Like many Americans, I was doing everything I could to help elect Barack Obama. It wasn’t all that much—but as an economist in Texas, I had some authority on the thinking of former Senator Phil Gramm, John McCain’s chief economic adviser. I’d made the front page of the Washington Post describing Gramm as a “sorcerer’s apprentice of financial instability and disaster.” (Gramm, with a certain sense of humor, denied it.) For that, and for my experience drafting policy papers, I was in contact every few days with Obama’s economists.
To economists in my own circle, it had long been clear that the financial crisis then unfolding was an epic event. We had watched the subprime mortgage disaster build up. In August 2007 we knew the meltdown had begun. Bear Stearns had failed. But for reasons that have to do with the pace and rhythm of politics, these issues remained on the back burner, the campaign being dominated by health care and the Iraq war. For those of us on the outside, it was hard to know whether the insiders understood what was coming.
And so it seemed a good idea to raise an alarm. But here you confront the Cassandra paradox: if you predict disaster, no one believes you. Economics is rife with alarmists; if the wolf really is at the door, it’s better to have a whole chorus saying so.
For this I had the help of the Charles Leopold Mayer Foundation for Human Progress, which convened a meeting in Paris. When you invite twenty friends to spend a few days in Paris in June, it’s rarely hard to persuade them to come. Among the Americans in the group were the editors of two important journals, a former United Nations financial expert, and the former federal regulator who had blown the whistle on the savings and loan fraud. There were also senior specialists from France, Britain, India, China, and Brazil.
The meeting had no political connection, but one result was a long memorandum, which I sent in early July to the Obama team. I do not know whether, or by whom, my memo was read. Not the slightest word came back.Read the rest at Truthdig
Yet the memo disproves the notion that nobody knew. To the group in Paris, three months before Lehman, what I wrote was obvious. It was our consensus view. What follows is an excerpt.
We Told You So
by James K. Galbraith | Lloyd M. Bentsen, Jr. Chair in Government/ Business Relations, Lyndon B. Johnson School of Public Affairs, and Professor, Department of Government, The University of Texas at Austin
(Originally appeared in The Baffler, Issue 19)
(h/t Kevin Fathi via email)
(h/t Kevin Fathi via email)
Excellent read. He was warned.
ReplyDeleteHe did more than warn them. Galbraith laid out a bold policy path for the crucial first months of the administration, that was 80% ignored. They instead chose the stupid Pete Peterson approach to budget issues along with some confidence fairly stuff and a deferential attitude toward the financial sector.
ReplyDeleteBubbles are endemic to capitalism
ReplyDeleteBut….
The housing bubble—deliberately fostered by the authorities
Just more evidence that Galbraith, like all “progressives”, is congenitally unable to differentiate private consensual behavior from compulsory government behavior. Of course, only by perpetually and meticulously confusing those two concepts is it possible to spread the phony “progressive” narrative.
Bob,
ReplyDeleteBack in 2003, I witnessed how moron Rumsfeld sicced his Iraq reconstruction contractors on the building materials industry with a blank check. (Inventories wiped out and prices raised.)
If he had a clue he would have done a price survey of the materials and implemented price controls and some rationing until he purchased all he needed...
Instead he was acting as the currency monopolist and setting higher prices for housing (not that the moron realized this...); this was NOT "private consensual behavior", and led to the housing bubble imo.
Resp
Ahhh, all that talk of embarking "on a directed, long-term strategy, based initially on public investment, aimed at the reconstruction of the physical infrastructure of the United States" spin you out?
ReplyDeleteI particularly like "it should reflect the core reality: the Federal Reserve and other financial regulatory agencies failed in their responsibilities in the past decade and now they must take up those responsibilities again.
The entire point of a regulatory system is to regulate. It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, and thus to prevent a situation in which financial interests dictate policy to governments. "
You know, the idea of regulatory capture, the thing that made the financial sector, led by a rabid Rand-ite (amongst others with their hand in the trough), more laissez faire than usual to the point of having barely any regulation? It's been very well documented and I'm sure you can't have missed it. It didn't end well precisely because self-regulation does not work. It is a contradiction, and not in a private firm's interest, where profit is the motive (and tendency toward monopoly), not an altruistic and benevolent "trickle down".
Social purpose ... who would've thought ...
Can't see Galbraith confusing anything here. "Fostered by the authorities" refers to the very private sector capture of Fed and political sectors, and is a fact. Making the economy even more "private sector" and unregulated than usual is a recipe for disaster, and that is what we got.
Government may be inefficient at times, and prone to "capture" and brown paper bags in the car lot, but to deny the sector's massive role and influence in society is pure nonsense. And to deny private sector inefficieny and corruption is highly dishonest.
apj
The entire point of a regulatory system is to regulate.
ReplyDeleteNo. The entire point of a regulatory system is regulatory capture.
You guys really need to read “Triumph of Conservatism” by new leftist Gabriel Kolko, a book that I’ve owned since 1973. It looks like you can get a used copy pretty cheap.
http://tinyurl.com/6mjsgfo
It’s always been common knowledge to me and other libertarians and Austrians that the “progressive” reforms were put in place by the very elite from whom the public allegedly needed protection. REGULATORY CAPTURE IS THE COMPLETE OPPOSITE OF LAISSEZ FAIRE. You “progressives” meticulously confuse the two concepts in your analysis. Libertarians and Austrians always meticulously differentiate the two in every single analysis. Your tone-deafness to this difference is stunning.
Prior to the “progressive” reforms, as Kolko states, "There was more competition, and profits, if anything, declined. Most contemporary economists and many smaller businessmen failed to appreciate this fact, and historians have probably failed to recognize it altogether"
The stage thus set by the failure of the merger movement, Kolko moves on to the myth that Progressive Era reforms were uniformly or even predominantly opposed by their affected industries. The key is to realize that, economic strategies like corporate consolidation having failed, companies turned to political strategies to freeze the status quo or to gain new competitive advantages. As Kolko states, "the essential purpose and goal of any measure of importance in the Progressive Era was not merely endorsed by key representatives of businesses involved; rather such bills were first proposed by them."
This is what results from granting the government plenary economic power in a “democracy”. Voters simply do not and never will have sufficient information to make informed choices and the all-powerful state will be easy pickings for the rich elite. Just like today. And it has nothing to do with “capitalism” in the sense of laissez faire. It’s preposterous to blame laissez faire for a regime of regulatory capture. The only purpose of such an analysis is to breed confusion, at which you MMTers are real pros.
Laissez-faire ends in monopoly capital, representative democracy ends with state capture by the influential. and direct democracy becomes unmanageable without a highly educated, well-informed and deeply committed electorate.
ReplyDeleteAny other other solutions?
Bob
ReplyDelete"Authorities" arent just governmental in nature. There are private authorities too. You dont think the National Association of Home Builders wasnt lobbying for all the pro housing policies? Or National Association of Realtors? The truth is virtually every law/policy is being pushed by some private actor that stands to benefit form this law. Why is there a law in Georgia that you cannot put more than a 10 kilowatt solar system on your house?
GEORGIA POWER said so to the legislature.
Yes this is state but Fed operates in exactly the same manner. Legislation is not passed in a vacuum.
"GEORGIA POWER said so to the legislature."
ReplyDeleteThey do have 70 lobbyists-- they more or less own the GA General Assembly. But they're actually pretty good guys. Two of happiest moments as a lawyer involved the realization that the people screwing my clients over were also, by happenstance, screwing over GA Power. A phone call to the right person at GPC.... within a couple of days my problems mysteriously vanished. In one case a state Senate committee, to a man, reversed themselves on a bill they'd already passed unanimiously. In the other case, a county called to tell me they'd suddenly decided to build the new road AROUND my client's farm instead of through it.
If only I could draft behind (as they say in NASCAR) Georgia Power on every case! :o)