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Stiglitz: Capitalist fools
Joseph E. Stiglitz, Vanity Fair
Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
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There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment.
Behind the debates over future policy is a debate over history-a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road-we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.
No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand. 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.
(January 2009 issue)
Also at Common Dreams.
Price Trends: Gasoline and CPI Are Twins
Ronald R. Cooke, The Cultural Economist
Just for the fun of it, I calculated the month to month change in the price of American gasoline (all grades) versus the month to month change in the Consumer Price Index (CPI-U), from January 2004 through October, 2008. Although the correlation is not perfect, it does show how the rate of inflation tracks the price of gasoline (and the oil from which gasoline is made). The left scale of the following chart shows the month to month change in CPI-U as reported by the Department of Labor, Bureau of Labor Statistics (BLS). The right scale shows the month to month change in the price of gasoline as reported by The Department of Energy (DOE)…
(11 December 2008)
The attack of the Invisible Hand (comic)
Tom Tomorrow, This Modern World via Credo
It begins in a secret lab… where an elite team of economists keep watch over the mysterious HAND…
First economist: It’s growing RAPIDLY! I wonder if we should regulate its consumption of MORTGAGE-BACKED SECURITES!
Second economist: What an absurd suggestion! Are you SURE you’re an elite economist?
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Down the road a distraught stranger rushes to warn local authorities of an impending CATASTROPHE…
Stranger [who looks like Paul Krugman]: Gasp — Housing bubble — pant pant — Derivatives — pant pant — Things man was not meant to MEDDLE with — wheeze gaasp —
First policeman: Oh oh! Sounds like somebody had one too MANY!
Second policeman: He can sleep it off in the TANK!…
(9 December 2008)
Humor
