Monday, December 03, 2007

Quote of the day: Though Mr. Krugman doesn't ask, I wonder what the presidential hopefuls think about our financial crisis. "What crisis?" you say?


"At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs."
--Paul Krugman, in his NYT column today, "Innovating Our Way to Financial Crisis"

"The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance," writes Krugman. He goes on:

How bad is it? Well, I've never seen financial insiders this spooked--not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified--because they've suddenly realized that they don't understand the complex financial system they created.

"Liquidity has been drying up," he says. The whole complex system of raising money by borrowing is grinding to a halt, threatening a recession, "possibly a nasty one." And it's basically owing to "a collapse of trust: market players don't want to lend to each other, because they're not sure they will be repaid."

The immediate cause, Krugman says, is the bursting of the housing bubble.
The run-up of home prices made even less sense than the dot-com bubble--I mean, there wasn't even a glamorous new technology to justify claims that old rules no longer applied--but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.

"But what has really undermined trust," he says,

is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn't supposed to have tens of billions of dollars in subprime exposure; it did. Florida's Local Government Investment Pool, which acts as a bank for the state's school districts, was supposed to be risk-free; it wasn't (and now schools don't have the money to pay teachers).

How did things get so opaque? The answer is "financial innovation"--two words that should, from now on, strike fear into investors' hearts.

Krugman allows for the possibility of beneficial innovations. "I don't want to go back to the days when checking accounts didn't pay interest and you couldn't withdraw cash on weekends."

But the innovations of recent years--the alphabet soup of C.D.O.'s and S.I.V.'s, R.M.B.S. and A.B.C.P.--were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead--aside from making their creators a lot of money, which they didn't have to repay when it all went bust--was to spread confusion, luring investors into taking on more risk than they realized.

Which brings us to the heart of the matter: "Why was this allowed to happen?"

At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich [right], who was a member of the Federal Reserve Board, about a potential subprime crisis.

And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation--but added, "I don't think we'd want it the other way around." Is that your final answer, Mr. Secretary?

I confess once again that I haven't been paying close attention to the presidential campaigns, so perhaps I've missed the spirited debate about how we got into this mess, how bad it's likely to get, and how we might get out of it, or at least ease the pain.

If by chance there hasn't been any such discussion, well, that's one reason I haven't been paying close attention to the sound-bitten campaigns.

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At 8:41 AM, Blogger Bruce said...

Krugman is certainly an economic expert. His reputation is well established. However, although, he is right when he says the root cause is the idealogy of the Bush types, it's MORE than that. Ideology is simply a belief. I think the whole problem of the financial chaos can be more clearly seen if we look at the root causes as a deliberate act of siphoning money up to a very few at the top of the economic food chain. Think of the efforts of the Bushies as the efforts of a MAFIA FAMILY and the whole thing becomes easier to understand and more horrifying. As Dubya's father one famously said, "we have to get more money into the hands of fewer people". The Bush Crime Family is no different than the Gambinos, the Lanskys, or any other mafia family; except that the Bush Crime Family has done more damage. Whether it's tax cuts for the wealthy, a proposed inheritance tax cut that would only benefit the 18 richest families in the country (some of whom have said they don't even WANT the tax cut and think it's wrong), bank scams, privatization of formerly government responsibilities for the benefit of a few cronies, or blatant war profiteering, the Bush policies have been designed to enrich only a few at the expense of all others in the world. Add to that the suspension of Habeas Corpus and you get to the REAL GOAL of the Bush Crime Family- the establishment of a pre-Magna Carta society of a few lords and millions of serfs who can barely keep existiing while they slave for the masters. Think not? Well, how many people in this country have had their pensions taken away and their pay cut, or their jobs taken away while the new jobs they are "offerred" are very low paying ones. How many people are losing their homes? How many don't even have time to think about how Korporate America is screwing them because all of their time is taken up just trying to meet the most basic needs of their families? It's all by design. It's not just an idealogy it's a a war, on us.

At 9:05 AM, Blogger KenInNY said...

Thanks, Bruce, that's certainly food for thought.


At 9:08 AM, Anonymous Anonymous said...

Excellent post, Bruce.

At 9:09 AM, Anonymous Anonymous said...

I have thought for a long time that the real goal of republicans was the return of the feudal system. I'm glad I'm not the only one who sees it.

At 12:47 PM, Anonymous Anonymous said...

Finally, an article from DWT that I can get behind. Although, I don't believe in the "gloom and doom". I think our economy will weather this storm. There might be a light recession; our system is cyclical.

Then this guy Bruce comes along and puts his kook left-wing spin on the article and talks his Bush conspiracy theories and gets "pats on the back" from others, what joke!

I bet when you have a flat tire on your car you have a way to blame it on Bush!

At 1:27 PM, Blogger KenInNY said...

Why? Has our Chimpy been out spreading tacks and broken glass on the highways?

I had no idea, but it just goes to show you can't let down your guard for a second with that one. Drive carefully, everyone!

Thanks for the warning--

At 2:59 PM, Blogger Bruce said...

For Al et al: Gee, I really don't consider myself a left winger. Time will tell on just how bad the economy gets but the similarities and attitudes between Hoover's time and Dubya's are worth noting. In the interest of not goinig too far afield, I didn't bother commenting on Dubya's grandad's machinations in China or his censure from Congress for financing Hitler (Trading With The Enemy Act) in the 1930's & 1940s, his dad's role in Chile in the 1970s, or his brother Neil's with Silverado in the 1980s. Bottom line is that there is 70 years of evidence as to what the Bush family is. And, I don't blame everything on Bush. After all, there's Reagan and his deregulation which has led to so much Korporate piracy and lost jobs. There's his "Vice President" George H. W. Bush and don't forget Bill Clinton and his NAFTA. It's all of a piece. Just because it's a conspiracy doesn't mean it's not real and there's nothing wrong with being paranoid if your enemies are real. Half a TRILLION dollars left the country for just a relatively few untouchable off shore accounts in only the first four years of Dubya's illegit reign. They dream of a world where we ALL work for below minimum wage in phone bank cubes, serve carcinogenic fast food to each other (no med care either) or pick apples or cotton for a dollar a day. It's a "let them eat cake" time again. The factories in Southeast Asia where mothers are chained to their work space and never see their kids are the prototype. The pre-Magna Carta world had walled castles where the Lords lived with their extended inbred families and private blackwater style armies that kept the status quo by force. What will we call today's gated communities tomorrow, when the companies that were insentivized by our government by tariff removal and tax code changes to ship our jobs overseas and steal our pensions do the same?. It's better to be prepared than shocked. Have a happy smiley face day!

At 3:25 PM, Blogger Bruce said...

Ya know. I've been giving Al's comment about the possibility that I would blame flat tires on Bush. At first, I said no I wouldn't do THAT. Hell, I don't even own a car. But, I do drive a lot (rentals) and I have certainly noticed how much more than usual the condition of our nation's highways has deteriorated in the Bush years. Why is that? The answer of course is that there is no longer enough tax revenue to keep up our infrastructure. Rather than repair the roads, we are expected to endure more damage to our cars shocks, tires, and exhaust systems while the nation's wealth is redistributed up (or is it DOWN) to the wealthy. In true Repug fashion, the cost has been passed on to the consumer! I sure hope neither of us are on the next bridge that caves in due to lack of upkeep! One thing is for sure, no "compassionate conservatives" will feel any guilt or remorse when it happens. They'll just go on laughing all the way to the bank.

At 4:50 PM, Anonymous Anonymous said...

Come on Bruce, you are so far left you've almost made it back around to the right!

I guess it's fairly easy to turn paranoid when you see a conspiracy around every corner and then just make up facts to give them credence.

I think you may be too kooky even for the extreme left-wing. I mean really, pre-Magna Carta?

At 5:31 PM, Blogger Bruce said...

Al baby, When it comes to making up facts, I don't and I notice that you didn't point out just which facts are, as you say, "made up". I have more integrity than that. Unlike Republikooks, I prefer to live in the reality based community even if the White House has publicly stated that they do not (Look it up.). I also don't get my news from Fox (FAUX NEWS) and CNN (CORPORATE NEWS NETWORK) The Times... All that said DWT is not meant to be a place for readers to digress into mudslinging so my comments relating to Kenniny's post are done. See you in the 12th century.

At 8:38 AM, Anonymous Anonymous said...

If not for Bush taking away so much money to give to his friends, there would be a lot fewer potholes in the road.


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