Joe Stiglitz on the Crisis
So, Joe Stiglitz is weighing in on the crisis with an article with Vanity Fair. His claims? Five major mistakes were made.
#1: Firing the regulator inflation-fighter Paul Volcker in favor of free-marketeer Alan Greenspan
#2: Gramm-Leach-Bliley AKA the "Financial Services Modernization" Act
#3: "Applying the Leeches" - by which he means poorly planned, "ineffective" tax cuts/"stimulus", that "made" the Fed pump money into the economy to stimulate it.
#4: "Faking the Numbers" - misleading accounting + dishonest ratings
#5: "Letting it Bleed" - bailouts instead of fixing the real problem
Simple responses?
#1: Doesn't matter who is in charge, the nature of the fractional reserve banking system paired with fiat currency would have pushed us this direction.
#2: I'm pretty sure that Robert Ekelund and Mark Thornton have said the same sort of thing, but with an actual reason: our banking system is filled with moral hazards (fiat money, FDIC, fractional reserves, the Fed), so this "deregulation" amounted to corporate welfare.
#3: "Yes, but..." if the Fed did not exist, then we would have avoided the current crisis anyway.
#4: Agreed. Fraud is bad. Even anarchocapitalists don't approve of fraud.
#5: Also agreed. Bailouts will make the problem worse, and don't fix the real problem. The real, root problem isn't a lack of regulation; it's the government-sponsored system of moral hazards that eliminates every natural check on irresponsible lending and makes regulation the only way to manage lending risk. Eliminate the moral hazards, and the regulations stop being "necessary".
So close, and yet, so, so far.
Comments (7)
shaneinwy
It never ceases to amaze me how perfectly obvious all of this is to me, yet the "experts" continually get the diagnosis wrong. They really are like a bunch of drug addicts who insist on blaming their poor health on a "bad batch".
Maybe it is just because I was kicked out of my local gov't brain laundry at a young age and therefor am not properly adjusted, but it seems to me that it would take a stupendous and highly labor intensive kind of willful distortion of reality to come up with this stuff. Blaming this on "capitalism", or markets gone wild, or lack of regulation, etc is like me breaking someone's legs and then claiming that it is clearly an inherent bio/physiological weakness that keeps them from walking.
Published: December 12, 2008 2:54 PM
mikey
Greenspans writings from the 1960s proves he was familiar with and agreed with Austrian econ. But the lure of power and prestige was too great.
His words still carry some weight. Perhaps he will appear on national television and recant, call for the abolition of the fed and reintroduction of free banking and gold-as-money.Before he dies.As an act of atonement.
Published: December 12, 2008 3:28 PM
Dennis
In reference to item no. 1, let us see how much inflation fighting will be done now that Stiglitz's man is president. My educated guess is that the Obama Fed will be just as, if not more, inflationary than the Greenspan Fed. Moreover, I wonder to what degree Stiglitz supported Volcker's somewhat tight monetary policy in the late 1970s and early 1980s; my intuition is not much.
Published: December 12, 2008 3:29 PM
DD
"Capitalist Fools" is the title of the article. "Socialist Fools" would be appropriate.
The mistake the Soviet Union made was that it didn't call it's system "Capitalism" also. That way, when they collapsed, they could have said that "Capitalism" has failed us, now lets try Communism.
Published: December 12, 2008 3:50 PM
guy with a rollformer
Mikey,
Mr. Greenspan advocated a gold standard, even while he was in the position. It makes me wonder whether he decided to let the world learn the dangers of fiat currency the hard way.
Published: December 12, 2008 4:11 PM
Enjoy Every Sandwich
Pfah, every failure he's referring to is a failure of government. It's just yet another proof (as if another was actually needed) that the government isn't capable of "running the economy".
Published: December 12, 2008 5:22 PM
Walt D.
DD
True Marxists would describe the old Soviet system as "State Capitalism" and not true socialism - communism is the end game where the socialist system economy becomes so efficient that every one has all needs met !! Unfortunately, in reality, socialism, or central government control of the means of production, in the absence of market pricing signals, is not able to allocate resources anywhere close to optimally - the communist utopia is an illusion.
Sadly, the US is unable to learn from the mistakes of the Soviet Union. It can only be a matter of time before we have food shortages, bread lines, soup kitchens. If making a good speech about nothing could solve the problem, then we would only have to wait for President Obama to be sworn in. However, I don't think the problem is that simple. IMHO peter Schiff has it right and all the other talking heads have it wrong.
Published: December 12, 2008 5:24 PM