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Stiglitz on the Current Crisis December 10, 2008

Posted by A Texan In Grad School in Economic Theories, Friedman.
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Nobel-laureate Joseph Stiglitz gives his account of the financial crisis in Vanity Fair.  He has some interesting ideas, but I think most of them don’t hold up.  His main claim is that markets, especially financial ones, require a lot of regulation.  Stiglitz singles out Greenspan quite a bit for the bubble.  No doubt, the low interest rates that Greenspan presided over were a huge factor in the housing bubble.  As Lawrence White points out at Cato Unbound,

Credit-fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates.

But Stiglitz doesn’t see this as an argument for Friedman Monetarism, rather, as is typical of modern liberal thought, Stiglitz believes that if only the right person was in charge.  Stiglitz leaves out any idea that Public Choice Theory may explain that politics doesn’t really do a better job than markets – even market failures.

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1. Kenneth Brinzer - December 15, 2008

Was this truly a market failure given all the government complicity?

Here, I’m thinking about the imposition of the Clinton-era CRA passed in 1995, and the subsequent threats of retribution by the US Attorney General on those entities that did not acquiesce to the “social good purpose loans” rationale of the CRA In effect, government established a template for loans based on “good intentions” and threat of government force struck down the prudent standards for loan underwriting that culminated in a gargantuan real estate bubble and financial epic financial implosion.

Also Sarbannes Oxley comes to mind that imposed FAS 157 (effective late 2007) to which was attributable 70% of the losses – over a matter of only a few months – that were incurred by American Banks and Brokerage companies up to the time of the bailout, i.e. $500 Billion in losses of the $700 Billion amount that necessitated the bailout.

And finally, I would include on this list of significantly- adverse government actions that did grave damage to our economy, the several year period of Eliot Spitzer activity as NYAG in which he tarred and feathered the financial services arena over 1) the late trading scandal, 2) an over-done obsession on the mutual fund industry fees, followed by his lengthy legal attacks on the CEOs of GE, NYSE, and AIG all international marque American corporte which did damage to our financial interests around the world.

While this is hardly a definitive list of debilitating government encroachment on the private sector that contributed mightily to the financial crisis, at least it is a start.


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