Free Markets, Free People

Compounding The Problem?

The “too big to fail” intervention in the financial realm may have put us in an even worse position:

Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

A comforting thought.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

“We aren’t doing anything significant so far, and the banks are pushing back,” he said. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

Key phrase – “politically difficult”. I.e. it may cost the Democrats and Obama some political capital. Wouldn’t want them to have to make difficult political decisions, would we – so the hope is they can “outsource” it. Make the decision out to be one that a group of leaders came up with and thus a broad consensus that gives the administration some political cover.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

That depends on what that political cost is calculated to be.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Indeed – and here we are set to spend even more money on a pet domestic issue.




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7 Responses to Compounding The Problem?

  • “Too big to fail”. There is an unfortunate though understandable impulse among many people, especially in government and big business, toward bigger, monopolistic institutions. Big business likes monopoly because it eliminates pesky competition with all the problems that entails. Government likes it because of the mistaken belief that it’s easier to control a handful of large institutions than try to manage the chaos of many small institutions.

    I bring this up because, a few days ago, I saw Turbo Tax Timmy on (I believe) CNBC. Among other talking points was one about how the government is apparently attempting to REDUCE the number of banks in the country. Why would they do this except out of the mistaken belief that they can more easily control a small number of large banks?

    In a perfect regulatory world, this might make sense: put all the eggs in one basket and watch that basket very closely. But the meltdown of ’08 and the Madoff affair show two fatal flaws with this idea. In the case of the meltdown, neither the banks nor the regulators could possibly foresee the potential, catastrophic results of the subprime market. Even if they had been able to see it, political considerations distorted the regulatory scheme; indeed, who in the boom years prior to ’08 would have wanted to regulate the market, which was doing quite well?

    In the Madoff affair, we see regulators who simply dropped the ball. They are human beings and make mistakes. There is no way to avoid this completely.

    Now, it seems that Turbo Tax Timmy, Bernake, and the rest of the DC big shots want to RECREATE this sort of system, and indeed make it even more susceptible to catastrophe.

    Gives ya a real warm ‘n’ fuzzy feeling, doesn’t it?

  • One of the worse things IMHO, to happen to free market economics in the last decade is the slavish devotion to Anti-Antitrust ideology. In a classic overreaction to the trail of Microsoft the econ thinkers have thrown the baby out with the bathwater in condemning all anti-trust.

    But having a small oligarchy of super sized companies in control of any one industry is NOT a good thing for either consumers, stockholders, employees, or, as we can now see, taxpayers.

    AIG should never have been allowed to own such a huge percentage of the insurance contracts in this nation.

    If companies are big to fail that should be a good indication that they must have some bad effect upon competition, and certainly have an undue influence on legislators and regulators.

  • “AIG should never have been allowed to own such a huge percentage of the insurance contracts in this nation.”

    Ownership wasn’t the problem here. Risk exposure was the problem. Not the same thing at all. Adherence to sane risk exposure limits ownership to proportionate levels as well.

    • Indeed, the most fundamental issue was the *socialization* of risk! That problem is exacerbated in a market that’s highly integrated.

  • But why should the big banks worry about risk exposure if they are too big to fail? There is no reason. So the ‘solution’ to the last crisis is looking more and more like it is going to be the cause of the next one.

  • A year later … and while Bush left office, he felt he really couldn’t do much, and Obama did nothing to change this (except shield Wall Street from those pitchforks).
    Which reminds me of this piece from yesterday …

    we know the drill that defines his leadership, for better and worse. When trouble lurks, No Drama Obama stays calm as everyone around him goes ballistic. Then he waits — and waits

    This is Presidential leadership ? We might as well have Chance Gardener as President .. or do we already ?