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Over the past few weeks, it's been pretty common for people like me, who have favored bank take-overs, to be portrayed as favoring a more "radical" approach to dealing with the financial crisis--and in one sense, that's certainly true. "Radical" comes from the Greek "radic", meaning "root", and radicals are those who want to solve problems at their roots. While bank takeovers might not really get at the roots of the problem, they'd certainly get us closer to the roots, so in that sense, it's a more radical approach.
But it's also a more conservative approach, too. How can it be both? Simple: this problem we face is severe and systemic. The most prudent, conservative thing to do is it to take action now, not just to repair damage and correct past mistakes, but to ensure against a repeat. And to do that, mere tinkering will not suffice. From The Compulsive Theorist:
Why a second best bailout may not be good enough
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Two things about the aetiology of the crisis stand out. First, perverse incentives for agents within the financial sector played a central role in bringing about the crisis. Second, there were (and remain) issues of poor system design in the financial sector: even perverse incentives might have had limited consequences in a robust system. The problem with the Geithner plan is that even [if] it works in terms of stabilizing the economy in the short-term, it does relatively little (the uncharitable would say almost nothing) to correct either incentives or system design. But the business and cultural norms and system-wide conflicts of interest which form the backdrop to the crisis run deep, and will not change without substantial impetus. It is precisely these deeper issues that we must address if we are to reduce the risk of a re-run of the crisis, probably on a larger scale, in a few years time....
This case can be put very simply: if we do not use current political momentum to fundamentally reform a system which has shown itself to be unstable and even dangerous, a second opportunity may come at a very high price. And this is not a gamble I wish to see our leaders make.
Not gambling: that's being conservative. That's me.
Furthering my point, this same essay links to an article in the Financial Times...
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from earlier in the month, "Seeds of its own destruction" by associate editor and chief economics commentator Martin Wolf. It begins:
Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.
and goes on to say:
Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again. The financial system is the brain of the market economy. If it needs so expensive a rescue, what is left of Reagan's dismissal of governments? If the financial system has failed, what remains of confidence in markets?
It is impossible at such a turning point to know where we are going. In the chaotic 1970s, few guessed that the next epoch would see the taming of inflation, the unleashing of capitalism and the death of communism. What will happen now depends on choices unmade and shocks unknown. Yet the combination of a financial collapse with a huge recession, if not something worse, will surely change the world. The legitimacy of the market will weaken. The credibility of the US will be damaged. The authority of China will rise. Globalisation itself may founder. This is a time of upheaval.
While the Obama team, and Democrats seem to be betting on a relatively quick recovery--within two years, at most--Wolf clearly sees a deeper crisis, leading to profound change, not as a matter of anyones choice, but simply as a matter of inevitability. Among other things, Wolf links to this paper abstract, by two authors who predicted the financial crisis in 2007, by using a similar historical analysis to the one undertaken in this paper:
The Aftermath of Financial Crises
Carmen M. Reinhart
University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER)
Kenneth Rogoff
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
January 2009
NBER Working Paper No. w14656
Abstract:
This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.
Right now, the Obama Administration seems to be devoting its rhetorical resources to countering Republican critiques, rather than attacking the whole mindset, and explaining why it has created both false and unreasonable expectations, which cannot be a guide to judging the pace and nature of recovery. In short, it is doing nothing to prepare the American people for the likely severity and difficulty of what lies ahead.
This is the very real and palpable political danger that Obama is courting.
The paper itself is behind a paywall, but a pre-publication draft is available here [pdf]. FYI, the historical data set used is explained thus (the earlier paper is the one predicting the crash):
Reinhart and Rogoff (2008a) included all the major postwar banking crises in the developed world (a total of 18) and put particular emphasis on the ones dubbed "the big five" (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992). It is now beyond contention that the present U.S. financial crisis is severe by any metric. As a result, we now focus only on systemic financial crises, including the "big five" developed economy crises plus a number of famous emerging market episodes: the 1997-1998 Asian crisis (Hong Kong, Indonesia, Malaysia, the Philippines, and Thailand); Colombia, 1998; and Argentina 2001. These are cases where we have all or most of the relevant data that allows for thorough comparisons. Central to the analysis is historical housing price data, which can be difficult to obtain and are critical for assessing the present episode.1 We also include two earlier historical cases for which we have housing prices, Norway in 1899 and the United States in 1929.
That's not a very big dataset, but (a) there really aren't a lot of crises this big, thank God, and (b) it's a hell of a lot better than a data set of zero, which is what Obama/Geithner/everyone else is relying on.
Obama persists in thinking in terms of Ronald Reagan. To his limited perspective, Ronald Reagan and Franklin D. Roosevelt are merely two sides of the same coin. He has no idea how much more massive the problems FDR faced than those confronting Reagan. He's orders of magnitude smarter than Bush, and yet, his understanding is still microscopic on an historical scale--as is everyone's in Versailles.
Reinhart and Rogoff aren't the only ones to have predicted this crash, obviously. A lot of people did. But Tim Giethner wasn't one of them. Nor was Larry Summers. Or anyone else I can think of who's part of Obama's team. And therein lies the problem. I wouldn't object to have some Wall Street connection in Obama's economic team. The problem is the total exclusion of outsiders and people who saw it coming.
Those are the people who, because of their social situation (i.e. situated outside of Wall Street and Versailles inner sanctums) are regarded as, well, not worth regarding. But in reality, because of the perspectives they hold, they are actually the best situated to evaluate and make recommendations that are most likely to avoid making matters much, much worse. They are, in fact, the actual "true conservatives" that folks on the right have been looking for ever since they realized that Bush's numbers were never coming back up.
And in that sense, because I do not believe in destroying the world economy in order to save (or totally transform) it, you can count me among them as a "true conservative," too.
But I'm still a Star Trek socialist, too. Never forget that. |
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