Friday, February 12, 2010

O QUE DIZ STIGLITZ

We (they) had been channeling too much money into real estate - too much money, to people beyond their ability to repay. The financial sector was supposed to ensure that funds went to where the returns to society were highest. It had clearly failed.

California mortgage lender Paris Welsh wrote to U.S. regulators in January 2006: "Expect faillout, expect foreclosures, expect horror stories." One year later, the housing implosion cost her her job.

Moody´s Economy.com projected that a total of 3.4 million homeowners woul default their mortgages in 2009, and 2.1 million woul lose their homes. Millions are expected to go into foreclosure in 2012. Banks jeopardized the life savings of millions of people when they persuaded them to live beyond their means.

Federal Reserve Chairman Alan Greenspan, the man who was supposed to be protecting the country from excessive risk-taking, actually encouraged it.

Globalization had opened up a whole word of fools; many investors abroad did not understand America´s peculiar mortgage market, especially the idea of nonrecourse mortgages.

(Obama) shoul have known that he couldn´t please everyone in the midst of a major economic war tetween Main Street and Wall Street. The president was caught in the middle.

Obama had learned that he couldn´t please everyone. But had he pleased the right people?

The banks had grown not only too big to fail but also too politically powerful to be constrained. If some banks were so big that they could not be allowed to fail, why shoul we allow them to be so big?

"If some banks are thought too big to fail ...then they are too big", (said) Mervyn King, the governor of Bank of England.

Their (banks) competitive advantage arises from their monopoly power and their implicit goverment subsidies.

Even if the too big to fail banks had no power to raise prices (the critical condiction in modern antitrust analysis), they should be broken.

Firms involved in the financial markets had made hundreds of millions of dollars in campign contributions to both political parties over a decade.

"As the United States entered the first Gulf War in 1990, General Colin Powel articulated what came to be called the Powel doctrine, one element of which including attacking with decisive force. There shoud be something analogous in economics, perhaps the Krugman-Stiglitz doctrine. When an economy is weak, very weak as the world apeared in early 2009, atack with overwhelming force. A government can always back the extra ammunition if it has it ready to spend, but not having the ammunition ready can have long lasting effcts. Attacking the problem with insufficient ammunition was a dangerous strategy, especially as it became clear that the Obama admistration had underestimated the strength of the downturn, including the increase in unamployment. Worse, as the administration continued is seemingly limitless support to the banks, there didn´t seem to be a vision for the future of the American economy and its ailing financial sector."


The Fed said it will deftly manage the economy, taking out liquidity as needed to prevent inflation. Anyone looking at tha actions of the Fed in recent decades won´t feel so confident.

Systemic risk can exist without there being a single systemetically important bank if all the banks behave similarly - as they did, given their herd mentalaty.

What has to be done? (...) a simple reform - basing pay on long term perormance, and making sure that bankers share in the losses and not just in the gains - might make a big difference. If firms use "incentive pay" it has to be really incentive pay - the firm should have to demonstrate that there is relationship between pay and long-term performance.

The financial markets had created products so complex that even all details of them were known, no one could fully understand the risk implications. The banks had at their disposal all the relevant information and data, yet they couldn´t figure out their own financial position.

The Obama administration articulated a clear double standard: contracts for AIG executives were sacrossant, but wage contracts for workers in the firms (GM and Chrysler, forced by Obama administration into bankruptcy) receiving help had to be renegotiated. Low-income workers who had worked hard all their life and had done nothing wrong would have to take a wage cut, but not the million-dollar-plus financiers who had brought the world to the brink of financial ruin. They were so valuable that they had o be paid retention bonuses, even if there were no profit from which to pay them a bonus. The bank executives could continue with their high incomes; the car company executives had to show a little lesse hubris. However, sacaling down their hubris wasn´t enough; the Obama adminstration forced the two companies into bankruptcy.

... there were alternatives that would preserved and strengthened the financial system and done more to restart lending, alternatives that in the long run would have left the country with a national debt that was hundreds and hundreds of billions of dollars smaller and a larger sense of fair play. But these alternatives would have left the banks shareholders and bondholders poorer. To the critics of Obama´s rescue package, it was no surprise that Obam´s team , so tightly linked to Wall Street, had not pushed for these alternatives.

Obama could have taken alternative actions, and there are still many options available, though the dicisions already made have substantially circumscribed them.

Regrettably, The Obama administration didn´t present a clear view of what was needed. Instead it largely left it to Congress to craft the size and shape of the stimulus. What emerged was not fully what the economy needed.

If a country stimulates its economy through debt-financed consumption, standards of living in the future will be lower when times comes to pay back the debt or even just to pay interest on it.

Between the start of the recession, in December 2007 and Octobar 2009, the economy lost 8 million jobs (in USA).

Conservatives invoke Ricardian equivalence more often as an argument against expenditure increases than as an argument against decreases. Indeed the theory suggests that nothing matters much. If the government increases taxes, people adjust; they spend exactly as much money today as they do otherwise, knowing that they will have to pay less taxes in the future. Those of the two assumptions are commonplace but obviously wrong: markets and information are perfect. In this scenario, everyone can borrow as much as they want.

The banks had gotten into truble by putting so much of what they were doing "off balance sheet" - in an attempt to deceive their investors and regulators - and now these financial wizards were helping the administration to do the same, perhaps in an attempt to deceive taxpayers and voters.

The U.S. government should have played by the rules and "reestructured" the banks (shareholders lose everything, bondholders become the new shareholders) that needed rescuing, rather than providing them unwarranted handouts.

With so many countries facing problems of their own, the United States can´t count on an export boom. Certainly, as I have noted, the entire world cannot export its way to growth. In the Great Depression, countries tried to protect themselves at the expense of their neighbors. These were called beggar-thy-neighbor policies, and included proteccionism (imposin tariffs and other trade barriers) and competitive devaluations (...). These are no more likely to work today than they did then; they are likely to backfire.

If global consumption is to be strenghtened, there will have to be a new global reserve system so that developing countries can spend more and save less.

In psychology, there is phenomenon called escalating commitment. Once one takes a position, one feels compeled to defend it.

A propósito desta última afirmaçao de Stiglitz, pode perguntar-se: será este um caso exemplo da calcificação ideológica que obstrui o fluir da razão?

Aqui afirma-se que sim. Mas essa afirmação está, indisfarçavelmente, carregada de uma ideologia que não admite evidências que a contrariem por mais que elas se agigantem. E o livro de Stiglitz está bem recheado delas.

Há muito mais em Freefall. De tudo o que li, penso que Stiglitz exagera na apreciação que faz da intervenção da administração de Obama, responsabilizando-a, insistentemente em conjunto com a administração Bush. Por outro lado, a sua crítica à forma precipitada como os estímulos foram lançados sobre a fogueira e a entrega ao Congresso da definição do volume desses estímulos parece ignorar que a situação impunha medidas de emergência que não podiam aguardar pelo estabelecimento de um plano de intervenção melhor orientada e que o presidente dos EUA não tem o grau de liberdade de intervenção pessoal que as propostas de Stiglitz pressupõem.

No comments: