Friday, September 19, 2008
This has been just a flabbergasting week of news, with the global financial markets showing unprecedented volatility and fragility. Clearly the Bush administration's simplistic dogma of deregulation and tax cuts as the answer to wealth creation, has lead us to a cataclysmic failure; and a government intervention which so far benefits those most responsible for the failure. The fate of the ordinary homeowner who may be facing foreclosure remains largely unresolved and has been virtually unspoken about this week. The President has been disturbingly disengaged from the crisis. His direct engagement could be instructive to the American people, yet he chose to lay low, come out for brief statements, then retreat. He's let Treasury Secretary Paulson do the heavy lifting alone; who thankfully seems to be strong enough to handle it.
In panic mode, the questions of moral hazard, and who stands to gain, have taken a back burner to more tactical maneuverings. They are probably necessary, yet are not a strategic or systemic solution to better governance of our financial system. Let's hope that a solid national debate ensues about how to rewrite the rules of the game, with better stewardship of the taxpayer's money. We want to hear intelligent solutions on the economic issues, not just sound bites about who's to blame from both Presidential candidates. It will be one of them that will struggle to set policy that gets us back on the path to growth next year. Most of us should recognize that whatever the final intervention looks like, it is a sour deal, that will pass bad debt onto all of our books. It should not free up those who caused it to carry on business as usual.
Q. In effect, is the U.S.A. declaring that profits are privatized and losses are socialized. And if so, where is the incentive to stave off those investments that might cripple our financial markets again in the future?
A. The answer to these two questions is really the same. If the government is going to be on hook to rescue a company when it fails, then the government has to be able to regulate that company — to try to minimize the chance of failure."
There has been a lot of information absorb this week. David Leonhardt at the Times, wrote an excellent question and answer on the economic turmoil this week in the New York Times which was an insightful explanation of very complex problems. Frankly, I've had a hard time understanding the implications of this week's news. I'm glad its not just me that's confused, and that smart guys like economist Steven Levitt at Freakonomics can say "To be honest, however, I haven’t got the foggiest idea what this all means". He posted another excellent Q&A about the financial crisis this week. You'll find more news bookmarked in the 'newsreal' column at right.
But perhaps the most insightful commentary that I found today comes from British comedians John Bird and John Fortune in this clip from earlier this year, about the failure of British bank Northern Rock which lampoons the greed and sense of entitlement which led us to a bigger global crisis point this week. It is interesting to watch it in the context of this week's news environment, and even better to end this business week with a laugh. Enjoy!