3/4 of the picture . . .
BR, I’m a huge fan and owe a lot of my knowledge to you and your blog, please keep up the good work. However, I am somewhat surprised you championed this piece.
On item #1, no mention of the role played by the federal reserve in keeping interest rates low and aiding the creation of the yield hungry credit markets. It seems to me that we didn’t have free markets in the first place so how can we complain about free markets not working?
Also, you have pointed out many times that not every company was getting shorted to $0. Good banks such as JPM, WFC & USB managed themselves well and were ultimate survivors. However, bad actors such as LEH, BSC, WM & WB had unsustainable businesses and were trying to be cleared out by the market. That is until the gov’t banned shorting…
Also, is it reasonable to assume that if we had regulated the derivatives market then companies such as AIG et al. would not have gotten into so much trouble? The mortgage lenders were already regulated and that didn’t work out too well.
~~~
BR: I think he is criticising the bailouts of 2008-09 — not the policies that led to trouble in the first place.
Bad news Patrick —
We’ve had as close to free markets from 1982- 2007 as you are likely to see in your lifetime . . .
BR:
It may be “as close to free” as we’ll see, but when the most important interest rate is set by committee meeting it is NOWHERE near a free market. To me. “free market” does not mean “little regulation”…it means more like the “invisible hand” is allowed to function. The whole system is based on a manipulated rate…how can that ever be close to a “free market”? Combine manipulated rates with little regulation and you REALLY have the potential (and realization) of disaster.
~~~
BR: The Soviets made the same argument after the USSR fell. “We never really had a communist state — those meddling politburo burueacrats were the problem!”
@MA:
The commercials are to sell gold eagle coins.
@Dan Duncan:
“1. Nobody ever claimed that markets aren’t prone to excesses. With Lesson #1, Stiglitz sets up his own Strawman.”
Really? What about free-market extremists, i.e., hardcore libertarians? Perhaps you should ask Patrick Neid what he thinks about it. It’s always the government’s fault, if things go wrong in free-market la-la land. Or external causes, which didn’t have to do anything with the internal dynamics of “free markets” or “real capitalism”. What about the neo-classical economic theory with their equilibrium models of the markets, according to which markets always go to an equilibrium? Markets don’t fail by themselves according to these models. According to those, it’s always “external shocks”.
rc
Q: Why this was published in the China Daily, and not in the US is beyond my understanding . . .
A: Stiglitz: 6 Harsh lessons We Failed to Learn, Fail to Learn, and Will Continue Failing to Learn
I think it’s time that we all better prepare for the next big slap in the face by that ” invisible hand” of the market place.
rc-
dude- in response to your question the other day-
the GSE’s will not be brought on the governments books- 5.5 Trillion- because it will crash treasuries- why is that hard to grasp?
that they backstopped by the USG is one thing- that they are brought on the USG’s books- another thing entirely- because in theory- the USG can let them fail as they are now constructed-
but not if it was actual US debt-
that’s my only point- are we clear now?
[...] Six lessons we failed to learn in 2009. (Big Picture) [...]
per SB :
>>>Here is my vote for best year-end piece:
http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html
<<<
I like the way Denninger highlights the phony , debt-fueled GDP growth of recent decades , but he butchered the data in his post for the decade of the 1960's , overstating the debt by a factor of 10 , then used that corrupted data to support his biased view of that era , as illustrated by this summation:
"Yes, before you ask, the 1960s decade is accurate – the entirety of "economic growth" in the 1960s was not production – it was debt. It should now be clear to you why what happened in the 1970s with interest rates and inflation occurred! Those events had exactly nothing to do with Nixon closing the Gold Window – rather, it was the expected and perfectly-predictable outcome of the 1960s debt orgy!"
Using the correct figure , 10% , rather than 100% , of cumulative GDP was explained by added debt. Would a ten-fold reduction in the impact of debt growth during the '60s cause Denninger to retract the statement above ? Not likely , and it's a major part of our problem , generally. People don't look at data to see what it says about the real world. They look for data — or manufacture it — that conforms to their view about the way the real world should be.
@porterhouse:
“#1 …
The more intervention there is in the economy the longer and harsher the correction will be.”
This claim is purely opinion. It’s not provable.
“#2
Let’s not forget the two big government failures: monetary policy and fiscal policy. One of the big lessons of the 20th century was that central planning does not work. Washington is a bit slow learning this lesson.”
Too generalized so that your statement isn’t true anymore. I would say central planning has worked quite well for certain countries under certain circumstances. For instance, I doubt very much the Soviet Union would have made it from a country of peasants to an industrialized country in the first half of the 20th century w/o central planning. The price people paid there is the other side of the story, though. There are other examples where central planning was quite an important part in capitalist modernization (e.g. South Korea). Capitalism itself wasn’t created by free markets, but by the absolutist states in Europe in the 16th century. It just doesn’t mean it works under all circumstances and forever in this way.
“Too-big-to-fail is a interventionist policy. An interventionist policy fails and Stiglitz blames markets and declares the solution to more interventionism.”
Too-big-to-fail was a response to the debt crisis, not the cause. Thus, whether this policy choice was right or wrong isn’t relevant for the question whether assigning the blame to the markets to have caused the crisis is correct.
“True free market types oppose the TBTF intervention that deepened the current recession.”
The second part of this statement is purely opinion. It’s not provable.
“#3…”
Again. Pure opinion.
“#4
Keynes is dead. He failed. End of story. Trying the same failed policies is insanity, not progress.”
Even if this is true, I doubt that you can present any empirical research, which proves that “free-market capitalism” is generally the better alternative.
rc
1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.
Markets are not self-correcting if they are not allowed to correct. When a central planning government attempts to” protect” its citizens by not allowing failure a market cannot correct itself. Failure removes bad behavior. By taking failure out of the system, the government removes the cleansing mechanism and only encourages excessive risk taking. Without failure, markets are prone to excess.
If some bureaucrat can be pressured to change existing regulations, there can never be “adequate regulation”. What is adequate today will be changed in the future. Further, if regulators don’t enforce the regulation in place, is the regulation adequate is it a bad regulation? Finally, when politicians force the manipulation of existing regulations to support their political agenda is the regulation adequate or is the goal of the political agenda better regulation?
“BR: A prevalent belief amongst Greenspan and other policy makers was that self regulation would work, as banks would not blow themselves up against their own self interest.”
Greenspan should have practiced what he preached. Unfortunately as a central planner he thought he could do it quicker, better and less painful than the market.
@Goldilocks:
You maybe right…in reading a piece like that, to me the 1960′s is ancient history…I am all about what is about to happen going forward and this guy is not afraid to speak his mind.
Anbody following the Chicago PMI bullshit? They announced a 60 print yesterday for Dec…only to revise it today to 58.7 as part of their annual benchmark revision. Words fail me on this insanity.
call me ahab:
“the GSE’s will not be brought on the governments books- 5.5 Trillion- because it will crash treasuries- why is that hard to grasp?”
These 5.5 trillion won’t be on the debt side of US government’s balance sheet. They are assets. Only the fraction of these assets that goes bust will translate into debt for the USG, since USG will have to cover for these losses. And the decision to cover for these losses has already been made. This is the purpose of the preferred shares programs. I quoted it.
Or read this:
“http://finance.yahoo.com/news/Fannie-Freddie-proving-too-apf-251278959.html?x=0&sec=topStories&pos=5&asset=&ccode=”
According to this, the losses are being estimated to amount up to 300 billion US-dollar. This would be the amount of the additional government debt.
rc
rc-
wow dude- we’re not connecting here- Fannie’s own disclosure-
“Securities issued by Fannie Mae are not guaranteed by the United States and do not constitute a debt or obligation of the Unites States or of any agency or instrumentality thereof other than Fannie Mae.”
the issue is not bad debt- it’s total debt that would be guaranteed by the USG
riley Says:
December 31st, 2009 at 11:36 am
1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.
“Markets are not self-correcting if they are not allowed to correct. When a central planning government attempts to” protect” its citizens by not allowing failure a market cannot correct itself. Failure removes bad behavior. By taking failure out of the system, the government removes the cleansing mechanism and only encourages excessive risk taking. Without failure, markets are prone to excess…….”
Exactly so. That is the nexus of every complaint lodged by the very few free marketeers that exist. The Stiglitz and the Krugs of the world don’t trust/like the process so they intervene. The bitter lesson we are all going to learn–all interventionism fails. All we are talking about is when. In my opinion the game we are now in officially started on Oct 20, 1987 when the mythical Greenspan put was born.
Free markets create inequities, abhorred by the political classes, while lifting the entire boat.
Moss, that is ALWAYS the case.
SB,
I was right all right. Denninger has already corrected his table and , to his credit , deleted the paragraph I highlighted above. I doubt he was able to delete his corresponding bias , however.
“1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.
2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses. .”
stiglitz contradicts his own theory in his first two “lessons” we failed to learn. in #2, he freely admits that the tbtf’s were running under the assumption that they would receive a taxpayer bailout regardless of their incompetence and / or level of corruption; similar to the thesis of one edward griffin http://nordskogpublishing.com/publisherscorner/2009/11/understanding-creature-from-jekyll.html. in #1 knowing full well that the tbtf’s operate under the assumption of perpetual backstops, he still goes as far as calling the wall street cartel we have a “market” in obvious reference to what he believes is a free market. so his entire premise is complete hypocrisy: he acknowledges the implicit taxpayer backstops the tbtf’s receive due mostly to the kickbacks, er, “campaign contributions” they give to their cronies in washington and somehow he attempts to connect this corporatist mantra with the “free market” and why it “failed”. in what book on free market capitalism is their a chapter devoted to companies operating under the notion of all reward with no risk and how that brings greater efficiency and value?
the only thing i see that failed is stiglitz and the like. for someone who is supposedly cock of the walk in academia, he fails to understand what a free market really is. intervention, cronyism and bailouts are NOT part of a true free market system. when companies operate in a “heads i win tails you lose culture”, rational decision making goes right out the window. it is completely ridiculous to blame the free market for the mess we are in today because true free markets simply do not exist.
@j_rod: Aside from maybe a period in the 1800′s, they never really existed. Unfettered free markets are a myth. Nor will they ever exist as long as the marriage between corporations and our gov’ t continues unabated. I feel like we’ve had these debates maybe 20-30 times over the last few years on this blog and nobody ever changes their minds along the way. Waste of time, IMO.
@Mannwich:
On “free markets”:
“Aside from maybe a period in the 1800’s, they never really existed.”
And we know how great things were back then. Particularly for the working class. And there weren’t any economic financial crises with grave consequences for the society at all.
rc
@rc. Bingo, but nobody here was alive back then, so it’s quite easy for the free marketeer ideologues to romanticize and wax nostalgic about a time they never lived through.
j_rods:
“true free market system”
Can you give me a few examples from history for a “true free market system” that has worked well for the general population, and not just for a privileged class of investors and the owners of the means of production?
rc
I would also venture to guess that we’d probably be an even MORE violent and crime-ridden society in a total free market environment. “Self-regulation” by force. Downright Hobbesian.
@ rootless:
so you’re a proponent of corporatism?
@ mannwich
i fail to see the connection between not advocating corporatism and having that somehow lead to the transformation from current society into gotham city. you’re basically missing the point of my post. if banks were not working under the implicit guarantee that their losses would be backstopped, they would not have made the same decisions that brought us to this point. and without that implicit guarantee you’re telling me society would be mad max?
@ rootless
“and not just for a privileged class of investors and the owners of the means of production”
are you so blind as to not see the oligarchy in action today? wealth inequality is to the point where the middle class will soon be gone. more people are on food stamps, welfare, unemployed, indebted than we have seen in our lifetimes and you’re trying to make the point that our current system works?
Barry Ritholtz Says:
December 31st, 2009 at 10:42 am
Bad news Patrick —
We’ve had as close to free markets from 1982- 2007 as you are likely to see in your lifetime . . .
That isn’t something we should be celebrating.
Point 1. “Markets are not self-correcting, and without adequate regulation, they are prone to excess.” I’m sick of hearing that one. While I’ll grant that markets are prone to excess, they will ALWAYS self-correct if given time and left alone. People, the government etc just don’t like going through the pain of the correction. Sometimes it is very painful…revolutions etc. but a market will correct eventually. Eventually could be 100 years…
not sure we can have a real free market ever. while some will say its government intervention that prevents it. all the while ignoring how business will play the market to their advantage, and always have and always will, thus destroying said market, as its no longer free. and i think thats just human nature. not that the TBTF ever considered that any thing would go wrong, ever. doubt that was ever in the equation. they were just working the market as they always have, doing what they wanted and making lots of money and ignoring any thing that didn’t fit their perception of what reality was, all the while things were falling apart around them. when the seas turned so bad they were in need they had their government bail them out to keep from destroying the entire economy. which they had worked so hard to do. and companies getting bigger usually is a sign of a market . that probably isn’t really free
@j_rod: It seems we each missed each other’s point, which is common when these debates stray into the ideological and not the topical. Anyone that has read my many posts on the bank bailouts topic knows that from the Day 1 of TARP I was against it, knowing that it would be a giant mistake for the long term good of most of the country, namely the middle and lower classes, but that does not mean I’m for so-called “unfettered free markets”, which would likely be just as rotten, or even worse. It’s all about POWER and any entity that gets too much of it will become corrupt, to the detriment of the non-winners, namely the average person.
I’m for a political and economic system where there is smart regulation that is actually enforced no matter who is breaking those rules, namely for the people in those positions to DO THEIR JOBS. We haven’t always been a kleptocracy. We’ve just morphed into a corrupt culture over the last 20-30 years in the name of the “getting what you can, while you can”, via any method, mentality. This is all about culture. Criminals wear suits and ties too.
@Goldi:
Denninger is a bit crazed on debt in that piece…debt can be used properly (like guns)…all assets are backed by a combination of debt and equity. Sometimes a company can have too much equity and not enough debt. But our economic debt today has run amok and this is clearly bad for the future. The issue is determining how it will unwind.
Another harsh lesson from this this decade: whenever someone in Washington or Wall Street is making their case by invoking fear (be it fear of terrorism, financial collapse, government intrusion, foreigners, Islamism, Socialism, Keyensiansm, or whatever) it’s usually because that person is being paid by a large corporation that is trying to further its own profits.
@j_rod at 1:21 PM:
“so you’re a proponent of corporatism?”
No, I am a proponent of analysis tested against empirical data.
@j_rod at 1:35 PM:
“are you so blind as to not see the oligarchy in action today? wealth inequality is to the point where the middle class will soon be gone.”
And what is this supposed to prove? It doesn’t prove that it would be better in a “true free market system”. In which one of the developed countries in this world is wealth inequality larger? In the ones with more or with less government intervention? BTW: Wealth inequality in the last century has been the smallest one in the countries with centrally planned economies in Eastern Europe.
“more people are on food stamps, welfare, unemployed, indebted than we have seen in our lifetimes and you’re trying to make the point that our current system works?”
No, I am trying to make the point that your claim a “true free market system” would work better than the current one has not been proven and is purely based on opinion and belief.
rc
willid @ 1:46-
good points
@willid3
“not sure we can have a real free market ever. while some will say its government intervention that prevents it. all the while ignoring how business will play the market to their advantage,”
A free market is never completely free of government regulation. The government’s role is to keep market opportunity equal for all participants . To enact regulations that protect its citizens. Regulations whose compliance with can be impartially judged. The free market is a market where the government does not support one market participant over another. The problem is not that business “plays the market to its advantage”. The problem is that businesses (and individuals) use the government the change and/or enact regulations that benefit them and restrict other market participants. It is this government intervention that prevents the markets from picking the winners and losers. That prevents the market from self-correcting. Either a central planner will choose who the winners are and how much they win and who the losers are and how much they will loose or the markets will but it can’t be both. The central planners decided which banks would be the winners. Now they are deciding how much they will win. The market has had no say.
Remember the real difference between a republican and a democrat is how they want to use the government to control behavior.
@br
“We’ve had as close to free markets from 1982- 2007 as you are likely to see in your lifetime . . .”
Were the markets really free, or did certain regulations get removed, changed or enacted that would give a business/industry an advantage in the market. Getting the government to intervene on your behalf is not a free market action even if that intervention is removing regulation.
Markets are not self-correcting
Of course they’re self-correcting, just not without pain.
Keynesian policies do work
Strawman?
Nobody argues that throwing gobs of money at the economy can get things going, albeit temporarily. The ONLY question is whether the end justifies the means.
Riley sasy
The problem is not that business “plays the market to its advantage”. The problem is that businesses (and individuals) use the government the change and/or enact regulations that benefit them and restrict other market participants.
a business playing to its advantage against its customer(s) is breaking the free market. as both parties to a transaction don’t have the same information. playing its advantage against its competitors isn’t the same thing.
[...] Stiglitz: 6 Harsh Lessons We Failed to Learn by Barry Ritholtz at The Big Picture [...]
1. greed is regulated by fear and visa versa, as long as one is playing with one’s own money.
2. amen
3. huh? would there be a market if we had perfect information?
4. yes, a free lunch will always garner a crowd
5. amen
6. who is going to figure out what innovation is good? obama? pelosi?
Australia didn’t have the excesses of lending that were seen in the US. We also had a commodities boom which lasted well into 2008, but only really affected a small part of the economy. So we didn’t have the boom, nor were we going to have the (big) bust. To say that Keynesian policies worked when an expansionary fiscal policy was not needed in the first place is just wrong.
This post should be entitled, “Stiglitz provides more evidence that he is a partisan hack”.
4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster
Um, no. Australia provides China with commodities. China’s government is forced a credit bubble during the downturn that fueled this demand.