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random rants about news, the law, healthcare law, economics and anything I find amusing

Op-Ed Columnist – Greed and Stupidity – NYTimes.com

Brooks believes that there are two overriding narratives that we must pick from to explain the current mess: (1) evil oligarchs took over the financial sector and lubed the wheels of power to allow them to get too big and too leveraged, (2) bankers suffered from an extreme lack of epistemological modesty.

There are many theories about what happened, but two general narratives seem to be gaining prominence, which we will call the greed narrative and the stupidity narrative…The best single encapsulation of the greed narrative is an essay called “The Quiet Coup,” by Simon Johnson in The Atlantic…Wall Street got huge. As it got huge, its prestige grew. Its compensation packages grew. Its political power grew as well… The result was a string of legislation designed to further enhance the freedom and power of finance… There were major increases in the amount of leverage allowed to investment banks…The U.S. economy got finance-heavy and finance-mad, and finally collapsed…In short, he argues, the U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down.

The stupidity part of the equation is less paranoid, but just as disturbing:

The second and, to me, more persuasive theory revolves around ignorance and uncertainty. The primary problem is not the greed of a giant oligarchy. It’s that overconfident bankers didn’t know what they were doing… Many writers have described elements of this intellectual hubris… To me, the most interesting factor is the way instant communications lead to unconscious conformity… global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time…Jerry Z. Muller wrote an indispensable version of the stupidity narrative in an essay called “Our Epistemological Depression” in The American magazine. What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” Banks got too big to manage.

He believes that the latter is the the more compelling explanation, and cautions that if policy-makers believe it is the first, we might over-regulate by restructuring the financial sector.  In other words, he cautions against exchanging the hubris of Washington restructuring for the hubris of Wall Street.

The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

He argues that we need regulatory controls to (1) ensure transparency, (2) reinitiate the separation between “savings banks, insurance companies, brokerages and investment banks”, and (3) ensure that the banks don’t get “too big.”

Hey, I’m in favor of all that.  But what other “restructuring” is really being contemplated?  Aren’t these the most serious and likely regulatory paths?  And when you are constraining growth,  forcing the downsizing of banking entities, or restricting what types of businesses can be integrated, isn’t that fundamentally about the “structure” of the financial sector?

Brooks contends that “one has to choose [among the two narratives] a guiding theory.”  But I don’t think I agree.  I think that both narratives get it partially right, and I think that Brook’s take on the correct regulatory outcome supports that thinking.   Many of the entities got too big to fail, the banking sector and policy-makers were complicit in both de-regulation and allowing this incredible growth of these huge transnational institutions, and these institutions created new markets with new instruments that looked like stocks and looked like insurance but were not regulated like stocks or insurance.   In the end, we (the bankers, the quasi-insurers, our policy makers, our federal reserve, our Congress, and ultimately all of us) were too stupid (or at least ignorant of history) to realize markets like these will cause systemic risk that can cause the whole house to crash down.  No pun intended.  The only way to address this systemic risk is like what came out of the Great Depression.  That is, a regulatory regime that provides transparency and forces individuals as well as institutions to have sufficient assets to secure the leverage that they have taken on.  This might be a gross simplification; the regulatory regime will be far more complex; but I think the principles are very much the same.

via Op-Ed Columnist – Greed and Stupidity – NYTimes.com.

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Op-Ed Columnist – Car Dealer in Chief – NYTimes.com

I think that Brooks has it wrong this time.  I agree that GM cannot restructure itself out of its current situation.  I agree that the Bush administration punted.  I agree that they should have — there needed to be preparation for the imminent bankruptcy.  I also disagree that this one has to remain a political football with Congress or the administration micromanaging GM’s bankruptcy process.   The administration needs to turf this to a real bankruptcy process and then get out of the way.  At the end of the line, it’s a fight between the financial stakeholders, not the politicians.  Throw the bondholders, unions, dealerships and other creditors into the pit (atop the corpse of shareholder equity) and see how it works out.

For 30 years, G.M. has been restructuring itself toward long-term viability. For all these years, G.M.’s market share has endured a long, steady slide…When the economy cratered last fall, the professionals at G.M. went into Super-Duper Restructuring Overdrive… The Bush advisers decided in December that bankruptcy without preparation would be a disaster. They decided what all administrations decide — that the best time for a bankruptcy filing is a few months from now, and it always will be…Today, G.M. and Chrysler have once again come up with restructuring plans…But this, President Obama declares, is G.M.’s last chance. Honestly. Really.No kidding…And yet by enmeshing the White House so deeply into G.M., Obama has increased the odds that March’s menacing threat will lead to June’s wobbly wiggle-out.  The Obama administration and the Democratic Party are now completely implicated in the coming G.M. wreck…The Midwestern delegations, swing states all, will pull out all the stops to prevent plant foreclosures. Unions will be furious if the Obama-run company rips up the union contract… The most likely outcome, sad to say, is some semiserious restructuring plan, with or without court involvement, to be followed by long-term government intervention and backdoor subsidies forever…It would have been better to keep a distance from G.M. and prepare the region for a structured bankruptcy process. Instead, Obama leapt in. His intentions were good, but getting out with honor will require a ruthless tenacity that is beyond any living politician.

via Op-Ed Columnist – Car Dealer in Chief – NYTimes.com.

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Op-Ed Columnist – Perverse Cosmic Myopia – NYTimes.com

Op-Ed Columnist – Perverse Cosmic Myopia – NYTimes.com.

“As a tiger sinks its teeth into the world’s neck, we focus on the dust bunnies under the bed…[Obama is trying to tackle the four most intransigent policy problems of our times and cannot address the immediate economic problem and the furor over the AIG bonuses]…risk[s] destroying the entire bank-rescue plan”

“[All this ]is not the most idiotic of the distractions…[A] core lesson of the Great Depression is that a global crisis calls for a global response…But the G-20 process is heading toward global impotence because the Europeans are dismissing this approach…The world is in flames and they want directorates and multilateral symposia…Many people used to wonder how the world’s leaders could be so myopic at various points in history — like during the Versailles Treaty or the turmoil of the 1930s. We don’t have to wonder any more. We get to watch the cosmic myopia replay itself in our own times.”

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