Joseph Stiglitz: 5 Disastrous Decisions That Got Us into This Economic Mess

[marmar]

via AlterNet:



5 Disastrous Decisions That Got Us into This Economic Mess

By Joseph Stiglitz, Vanity Fair. Posted December 11, 2008.

We are at a dangerous moment. Behind the debates over future economic policy is a debate over history -- here are the major mistakes that got us here.



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.

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. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation -- or "liar" -- loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn't have the tools, he could have gone to Congress and asked for them. .......(more)

The complete piece is at: http://www.alternet.org/workplace/111709/5_disastrous_decisions_that_got_us_into_this_economic_mess/

[fasttense]

1. Let's see if I get this right.

According to Joseph Stiglitz, the republicons with the help of some delusional Democrats,

First fired the guy who knew what he was doing;

Then, they took the controls off;

Then they cut taxes on the only people who were making money;

Then, they faked the numbers;

And finally made it worse by trying to fix it.

Sure sounds like a republicon plan.

[BR_Parkway]

3. Damn good summary - I'd say you nailed it

[Shiver]

2. Wow...

That is a damn fascinating read... one of the first articles I've seen that has made this whole fucking thing understandable.

[slipslidingaway]

4. Thanks and another factor... Retail Sweep Programs ???

http://research.stlouisfed.org/publications/review/01/0101ra.pdf

"In January 1994, the Federal Reserve Board permitted
a commercial bank to begin using a new
type of computer software that dynamically
reclassifies balances in its customer accounts from
transaction deposits to a type of personal-saving
deposit, the money market deposit account
(MMDA).1 This reclassification reduces the bank’s
statutory required reserves while leaving
unchanged its customers’ perceived holdings of
transaction deposits.

The use of deposit-sweeping software spread
slowly between January 1994 and April 1995, but
rapidly thereafter. Estimates of the amounts of
transaction deposits reclassified as MMDAs at all
U.S. depository institutions, prepared by the Board
of Governors’ staff, are shown in Figure 1.2 By late
1999, the amount was approximately $372 billion.
In contrast, the aggregate amount of transaction
deposits (demand plus other checkable deposits) in
the published M1 monetary aggregate, as of
December 1999, was $599.2 billion.

In this analysis, we interpret the effects of
deposit-sweeping software on bank balance sheets
to be economically equivalent to a reduction in
statutory reserve-requirement ratios. We seek to
measure the amount by which such deposit sweeping
activity has reduced bank reserves (vault
cash and deposits at Federal Reserve Banks).
Currently, transaction deposits are subject to a 10
percent statutory reserve-requirement ratio on
amounts over the low-reserve tranche ($44.3 million
during 2000, $42.8 million during 2001),
whereas personal-saving accounts, including
MMDAs, are subject to a zero ratio.3.."

[sinkingfeeling]

5. Read this earlier this morning and saved it away. Well written and easy to understand.

[bvar22]

6. Hmmmm.......

"The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation -- a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant -- and successful -- in their opposition. Nothing was done."

Those names sure ring a bell.
Now where have I seen them lately?

[progressoid]

8. Yeah, those guy scare me.

[yurbud]

7. why not name HIM secretary of the treasury? that would be a sign of goodwill to the whole world