Holy Cow... This is such a friggin' good article (h/t Jesse's Cafe) and it goes to my Credit discussion.
Financial markets have been likened to the brain of the economy. They are supposed to allocate capital and manage risk. When they do their job well, economies prosper. When they do their job badly, as we are once again learning, everyone suffers. Financial markets are amply rewarded for their work--in recent years, they have received over 30 percent of corporate profits--and the standard mantra in economics was that these rewards were commensurate with their social return...
The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system's latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits--private rewards that were not commensurate with social benefits. The imperfections of information (resulting from the non-transparency) led to imperfections in competition, helping to explain why the usual maxim that competition drives profits to zero seemed not to hold.... One should have suspected that something was wrong with the economic system when millions of Americans owed billions to credit card companies and banks in "late fees," "penalties," and a variety of other charges, transforming a high annual interest rate of 20 percent into a truly usurious effective interest rate of 100 percent or more for those who fell behind in their payments.
To put it another way, had those in the financial sector allocated capital and risk in a way that fueled the economy, they would have had handsome profits. But they wanted more, and so established incentive structures that encouraged gambling. If they gambled and won, they could walk away with a share of the profits. If they gambled and lost, the investors would bear the consequences.... The financial-system-as-casino... is a negative-sum game. Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us. Some have lost their homes and life savings. Others are innocent bystanders who resisted the false promises of the mortgage brokers and the credit card companies, but now find themselves out of jobs as the economy weakens.
In short, the problem with the U.S. economy is not that we have allocated too many resources to the "soft" areas and too few to the "hard." It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generously--though a strong argument could be put forward to that effect. It is that too little effort was devoted to managing real risks that are important--enabling ordinary Americans to stay in their homes in the face of economic vicissitudes--and that too much effort went into creating financial products that enhanced risk. Too much energy has been spent trying to make an easy buck; too much effort has been devoted to increasing profits and not enough to increasing real wealth, whether that wealth comes from manufacturing or new ideas. (emphasis mine)
It's nice to hear a Nobel Prize winner thinking along the same lines as myself. But it also reinforces my fear that this is too little notice, too late.
A long time ago, when I worked for a HUGE CORPORATION, we did one of those corporate exercises where we learned about the feedback mechanisms, including negative feedback, which reduces output but may be necessary to stabilize the system. IOW, on some level, rather than casting pejoratives on the current slew of doom-n-gloom economists (like Roubini and Stiglitz w/ this article), we should simply come to the realization that their prophetic economic downturns (the real ones, not like the blips of 92 and 01) are simply necessary negative feedbacks. There needs to be a purging of the system in order to re-stabilize the system. A global recession, or even a localized one, will wean Americans off the teat of credit (man, I'm crass today) and get our minds off the cultural issues that are so divisive but have SO FRIGGIN LITTLE REAL MEANING IN OUR EVERYDAY LIVES.
Yeah, I hate Sarah Palin. I hate her w/ a passion (and yes, this is a total non-sequiturious digression). Because she stands there at the podium, rallying her troops to fight these cultural battles (that I have vowed to stop engaging in. It's like trolls... you gotta learn to STOP FEEDING THE TROLLS) and ignores the much more real issues that need to be addressed to keep this country strong (economy, economy, economy, education, senior entitlements and health care - and only b/c these are damn vital to how the economy is going to turn out).
But at least I now understand what the big "C" conservatives are feeling. Sarah Palin is the Republican's Barack Obama. So they probably view Obama with the same visceral dread and loathing that I have for Governon Palin. But I'm a logical being, I can get over this, I can argue myself down from my fur up, claws out, gut reaction... right?
Pbbfftttt...
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