Stella sat down with an international economist to ask the burning questions that have not been answered by the media. Our friendly economist is the kind of guy who is very busy, because there’s a global financial crisis, yet found the time to talk to Stella over a glass of Johnnie Walker on the rocks.
Who’s to blame?
Everyone in the developed world is to blame. It’s a collective failure and it’s global.
But really, who’s to blame?
Everyone was acting in their own self interest:
Mortgage brokers are guilty of pushing subprime mortgages.
Home buyers are guilty of taking on loans they can’t pay.
Wall Street is guilty of packaging risk. Investors are guilty of buying risk without knowing what they are buying. Wall Street was doing what they do – taking risk from people who don’t want it and giving it to people who do. In theory it’s a good thing. Everyone should have had an interest in the risk but they weren’t appreciative of the risk
It’s the principle-agent problem. Owners (the principle) put trust in traders who are making complicating trades. At Lehman Brothers, for example, a guy whose job is to trade securities and make money, he’s judged on results. The risk he’s selling might come home to roost in five years—he knows there’s a bubble and it will burst. But if he’s not making money relative to his peers, he’s out of a job.
Deregulators are guilty of not anticipating the result. Greenspan is guilty of pumping oxygen into the housing bubble – it’s his biggest failure. Phil Graham, Robert Ruben and Larry Summers are guilty of pushing for deregulation.
Western consumers are guilty of buying too much stuff.
The Chinese are guilty of saving too much. The more they save and loan back to the West, the more money there is sloshing around for credit. It’s easier to get loans, prices go up, everyone feels wealthy, house prices go up, and they buy more.
When the party ends everything collapses.
Isn’t Bush guilty?
This is not Bush’s issue. It could have happened under a Democratic administration. But, it tends to be a right-wing thought mode that produces this.
How do we stop it happening again?
You can’t.
You’re kidding?
Booms, busts and bubbles have occurred since the financial system began.
We can do things to prevent them happening again in the same way, but they morph into another form.
Like a virus that adapts?
Yes.
(Stella starts drinking heavily. She thought you could fix everything.)
How do we change our global economic model to reconcile the dependence on consumption with a sustainable environment?
Cold fusion. Mud huts. It’s a silly question.
Why?
Consumption is the center of the economy, it’s at the heart of the economy, it’s how we live.
Yours is a question for environmentalists. We move from fossil fuels to renewable resources. But you don’t want to kill the economy. I’m a big fan of carbon taxes, fuel taxes, cap and trade, but done in as sensible a manner as you can. Lobby for China to reduce green house gas—the government is not accountable to the people, so unless they are facing mass revolt, they will push growth above all else.
Bush/Cheney got it wrong, you don’t subsidize the carbon industry. You make it more costly to consume, make its cost its true cost—internalizing externalities is the economist’s term.
Save or spend?
We should all save. Our 401(k)s are down, house prices are down, everyone is spending less.
The problem is that when everyone does that in unison, the economy collapses; Keynes called it the paradox of thrift.
Someone has to step in and fill the hole and that’s where the government comes in.
Is Goldman Sachs like the Masons?
Maybe in 1929. They’re just a company. There’s no mystery. They operate like a company. There’s no cabal. Read the Simon Johnson article in The Atlantic. But they are financial oligarchs. There’s definitely a revolving door.
Will the Euro last?
Is Alabama going to drop out of the U.S. dollar?
What about the challenges it’s presenting to Spain and Ireland?
The euro is not short-term economic expediency.
It’s a marriage, not a fling?
Yes, and once married, it’s hard to divorce.
Thumbs up or thumbs down: the bailout?
Must be done, but I’m not crazy about the way it’s being done. Any country with a huge financial crisis must have government intervention. The standard is to intervene, straighten things out, nationalize, and sell a few years later. Or you’ll be in Japan’s lost decade.
Thumbs up or thumbs down: the stimulus?
Too many tax cuts, not enough spending. Should be $2 trillion. A necessary evil.
Thumbs up or thumbs down: Gordon Brown?
He’s a good economist, knows what he’s doing, he’s smart. His bank bailout was much better than ours because he cut through the politics and did what was necessary. We didn’t nationalize the banks. If the U.S. had followed his model we’d be better off.
Thoughts on Brown’s new 50% tax bracket for those earning more than $220,000?
It’s absolutely right. The trickle down theory has been discredited. Regardless of fairness, it doesn’t work. People who make more than $250,000 should be part of a progressive tax network trickle down. Joe the plumber should get a tax break until he earns over $250,000.
If you were in charge, what would you do next?
Hang myself.
This is not about the U.S. it’s global. So the Republicans behaving as they are is astonishingly economically myopic. There are very few issues on which left and right wing economists agree, but the current situation is one of them.
Putting political constraints aside, I would nationalize the banks, clean them up, and sell them off in two years. I would inject $2 trillion in stimulus and while you’re at, you might as well put it in productive investments such as infrastructure and green technologies, welfare and unemployment. A big priority, just on economic principles, is reining in the costs of healthcare. The U.S. has the best healthcare system technologically, but it’s way more expensive than it needs to be.
Any words of advice for faithful readers of TGW?
These are truly exciting times. It defines our generation. It makes us different from everyone else for the last five decades, so enjoy it.
Fascinating interview, Stella, and many thanks to your tipsy economist friend.
For starters, though, why should we listen to him given the failure of his profession to foresee or prevent the current crisis?
The, “we all got it wrong,” but “there’s nothing we can do about it” is what bugs me about a standard economist’s point of view. We have entrusted our societal future in the hands of a group of analysts who (mostly) adhere to quantitative analysis. This is why most economists didn’t see the current problem coming – the numbers didn’t predict it. (Or maybe the data did, and it was just read incorrectly.)
To say that We (and by “We” I mean consumers and home-buyers) got it wrong is like the US auto industry blaming the public for buying too many SUVs and thus destroying them when the market shifted toward smaller cars. (I imagine Exxon-Mobil is going to blame us for our final demise because we continue to buy their subsidized carbon-based fuel?)
Do economists think that the incessant advertising for credit cards and mortgage companies has something to do with the average person’s poor consumer habits? Or would I just sound like a lunatic if I was to ask (the way I did when I had a conversation with a well-meaning economist more than three years ago about the unsustainability of the system)?
Okay, I’m done now — sorry to be so finger-waggy.
“Is Alabama going to drop out of the U.S. dollar?”
Would that help? Maybe we can encourage it. Rick Perry wants Texas to secede, after all.
Stella, this is a marvelous interview. I only wish I could have been a scotch-sipping fly on the wall. And that we could all have played some poker afterward, with house deeds and car titles as antes.
Really interesting post. I smell Bacon.
Is the first glass supposed to be half full and the last one half empty?
Is it any wonder that the Scotch class is perfectly clear and the rest of the whole world is fuzzy?
#1 – I have to say I remember this particular economist telling us that the housing market was a bubble for the last few years – especially because I and those close to him have talked a lot about real estate.
As for the rest…I don’t know.
He also said that economics is not a science but a way of understanding human behavior – maybe that’s why it’s a better analytical tool than a predictive tool.
#2 – I definitely have a problem with having experts tell us over the years what’s good for the market, which many of us accept, and them being wrong. And i can’t believe there isn’t a way of at least modifying the system.
Problem is enough of us profit from it at one level or another not to challenge it.
#3 You are always welcome as a scotch-sipping fly on the wall, with your big-bluffing, high risk-taking poker ways.
the Scotch class
Awesome Freudian slip.
Oh, or maybe intentional.
“Is the first glass supposed to be half full and the last one half empty?”
Great observation.
Not to get all Gramscian (I guess I just did), but even the idea that we call it a “housing bubble,” is way for economists (and other reality-weavers) to sell us on an – if not incorrect – softer version of reality: the problem was never a “housing bubble,” it was a credit bubble.
Who is this Scotty, and why is he so darn prickly?
The, “we all got it wrong,” but “there’s nothing we can do about it” is what bugs me about a standard economist’s point of view.
Yes. FAIL.
Also:
Since the 1970s, financial deregulation has led to numerous speculative bubbles and burstings all over the world, wrecking the economies of many nations and causing real suffering to millions. The people who direct global capital flows have profited from these man-made catastrophes while using their massive political influence to ask for and receive more and more deregulation.
Perhaps deregulators knew more or less what the results of their actions would be; perhaps the goal of deregulation was not generalized prosperity, as we’ve been told, but profit opportunities for predatory capital.
Great interview, Stella. I thought the point about booms, busts, and bubbles being like a virus that adapts was especially interesting.
I found these : ( http://tinyurl.com/dzolpn ) statistics from NPR interesting. Our total consumer debt is at an all time high, in relation to the national GDP. The only other time this happened in history was in 1929. The numbers are telling.
Great Post! Insightful, yet at the same time filled with a common-sence approach!
Linked from this blog post is a great essay by the British writer Dan Hind about the origins of the current crisis, who’s to blame, and what we have to do to keep it from happening again. Highly recommended, although it’s a bit long and has some stuff about British politics that American readers might have to just skim through. It argues against several of our economist’s points above.
I know people have limited time and attention, but I’d like to put in a plug for spending a bit of your own time and attention trying to understand what’s happening right now with this crisis. It’s a huge story and a genuinely systemic crisis. And the intellectual situation feels a lot like the situation leading up to the invasion of Iraq — a lot of experts on TV and in the papers arguing one way, only it turns out they’re all retired generals or work for defense contractors (or now, are economists or bankers or real-estate speculators or whatever). It’s up to us to seek out countervailing sources of information and argument. There are a few blogs on our sidebar that provide a good starting point.
Stella, nice post. I’m catching up on GTW now that the semester has wrapped up, and I wish that I had caught this on the day of. Nice interview.