Harsh lessons we may have to learn again By Joseph E. Stiglitz (China Everyday)
Up-to-date: 2009-12-31 07:51 2009-12-31 07:51:21.0Joseph E. StiglitzHarsh lessons we might should discover againlesson,2009,financial system,crisis11011501Op-Ed Contributors2@webnews/enpproperty-->
The finest that can be mentioned for 2009 is the fact that it could have already been even worse, that we pulled again through the precipice on which we seemed to get perched in late 2008, and that 2010 will almost absolutely be greater for the majority of nations across the world. The world has also realized some valuable lessons, though at excellent cost both to current and long run prosperity - expenses which were unnecessarily substantial offered that we really should currently have realized them.
The 1st lesson is markets aren't self-correcting. Certainly, without sufficient regulation, they can be inclined to excess. In 2009,
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Under the threat of a collapse of the entire system, the safety net - intended to help unfortunate individuals meet the exigencies of life - was generously extended to commercial banking institutions, then to investment banking institutions, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few.
We are accustomed to thinking of government transferring money through the nicely off to the poor. Here it was the poor and average transferring money to the rich. Previously heavily burdened taxpayers observed their money - intended to help banking institutions lend so that the economic system could be revived - go to pay outsized bonuses and dividends. Dividends are supposed to get a share of profits; here it was simply a share of government largesse.
The justification was that bailing out the financial institutions,
Microsoft Office Pro Plus 2010, however messily, would enable a resumption of lending. That has not happened. All that happened was that average taxpayers gave money to your very institutions that had been gouging them for years - through predatory lending,
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The bailout exposed deep hypocrisy all close to. Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program. Those who had argued for free market's virtue of "transparency" ended up creating financial systems so opaque that banks could not make sense of their own balance sheets. And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to your banks. Those who had argued for "accountability" and "responsibility" now sought debt forgiveness for the financial sector.
The second important lesson involves understanding why markets typically do not work the way they may be meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they misplaced, the taxpayer would pay. Moreover, when information is imperfect, markets typically do not work nicely - and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed fees on others, and failures in the financial system imposed expenses on taxpayers and workers all over the planet.
The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged in the crisis faster. Other countries succumbed for the old orthodoxy pushed by the financial wizards who got us into this mess in the primary place.
Whenever an financial system goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit - raise taxes or cut expenditures - to "restore confidence." But those policies almost always reduced aggregate demand, pushed the financial system into a deeper slump, and further undermined confidence - most recently when the International Monetary Fund insisted on them in East Asia in the 1990's.
The fourth lesson is always that there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banking institutions ignored what was happening to their financial markets. The expenses of mild inflation are miniscule compared towards the charges imposed on economies when central banking institutions allow asset bubbles to grow unchecked.
The fifth lesson is the fact that not all innovation leads to a more efficient and productive economic climate - let alone a greater culture. Private incentives matter, and if they may be not nicely aligned with social returns, the result may be excessive risk taking, excessively shortsighted behavior,
Microsoft Office 2007 Standard, and distorted innovation. For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the expenses associated with them - both economic and social - are apparent and enormous.
Indeed, financial engineering didn't create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their households, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards which were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.
We will soon find out whether we have realized the lessons of this crisis any much better than we really should have learned the same lessons from previous crises.
Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010 we may find ourselves faced with another opportunity to learn them.
The author is an Economics Nobel laureate and university professor at Columbia University. He has many books, including Globalization and Its Discontents and The Roaring Nineties, to his credit. His latest book, Freefall, will be published in January.
(China Day-to-day 12/31/2009 page9)
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