Harsh lessons we may must learn once again By Joseph E. Stiglitz (China Everyday)
Updated: 2009-12-31 07:51 2009-12-31 07:51:21.0Joseph E. StiglitzHarsh lessons we could need to learn againlesson,2009,economic climate,
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The best that can be mentioned for 2009 is that it could are even worse, that we pulled again from the precipice on which we appeared to get perched in late 2008, and that 2010 will practically absolutely be greater for the majority of countries around the planet. The globe has also discovered some important lessons, though at excellent cost equally to present and long run prosperity - expenses which were unnecessarily substantial presented that we need to currently have learned them.
The very first lesson is the fact that markets usually are not self-correcting. Indeed, with no satisfactory regulation, they're prone to excess. In 2009, we once more saw why Adam Smith's invisible hand usually appeared invisible: it's not at all there. The bankers' pursuit of self-interest (greed) didn't cause the well-being of society; it didn't even serve their shareholders and bondholders properly. It certainly did not serve house owners who're shedding their properties, workers that have lost their employment, retirees that have seen their retirement funds vanish, or taxpayers who paid a huge selection of billions of bucks to bail out the banks.
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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 financial institutions, then to investment banking institutions,
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We are accustomed to thinking of government transferring money in the well off to your poor. Here it was the poor and average transferring money towards the rich. Currently heavily burdened taxpayers found their money - intended to help banks lend so that the economic system could be revived - go to pay outsized bonuses and dividends. Dividends are supposed to be a share of profits; here it was simply a share of government largesse.
The justification was that bailing out the financial institutions, however messily, would enable a resumption of lending. That has not happened. All that happened was that average taxpayers gave money towards the very institutions that had been gouging them for years - through predatory lending, usurious credit-card interest rates, and non-transparent fees.
The bailout exposed deep hypocrisy all about. 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 financial institutions 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 financial institutions. Those who had argued for "accountability" and "responsibility" now sought debt forgiveness for the financial sector.
The second important lesson involves understanding why markets usually do not work the way they can 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 lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work properly - and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed expenses on others, and failures in the financial system imposed costs on taxpayers and workers all over the globe.
The third lesson is the fact that Keynesian policies do work. Nations, 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 initial place.
Whenever an economic 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 economy 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 there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The expenses of mild inflation are miniscule compared to your fees imposed on economies when central financial institutions allow asset bubbles to grow unchecked.
The fifth lesson is that not all innovation leads to a more efficient and productive economic system - let alone a far better society. Private incentives matter, and if they're not properly aligned with social returns, the result may be excessive risk taking,
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Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their properties, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who're less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently,
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We will soon find out whether we have realized the lessons of this crisis any greater 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 might 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 Everyday 12/31/2009 page9)
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