daisoir 's List: economics

• Resources were misallocated and risks were mismanaged so severely that the private sector had to go running to the government for help

  • so the invisible hand gives into the iron fist?
• ome looking at the U.S. economy's decreasing reliance on manufacturing and increasing dependence on the service sector (including financial services) have long worried that the whole thing was a house of cards.
• We live in a knowledge economy, an information economy, an innovation economy.
• Because of our ideas, we can have all the food we can possibly eat--and more than we should eat--with only 2 percent of the labor force employed in agriculture. Even with only 9 percent of our labor force in manufacturing, we remain the largest producer of manufactured goods.
• It is better to work smart than to work hard
• America's dominance in so many aspects of high-tech is testimony to the real returns to these soft expenditures.

  • So the idea of high-tech production and financial services, has trumped all production revenues of the "agricultural, materials, textiles" world of indulstrial production.
• Indeed, I would argue that we would do even better if we had more resources in these sectors.

  • Good point.
• n recent years, financial markets created a giant rich man's casino, in which well-off players could take trillion dollar bets against each other.
• Financial markets have been likened to the brain of the economy. They are supposed to allocate capital and manage risk.
• Financial markets are amply rewarded for their work--in recent years, they have received over 30 percent of corporate profits--and the standard mantra in economics was that these rewards were commensurate with their social return. That is, financial wizards might walk off with a great deal of money, but the rest of society is better off because our capital generates so much more productivity than in societies with less well-developed--and less rewarded--financial markets.

  • Skidelsky talks about this also as the idea of the "Social Contract" between these financiers and their executive incomes, and the rest of societies labourers. The high sum pays off for their "responsibility" in increasing national wealth and thus raising standards of living.
• But not all innovations enhance welfare, even when they increase profits. For instance, cigarette profits

  • Also known as "externalities".
• but, in killing rivals like Netscape, it had a chilling effect on innovation.

  • And then you have generation Y fighting back with all the opensource and p2p markets of "co-operative" development. Completely un-monopolized. Is that a pseudo-marxist trend maybe? Or just liberal economics at the core with its theory of "creative destruction".
• The imperfections of information (resulting from the non-transparency) led to imperfections in competition, helping to explain why the usual maxim that competition drives profits to zero seemed not to hold.
• Behind the subprime crisis were mortgages designed to encourage repeated refinancing of homes
• --a pyramid scheme that generated billions of dollars in fees for the mortgage company as long as home prices continued to soar. It was inevitable that the bubble would break.
• It was almost as if the entire financial system was converted into a giant casino in which the system was rigged to guarantee those running the games huge returns, at the expense of the players. But in Las Vegas and Atlantic City, the games are near zero-sum: The gains of the casino owners approximately equal the losses of the players. The financial-system-as-casino, on the other hand, is a negative-sum game. Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us. Some have lost their homes and life savings--to say nothing of their dreams for their own futures and those of their children. Others are innocent bystanders who resisted the false promises of the mortgage brokers and the credit card companies, but now find themselves out of jobs as the economy weakens. And the poor are hurt as state revenues plummet, forcing cutbacks in public services.

  • Excellent analogy, really highlights the idea of financial security being the backbone of a nation, and it is a bottom down system that sees no moral responsibility from the captains of the titanic, who are paddling away on their lifeboat from the sinking ship.
• In short, the problem with the U.S. economy is not that we have allocated too many resources to the "soft" areas and too few to the "hard." It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generousl
• managing real risks
• and that too much effort went into creating financial products that enhanced risk.
• The invisible hand often seems invisible because it's not there. At best, it's more than a little palsied.

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• The Trillion Dollar Meltdown
• At the same time, Morris unwittingly exposes the flaw in the financial system: it was too complicated for anyone but a professional investor to understand.
• "Intellectuals are reliable lagging indicators, near–infallible guides to what used to be true")

  • A great quote. And so true.
• "Greenspan put". Denouncing a "new paradigm of active credit management"
• a "tsunami of dollars" – the result of America’s huge trade deficits, financed largely by East Asia. It was Chinese savings invested in US Treasuries which enabled Greenspan to keep the interest rate at 1 per cent for thirty months. "America’s housing and debt binge was made in China.”
• It was in this regime of deregulated markets, cheap money and Asian–financed consumption demand that leveraged (debt–dependent) finance took off.
• The stages in the rake’s progress were the junk bond explosion of the 1980s, the development of mortgage–backed securities or "pass throughs", the creation of portfolio insurance to "manage" the extra risk, and the sprouting of hedge funds to buy up the riskiest debt and sell it to wealthy speculators. Credit agencies fed the bubble by giving bonds containing "toxic waste" triple–A ratings. Morris does not decry the value of all this financial engineering. But the new investment instruments, while hugely enlarging credit facilities by spreading risk, suffered from dangerous flaws only revealed in moments of stress. A small number of institutions – global banks, investment banks, hedge funds – built an unstable tower of debt on a tiny base of real assets. So long as a cheap–money regime forestalled defaults, the tower might wobble but stay erect. A rise in interest rates from 2005 onwards brought it crashing down.
• Morris makes the excellent point that banks make high profits by taking large risks, but their losses are partly socialized. Banks cannot be both public utilities and risk–taking institutions.
• It provides a service to the public and should never be beyond the understanding of the public or at least of those who regulate it on the public’s behalf.

  • In other words, it should be simple to understand. Banks should be banks, not speculators: insurance companies should insure real assets, not toxic waste: prudential rules should limit debt–to–equity ratios. There would then be less demand for the service of high–powered mathematicians to invent instruments which bamboozle the rest of us.
• Turner’s thesis, in brief, is that globalization has resulted in a global shift in world GDP shares from wages to profits. The result has been a crisis of "realization" – over–investment in relation to wor
• merican consumption demand could be kept going only by the expansion of debt.
• From the 1980s, American politics was captured by "a vast right wing conspiracy" which set about dismantling the protective structures of the New Deal by creating "distractions". The chief of these was race. Race, in particular, duped the white voter into neglecting his material interests.
• But any historian knows that material progress is not history’s only storyline, and that religious and tribal feelings are not just "distractions" from humanity’s rational goals, but are as constitutive of human nature as is the desire for "more for less"
• Sachs’s uncritical attitude to science is matched by his naivety about politics. He seems to believe that the main reason for government failure to tackle global problems with the required vigour is organization deficiencies (for example, failure to mobilize available knowledge), forgetting that governments – and more generally politics – have not been set up to solve global problems but to protect their countries against domestic disorder and external attack.

  • Skidelsky understands real politik
• But for many development economists, "governance" is not something to be added to a list of infrastructural projects financed by the World Bank. It is what makes such projects possible. And the quality of "governance" is embedded in the habits and customs of the people.
• Societies progress at their own pace. They can be tweaked a little by scientists. More likely, they will be jolted out of stagnation by disaster.
• The case for free trade came to be argued in purely technical terms. But social democracy at home was ideologically inconsistent with free trade abroad.
• globalization today should be pursued by unilateral action rather than by complicated multilateral negotiations through the World Trade Organization.
• "national market–based reforms"
• The problem, which he admits, is that globalization threatens the living standards not just of unskilled and skilled workers, but of the Western middle class as a whole. "The political challenge", he writes, "is to keep borders open and extend market–based reforms, while containing inevitable protectionist pressures".
• "The well–being of our entire planet is at stake. We know what needs to be done. We have the tools to hand. We only need the political resolve" – which to many will mean that we don’t have the tools to hand, since political resolve is a tool too, which Stiglitz doesn’t tell us how to invent.
• The answer is yes, but the economists cannot explain why these alternatives were not adopted.
• Capital also seems to want to flow, not from but to where it is already abundant – the United States has become a giant vacuum cleaner sucking in capital from all round the world – and even when efficient, capital flows benefit rich people from poor countries, not the poor.
• However, DeLong cannot abandon his neoliberalism; "in the end we may have to tolerate the equality–lessening reverse flow of capital in order to promote the equality–increasing and wealth–increasing diminution of corruption." At least he is honest enough to admit the dilemma.

  • LOL
• The last Soviet leader, Mikhail Gorbachev, recently remarked that, what with all the bail–outs of banks and corporations going on, we now seem to have capitalism for the poor and Communism for the rich. This is a neat easy way of saying that we stand on the threshold of uncharted territory.

  • Haha. That's a fantastic ending

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