DISTASTEFUL as it may seem, we need to prepare for the next financial crisis, which, of course, will arrive eventually. Right now, though, people are so angry about the recent bailouts of Wall Street that the government may not be able to use the same playbook again.
The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.
Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”
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Sunday, November 14, 2010
Sunday, October 3, 2010
The Survival of the Safest
CORPORATE managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale.
It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.
Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.
A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.
Read full commentary
It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.
Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.
A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.
Read full commentary
Friday, September 24, 2010
Seven More Years of Hard Times?
NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.
Read full commentary
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.
Read full commentary
Monday, August 30, 2010
The Case for Reviving Revenue Sharing
PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.
In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.
State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.
In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.
Read full commentary
In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.
State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.
In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.
Read full commentary
Monday, August 9, 2010
What Would Roosevelt Do?
ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.
Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.
Two friends of mine, both economists, came upon a stimulus project recently that illustrated the problem. On a Wyoming highway they saw a sign that read “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” and prominently featured a picture of a worker digging with a shovel. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer with a shovel. That project employed capital, certainly, but not many human beings.
Like many such stimulus projects, it could be justified if you accept the idea that gross domestic product, not jobs, is central — a misconception rooted in economic theory, or at least in the way that Keynesian economic theory has evolved.
Read full article
Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.
Two friends of mine, both economists, came upon a stimulus project recently that illustrated the problem. On a Wyoming highway they saw a sign that read “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” and prominently featured a picture of a worker digging with a shovel. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer with a shovel. That project employed capital, certainly, but not many human beings.
Like many such stimulus projects, it could be justified if you accept the idea that gross domestic product, not jobs, is central — a misconception rooted in economic theory, or at least in the way that Keynesian economic theory has evolved.
Read full article
Tuesday, July 27, 2010
Who Should Safeguard Financial Stability?
NEW HAVEN – Central bankers around the world failed to see the current financial crisis coming before its beginnings in 2007. Martin Čihák of the International Monetary Fund reported in July 2007 that, of 47 central banks found to publish financial stability reports (FSRs), “virtually all” gave a “positive overall assessment of their domestic financial system” in their most recent reports.
And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis. That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [http://squamlakegroup.org/], a think tank of 15 academic financial economists to which I belong, reached in our recently published report, Fixing the Financial System.
Macro-prudential regulators (government officials who focus not on the soundness of individual financial institutions, but rather on the stability of the whole financial system) are sorely needed, and central bankers are the logical people to fill this role. Other regulators did no better in predicting this crisis, and are even less suited to prevent the next.
And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis. That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [http://squamlakegroup.org/], a think tank of 15 academic financial economists to which I belong, reached in our recently published report, Fixing the Financial System.
Macro-prudential regulators (government officials who focus not on the soundness of individual financial institutions, but rather on the stability of the whole financial system) are sorely needed, and central bankers are the logical people to fill this role. Other regulators did no better in predicting this crisis, and are even less suited to prevent the next.
Sunday, June 20, 2010
Help Prevent a Sequel. Delay Some Pay.
by Robert J. Shiller in The NY Times
CONGRESS’S approach to financial reform has been a bit like my own household’s response to a moth infestation in our kitchen a couple of years ago. After we got over the initial shock, my wife and I responded rapidly, disposing of food in which moths were breeding. Then we broadened our focus, throwing away items that had passed their expiration date or were no longer needed. Then we made a list of things to buy and went shopping.
But, in retrospect, we neglected something important. We didn’t take control of the crisis by finding where the moths came from, or figuring out how to prevent their return. (Just two weeks ago, we found another infestation.)
How does that compare to the federal response to the financial crisis?
Well, now that we’re past the initial phases of crisis management, Congress has a chance to address the underlying issues in a fundamental way. Unfortunately, though, the reform bills approved separately by the House and the Senate — and now in conference committee — deal with the crisis by offering a host of little cleanups and shopping lists. The cumulative effect would certainly be positive, but the current versions wouldn’t really prevent a repeat of the mess.
Read full commentary
CONGRESS’S approach to financial reform has been a bit like my own household’s response to a moth infestation in our kitchen a couple of years ago. After we got over the initial shock, my wife and I responded rapidly, disposing of food in which moths were breeding. Then we broadened our focus, throwing away items that had passed their expiration date or were no longer needed. Then we made a list of things to buy and went shopping.
But, in retrospect, we neglected something important. We didn’t take control of the crisis by finding where the moths came from, or figuring out how to prevent their return. (Just two weeks ago, we found another infestation.)
How does that compare to the federal response to the financial crisis?
Well, now that we’re past the initial phases of crisis management, Congress has a chance to address the underlying issues in a fundamental way. Unfortunately, though, the reform bills approved separately by the House and the Senate — and now in conference committee — deal with the crisis by offering a host of little cleanups and shopping lists. The cumulative effect would certainly be positive, but the current versions wouldn’t really prevent a repeat of the mess.
Read full commentary
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