Joseph Stiglitz in January Vanity Fair: Capitalist Fools.

[cali]

Capitalist Fools
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.
by Joseph E. Stiglitz January 2009
Treasury Secretary Henry Paulson and former Federal Reserve Board chairman Alan Greenspan bookend two decades of economic missteps. Photo illustration by Darrow.



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.

How did we land in a recession? Visit our archive, “Charting the Road to Ruin.” Illustration by Edward Sorel.
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.

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Great, very readable article.

http://www.vanityfair.com/magazine/2009/01/stiglitz200901

[Fumesucker]

1. Eh, it would be helpful if Obama were actually to listen to those who were right all along..

Judging by the economic team he is putting together that is not the case.

The powers that be will take a huge hit if and when we actually start acting in a rational manner with respect to the financial world, they will fight that tooth and nail.

[anigbrowl]

7. I guess that's why Paul Volcker is head of his Economic Recovery Advisory Board

I think you need to be a bit more selective about which fumes you suck. It might have been nice if Volcker could be made Fed Chairman again, but let's not forget he's 87, he probably can't and won't take such a demanding day-to-day job.

[Truth2Tell]

9. Volcker is the exception.

He has followers of Rubin crawling all over the rest of his economic team.

[Kip Humphrey]

2. Ideology over realism, whoever says the decisions leading to the "Great Recession" were "mistakes"

need only study up on the history of the neo-liberal/conservative, Gaia/Globalist, neo-fascist ideological movements to understand that we are experiencing the intended outcomes of neo-liberalcon fascist globalism along an uninterrupted path toward their ideological ends.

Case in point: with the prospect of a looming depression, unambiguous efforts are currently under way to destroy the union movement by going after the UAW, a jewel in the movement's crown. Going after the UAW is an indicator to me that the pursuits of their agendas are continuing uninterrupted in almost casual contempt of the decline of the RNC, Obama's election, and the aforementioned pending depression.

[sendero]

3. I hear this charge being made often..

... and I just don't buy it.

This is not some grand plan, this is the result of "true believers" getting their way and finding, surprise, that their deeply held ideological beliefs are bullshit.

Never attribute to malice that which can adequately be explained by stupidity. The "free markets" assholes erroneously conflated the idea that markets should be free with the idea that businesses should be free of oversight and regulation.

Why anyone would ever think that would work is beyond me.

[anigbrowl]

8. Agree 100%. I'm a big adherent of the 'muddle theory'.

[Agony]

4. This is where the rubber meets the road... don't miss this over the Warren fiasco

Free markets aren't free... regulation is what makes the market work.

It makes my head spin to realize that our current economy and marketplace has been turned over to the devotees of Adam Smith and his Invisible Hand (invisible because it isn't there, zero regulation) and the moronically naive Ayn Rand. Reagan, Greenspan, Rubin and Summers, Paulson, and the illustrious BFEE... awesome!

Thanks for catching/linking this article, cali. THIS is what President Obama needs to change, the rampant deregulation (and privatization) eating at us.


BTW, I do not want to minimize the Warren fiasco that President Obama has created. I do not support his decision to invite this divisive individual to the peoples inauguration. He chose poorly.

[Odin2005]

5. Don't blame the REAL Adam Smith, the Pukes would call him an Evil Socialist

The real Adam Smith (as opposed to the idol of him created by the right) was not opposed to appropriate regulation and other things the Right decries

[Usrename]

6. This could be only part of our problem.

Sure, it's hard to argue with the things the author says, but I think a whole lot is being missed. Mainly, a closer look might show that these same issues have a theme that extends much farther back in history. This might even be called the modern incarnation of a conflict that has always existed, a fight that will never be completely won, a battle that must be perpetually waged. The modern term is probably "class warfare", but it's more than that. It has become a war between people and their non-human, non-living creations.

Perhaps one of the more important root causes of all this currency manipulation is that we allow corporations to exist solely for the purpose of making money. Why is that a good idea? I can understand allowing the creation of these kinds of entities for many other purposes (where profit is only and incentive, not a goal) and maybe someone should take a serious look at outlawing those entities that serve no other purpose.

Maybe we need to start looking more deeply at our situation.

I think that once a corporation reaches a certain size it becomes like a black-hole for money. It creates it's own gravitational pull that is so strong nothing can escape. No mere mortal can do anything that would be effective in slowing or moderating these juggernauts, only governments can do that and they should.

Maybe.

[Truth2Tell]

10. K&R. Thank you cali. nt

[moondust]

11. "Trust but verify."

Wolf Blitzer conjured up this old Cold War Reaganism Sunday in the context of sorely needed regulatory reform. It was amusing as Reagan no doubt rolled over in his grave at the thought of his words being used to support government regulation. Carly Fiorina appeared to gag as she nodded in agreement.