Previous posts in this discussion:
Post
Did We Nationalize the US Financial System in 2008-'09? (David A. Westbrook, USA, 12/05/12 4:28 pm)In response to Cameron Sawyer (5 December), we did in effect nationalize the financial system in 2008/09. We picked winners and losers, and took market risk off the table for winners. We even took enormous equity stakes in AIG and Citi, and facilitated the financing of the mergers of the rest of the losers, save Lehman. We directly nationalized commercial paper, for a while, and student lending, largely still.
We did almost nothing about moral hazard. Even granting that radical intervention was necessary, as I do, this wasn't necessary.
That's capitalism of a sort, but one thinks of Africa, as pointed out by Simon Johnson (MIT and IMF).
While Dodd Frank (which I've taught in seminar, but it's deathly boring) has done some sensible things, it's tough to be too impressed. As a legislative achievement, Dodd Frank isn't in the same solar system as the 1933 and '34 Acts. Market concentration is worse (albeit far better than in Europe); nobody believes the systemic risk mechanisms will work under stress. Some of the consumer protection stuff is good, but ho hum.
Turning to the traditional role of finance, allocation of capital, we've seen notable unwillingness to lend, in part because of negligible interest rates. (I think the effective bound for using monetary policy for stimulus is considerably above 0%.) I need not remind you that growth in this country is horrible, inequality is rising, unemployment is high... and the country is more polarized than ever in my lifetime, perhaps excepting Vietnam. So as a matter of political economy, and while I completely support the need to intervene, I give the Bush/Obama response at best a B at the time, and a C since.
Intellectually--and the real failing of Dodd Frank--we've not come very far. And surely traditionalists who annoy people, like Summers, was a stupid way to try to get serious thinking done.
A lot more was possible. But that would have required confronting Greenspan's correct claim that "the edifice collapsed," and asking for the reformation of finance as an intellectual discipline, and ultimately, of political economy. I did a lot of work on this at the time, issuing it in a book, Out of Crisis: Rethinking Our Financial Markets.
See http://law.buffalo.edu/Faculty_And_Staff/submenu/Westbrook/reviews.asp#2
Since then, I've been thinking in large part about the stasis of elites on both sides of the Atlantic. I'm also trying to think about what may be hoped from political economy.
JE comments: Who needs a refresher course on moral hazard? Please forgive this language teacher--Economics 101/102 was a long time ago:
http://en.wikipedia.org/wiki/Moral_hazard
Really smart and provocative stuff on WAIS today.
Visits: 12