Cartoon: Everyone Cheats

Tyler Cowen on Politics and the Economy

Tyler Cowen's When Politics Don't Belong

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating...

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill...

President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege.

We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector...

read the entire essay

Barry Ritholtz comments on Cowen's essay

The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends; They asked for and received special treatment. This is a unique dispensation that almost no other businesses have enjoyed — certainly nowhere near the degree the finance sectors has received. Instead of earning their way via market place competition, these financials were uniquely treated in terms of regulation, legislation and tax policy.

Indeed, many people still seem wed to the wrong belief — it was not too much regulation that caused the problems. Rather, it was the special exemptions from regulation that in reality led to the crisis. From leverage to derivatives to lending standards to interest rates, the government acquiesced to the wants of the banking sector.

source

My thoughts: Ritholtz likes to talk of "radical deregulation." This is not what we have. Deregulation would apply across the board to all players. Ritholtz correctly points out that "these financials were uniquely treated in terms of regulation, legislation and tax policy." This is exactly what Cowen point out when he states, "Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege." This disagreement is more about terminology that facts.

Cartoon: Financial Crisis

Financial Crisis: Who is to Blame?

Then you have outright ignorant people who lack the intellectual rigor or curiosity to learn the facts for themselves and become informed, educated people, preferring to just find a scape goat because blaming one person is easier than trying to learn about international finance, monetary policy and price to rents ratios...

the real culprit boils down to two groups of people; one of which no politician has the cajones to point out and another group we all love to blame.

The first group of people who are genuinely the ones to blame for the housing crisis we're in are banks and bankers...

The second group deserving the blame is a revolutionary idea I had, also detailed in the book;Would we even have these problems if people did what they said they were going to and PAY BACK THEIR FREAKING LOANS IN THE FIRST PLACE?Has that thought occurred to anyone? That if the people who put their signature on the loan documents, "promissory notes" suggesting they (I don't know) PROMISE to pay the money they borrowed back, then we wouldn't be having this discussion?! You know, like they agreed to return the money they took? Like how it's been done for eons? You pay back what you owe and do what you're going to say?...

source

Financial Losses

interactive graph from the New York Times

Greg Mankiw on Bailouts

If you start bailing the firms out when they lose, you have to regulate the gambles they take. You can no longer count on the creditors to limit the firms' leverage, as the creditors are counting on Uncle Sam if things go wrong. But the more regulated these firms are, the lower their productivity will be.

The bottom line: The Bear Stearns bailout may have saved the economy from an episode of financial contagion in the short run, but in the long run it will likely leave us with a more regulated and less vibrant financial system.


source

My Comments: Bear Stearns should have been allowed to fail.