Blue Mass Group

Reality-based commentary on politics.

Stig-litz! Stig-litz!

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Well, it may not matter so much that the Nobel Prize winner isn't on the Council of Economic Advisors (although it is a little strange); what matters is that people acknowledge that he's right. In Vanity Fair:

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known.

Ah, good old Alan. I remember telling him telling folks to take out ARMs to keep the bubble up. It was bonkers at the time. Bonkers. 

Anyway, as Stiglitz says, we're not where we are for one reason. It's been a series of decisions based on crackpottery and a Panglossian ideology that says you don't need rules to prevent chaos and meltdowns. Just remember about self-correcting markets the next year-and-half or so.

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Comments

  1. Stiglitz also makes  clear that our local friend Larry Summers was not without error during his term in the Clinton admin. doing little to regulate the excesses.

  2. Too bad Stiglitz is too “progressive” to get a role in Obama’s cabinet. Remember that Obama is choosing “competence” over “ideology” for his cabinet, where “competence” apparently means having been wrong on the biggest issues of the day, as evidenced by the Summers and Clinton appointments.

    • If you have an employee with his fingers in the till, do you promote him?  Sure, if this is politics.  In politics you send them back to the Congress and Senate or to high appointed office.  We are the suckers.  As Democrats we laud the skill and accomplishments of our rascals while the Republicans laud theirs.  Poor America is in the middle.  Perhaps we should give out a “Robert Mugabe Excellence in Government” award to those politicians that have done their best to bring our country to her knees.  

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      p>Maybe there are too many candidates…

  3. Stiglitz in the December 11 Financial Times  notes that “Chapter 11 is the right road for US carmakers”

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    p>

    The debate about whether or not to bail out the Big Three carmakers has been mischaracterised. It has been described as a package to help the undeserving dinosaurs of Detroit. In fact, a plan to bail out the carmakers would benefit shareholders and bondholders as much as anybody else. These are not the people that need help right now. In fact they contributed to the problem.

    Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed…

    What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

    The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do…

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