Wednesday, December 17, 2008

Naive Professors?

"This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. ... Practically every day the government launches a massively expensive new initiative to solve the problems that the last day's initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public's perception of the government's competence and trustworthiness. ... The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at a minimum cost to taxpayers. ... From this perspective, one must ask what would have been so bad about letting Bear Stearns, AIG and Citigroup (and in the future, General Motors) go into receivership or Chapter 11 bankruptcy? ... In other words, instead of bailing out AIG and its creditors, it would have been better for the government to guarantee AIG's obligations to J.P. Morgan and those who bought insurance from AIG. ... AIG may have been responsible for its financial problems, but the culpability of those who do business with AIG is less clear, and so helping them does not reward bad behavior", my emphasis, Oliver Hart & Luigi Zingales (H&Z) at the WSJ, 3 December 2008.

"Bernanke and Company, who are running the U.S. central bank, the [Fed], have been very busy in the past year or so. The size of the bank has more than doubled since August of 2007. ... The main idea behind all this lending is to prevent some large banks (and other financial insititutions) from failing, shrinking, or restructuring. Behind this is, the goal of maintining the existing structure of banking and central banking. And behind that is the goal of maintaining government power and the existing political structure intact. Preventing economic collapse and maintaining the bank lending to the public are not the central goals of those who understand these matters. These are important to the knowledgeable authorities only insofar as they support the goal of maintaning the existing power structure. There are, of course, ignorant economists who think that without government intervention, the economic and financial system cannot survive and we will all be wandering around in bearskins with spears. However, if the financial and economic system were to collapse and if the government and the Fed did not interfere, a free market revival would occur with amazing rapidity. ... From this perspective, keeping the economy going is not per se what is important to those in power, because the economy will always keep itself going without these authorities and do a better job of it at that without them. What is important to them is keeping the existing economy going in the way that it is tied in to the existing power structure. ... The Fed is thwarting the public (and any semblance of a free market) by making the loans that the public refuses to make. ... The battle here is between the public and the government. ... In 2007 and 2008, the Fed is doing what the Reichsbank did in 1931. ... The point here is not the legality of the matter, It is the action of both banks in taking large amounts of long-term illiquid paper of questionable value and providing good assets and/or central bank credits in return. The Fed's TAF ($406 billions worth and slated to rise to $900 billion) is the name for the Fed's counterpart of what the Reichsbank did. As in 1931, there is no plan in place to wind down these assets. They require 'continuous prolongation.' ... Capital that should be going to healthy enterprises is diverted to government and to zombie enterprises. ... The harmful policies and actions of the central banks and the government in response to recessions, such as occurred in the 1930s and are occurring now, are, in a deep sense, not 'policy errors' or 'policy mistakes.' That language suggests that there exists a set of correct policies under the existing political structure that will resolve economic problems. That is a misleading way to think about the issue. ... Within the current political setup, central bankers would have to stop being central bankers and legislators would have to stop being legislators in order to play a constructive role in recessions. ... But if all this is to change, it means that the basic political arangement has to change. To change matters fundamentally, various leopards have to change their spots. A revolution in ideas needs to occur", my emphasis, Michael Rozeff (MR), 8 December 2008, at

H&Z are Harvard and the University of Chicago professors, respectively. H&Z are naive at best; tools of the plutocracy at worst. Uncle Sam is not looking to "solve the problems" of the American economy, whatever that is. Unc wants to protect politically favored interests. I agree, Unc's recent actions call into question his integrity and competence. We follow the recent 401(k) flap with interest. Yes, Unc has a "golden opportunity" now, however, I think H&Z and I disagree as to what it is. I have no problem with AIG, Bear or Citigroup going bankrupt. H&Z are big business apologists, I hope they get fat consulting contracts from say, Goldman Sachs for writing this. Why? Joe Schmoe's culpability is even "less clear" than that of AIG's counterparties! How do H&Z identify market failures? Do they look into Ed McMahon's "hermetically sealed mayonaisse jar"?

I agree with every word MR wrote. Perhaps more than just a "revolution in ideas". I'll suggest reading Crane Brinton's, Anatomy of Revolution, 1965, again.


Anonymous said...

Reordering the moneyscape is a big thing ...

More new ideas... yesx10!

I think the Cenbank/Treas magic act be wearing thin...

Anonymous said...

“the basic political arangement has to change”
I would guess many, but probably not a majority, would agree with this; the question is how. MR seems to pedal the same “government bad, market good” story that has served as a cover for the current “political arrangement” to enrich and empower itself. And his “revolution” amounts to money going, by the magic of market, to “healthy” enterprises. I would like to see a list of those… Not very enlightening… As for revolutions, read true practitioner, not their misguided biographers.

VoiceFromTheWilderness said...

The fallacy in the majority of what you have quoted here is the assumption that there is such a thing as 'the government' -- there isn't. 'the government' was taken over by big businesses, and wall st. in particular sometime ago.

Thus we see, as with the bush tax cuts, every problem that arises turns out to have the same 'culprit' -- 'the government'.

The WSJ would love for us to start thinking that *anything* they publish is worthy of anything other than derision. The WSJ is desperate for us to forget that it is precisely the policies *they* have advocated for vociferously, and often viciously, that are precisely the cause of the problems we are having.

Only in fantasy land america, can 30 years of blaming government not be responsible for a breakdown in government regulation. Only in fantasy land america can people who have pushed, publicly and endlessly for control, and upon gaining control oversee the collaps of the US economy NOT be held responsible for what they have wrought.

Nothing will get better in this country until the lies that have created the problem are recognized.


The first article quoted is startling for it's self serving duplicity. Startling not because we haven't see it before, but because the world view it represents is so obviously insane. 'Economists lost their principles' huh? Don't worry, the person writing that article lost theirs long before. This era is the era of no principles, that apparently had escaped the notice of our insightful article writer.

Anonymous said...

Hello i.a.

Ben Bernanke looks unassuming but he and Paulson are the two biggest crooks the world has ever seen.