Bob Cropf

Posts Tagged ‘financial crisis’

Did Obama’s team incorrectly diagnose the economic crisis?

In Keynesianism, Obama, stimulus on May 4, 2009 at 1:34 PM

In the April/May issue of the liberal-leaning Washington Monthly, James K. Galbraith writes that the team behind Obama’s economic recovery plans all share the same background and creed (you can find the article online here.). The problem with that, according to Galbraith, is that this leads to severe limitations in their vision of the possibilities of the economy.

Geithner, Summers, Romer, Orszag, et al. all share the underlying belief that the economy will right itself. The chief difference between Obama’s economic team and conservatives, however, is that Obama’s advisers believe that the economy needs a little help from the government to get back whereas economic conservatives assert that such help would actually do more harm than good. Galbraith argues that this could lead to a weak approach to fixing the current mess:

“If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small.”

Interesting point: The article claims that the hopes for a quick recovery are based on the assumption that this recession will be no worse than the 1981-82 downturn, the worst in recent history. However, if this is not the case, then the models that have been used to predict a rapid turnaround would be wrong.

If we discard as “normal,” postwar economic experience, then there might not be a near-term recovery at all. A strong argument could be made that the situation we now find ourselves in is vastly different from the postwar economic regime that we are familiar with.

Galbraith argues that Geithner, Summers, et al. are primarily concerned with restoring the pre-crash economic order, which was built on the predominance of private banks. Galbraith quotes the Treasury Secretary, Geithner as telling CNBC:

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

In the past, economic downturns were shallow enough to permit a bank-led recovery. However, this time things are radically different, according to Galbraith. Millions of families have lost a huge proportion of their wealth. As a dire consequence, for many Americans, Social Security and Medicare represent their chief source of wealth.On top of that, the nation’s largest banks are bankrupt or nearly so. Thus, any attempt to restore the pre-crisis regime is automatically doomed to failure.

The article goes on to say much more. Galbraith is a respected economist, who holds a prestigious chair in Government/Business Relations at LBJ School of Public Affairs, University of Texas at Austin, so he is someone whose words count for something in Washington, DC.

I bring it to the class’ attention because while much of the mainstream media focuses on the conservative attacks on the Obama economic plan, there is also a liberal critique that has not received quite as much attention. Galbraith is a good example of the “loyal opposition” within the left.

RC

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Great Depression or Great Recession?

In economics on April 7, 2009 at 4:53 AM

There is a lot of debate occurring in the blogosphere on whether we’re in a depression or recession. Some commentators, as mentioned in earlier posts here, have taken to calling our economic crisis, “The Great Recession.” Others are calling it another Depression. The excellent economics site, Vox, falls squarely in the latter camp with its most recent post. The authors support their claim by citing a number of significant trends in the data. First and foremost, they emphasize that the current situation requires a close consideration of global rather than just domestic US data. When one looks at the world economic condition, the sight is not pretty. In nearly every important indicator–industrial production, stock markets and trade–the global trends are tracking the Great Depression. However, I think this gloomy prognosis has to be qualified by two observations, one the authors make themselves and one of my own. First, the data points for the current crisis are fewer so far than the trend lines shown in the post’s graphs. Thus, it is still too early to tell whether this downturn will be as severe as the Great Depression or whether it will last as long. Second, and related to the first point, the governments of the world seem to be responding in a more proactive and effective manner to this crisis. This is the gist of their conclusion, which suggests that through a sustained, global policy response, the world’s intertwined economies can hope to weather this difficult economic storm.

Globalization and the Great Recession

In economics, Obama on March 31, 2009 at 12:47 PM

Back in the golden era before 2001, the International Monetary Fund (IMF) took a hands-off approach to capital controls imposed by national governments. As Sarah Anderson points out:

As part of a broader market fundamentalist agenda, the IMF and the U.S. government once galloped side by side in a crusade to eliminate these controls, which are various measures to reduce volatility by taxing or prohibiting certain cross-border investments. The IMF banned them through loan agreements, while the U.S. government severely restricted their use through bilateral investment treaties and the investment chapters in trade agreements.

The thought was if free trade worked, why not deregulate the flow of capital as well?

The problem was the countries that fare the best in times of financial meltdowns like the one we’re experiencing just so happen to be the countries with more restrictions on capital. The point was empirically proven in the Asian Crisis in the late 1990s. The IMF seemed to learn this lesson and became less dogmatic on the point of regulating capital. The same, however, could not be said for the previous administration, which followed a market fundamentalist line on this issue.

Now, the current administration has an opportunity to reverse the failed policy of the past and follow the lead of economists such as Joseph Stiglitz and Paul Krugman who favor allowing nation-states to impose tighter controls on capital flight. So far, the administration has not said too much on the subject and it is hard to read too much into previous statements on similar topics by Obama and his economic policy advisers. (Tim Geithner is on record, however, as supporting continued deregulation–another reason to suspect his good judgment at Treasury).

As the G-20 gets underway this week, one can hope that this issue will be revisited. Ideally, there will be a consensus among the world leaders to convene another meeting to tackle the question of capital controls in the near future.

BC

Bailing out bankers rather than banks

In economics on March 18, 2009 at 10:41 AM

David Leonhardt in today’s NY Times, writes a good article pointing out the fallacies in A.I.G’s claims that the bonuses the company paid out to its employees for “retention purposes.” He systematically discredits this argument on several grounds:
1) They’re totally unnecessary. He points out that almost no executive has left one company for a similar position at another company.
2) For jobs below that of CEO, it is not necessarily a bad thing for turnover to happen. After all, isn’t the case that the Financial Product division is the one most responsible for getting the company into its current mess?
Leonhardt also dismisses A.I.G chief, Edward Liddy’s claim that the bonuses are needed to keep top talent in the firm by pointing out that a) it hasn’t worked–52 employees receiving bonuses still left and b) none of the employees are truly
indispensable; all could without a great deal of trouble be replaced. The whole situation points to the need for increased government oversight of the industry, which should have been in place years before, so that the situation we now find ourselves in would probably never have happened. This is what occurs when you leave the asylum to be run by its inmates. How could anyone expect things to turn out differently?

As a side note, there is a very interesting video of a lecture by Alan Blinder at Princeton’s Woodrow Wilson School, which was given in November 2008 and is well-worth watching. The lecture is entitled “The Origins of the Financial Mess.”

Job losses in line with earlier recessions

In economics, Unemployment on March 13, 2009 at 7:21 AM

For all the talk about this economic downturn being the worst since the Great Depression, most economists who study this kind of thing say that the data so far resembles 1981-82 recession ( see Fox and Polley). The charts on the two sites show a close resemblance to earlier recessions. Polley says the current downturn is demand-driven. Based on this interpretation, he argues that the recession will probably last at least another year. On the bright side, he suggests that we should be back at peak employment in 24 months.

Broad restructuring of the economy occurring

In economics on March 9, 2009 at 12:11 PM

Yesterday, Kathleen wrote about bank nationalization. Another clear sign that our economic landscape is undergoing a radical transformation is in this article from the Economy in Crisis blog. The writer says that many of our business icons (e.g., General Electric, General Motors and Citigroup) are plummeting in stock value. Companies, which until recently have been the models of corporate America, are struggling to stay afloat. What this suggests to many people is that a broad and deep restructuring of the US economy is underway. Titans of industry of just a few years ago are falling by the wayside. The question, as yet unanswerable, is who will replace them?

The shift has been occurring for some time. The manufacturing sector has been in decline over the entire post-war era but is in free-fall today. The average factory worker in the auto industry made over $52,000 not including benefits in 2004 according to this article in the Detroit News. By any standard, this is a decent wage for a non-college educated worker. The sector that has shown the largest increases has been the service area, mainly retail. These are largely non-unionized jobs that pay far less than union factory jobs. For example, Wal-Mart associates made a paltry $19,165 in 2008. That’s $2,000 below the federal poverty line (Wake-upWal-mart.com). On NPR, I heard that the Targets and the Wal-marts of the world are still growing–about the only businesses that are. Hence the transformation from relatively high-wage manufacturing jobs with decent benefits including health care to low-paying, few if any benefits continues, which is not the direction we as a society want to be heading in.

Marx would have approved of banks bail-out

In economics, Free-market on February 20, 2009 at 8:58 AM

This tongue-in-cheek article in the Financial Post, a Canadian online publication, makes the case that Karl Marx would have endorsed last year’s bailout of the US financial sector. According to the article, Marx would have joined such stalwarts of conservative economic thought as the Heritage Foundation and the Wall Street Journal’s editorial page in applauding the $700 billion bank bailout. As we have often said in class, sometimes the current crisis makes for some interesting bed fellows.

The article itself presents a fairly standard neo-classical argument against the bailout. It goes on to say:
“At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets? ”

The author, who is a free-market Canadian journalist, is probably thinking that somewhere Milton Friedman is spinning in his grave.

A Marxian take on the financial crisis

In economics on January 31, 2009 at 9:44 AM

I came across this blog post today. I skimmed it and thought it looked rather interesting in light of our class discussion last week. In particular, pay close attention to what the writer says is the importance in Marxian analysis of the word, “crisis.” Recall O’Connor’s use of the word in his article. What is being conveyed is the idea of a complete breakdown in confidence. In a capitalist economy, confidence is key (you don’t have to read Marx to believe that). Therefore, if there is a lack of confidence or declining confidence then things can go south pretty fast. That’s what happened according to the Marxian viewpoint. The conclusion is pretty scary if you believe the writer: We’ve come to the point where we are not trying to save either the poor or the rich, but the system itself! As you read this, think about how a Neo-classical of Keynesian might respond. Do you think they would predict a complete and total collapse of the entire system as readily? How would they challenge the Marxian perspective on the data?

Origins of the economic crisis

In economics on January 29, 2009 at 11:30 AM
Jeff Frankel's Weblog Dec 5, 2008

Source: Jeff Frankel's Weblog Dec 5, 2008

Who killed the economy

In economics on January 29, 2009 at 10:12 AM

Now you play the game that is keeping economists up late at night. Trying to figure out who is most at blame for killing the economy. Just click on this link to vote on who is the most blameworthy. Will it be Greenspan or Bush? Maybe it will be something like Hedge Funds and China instead of someone.