Joseph Stiglitz, and the Failed Ideas of Economists
In his 1982 book, The Economy In Mind, the late Warren Brookes relayed a story from 1979 in which a Keynesian economist from the United States was passing through customs at JFK Airport. When the customs officer processing his entry saw his profession, he commented, “I don’t know whether I should let you back in, Professor, considering what you economists have done to this country.”
The officers’ words take on special meaning amid an economic crisis largely caused by economists eager to elevate central management of the economy over a decentralized system whereby profits and price signals lead to a natural process in which the prudent are rewarded over the profligate. That’s the basic nature of markets, but despite this truth, economists such as Joseph Stiglitz continue to throw free markets in front of the proverbial train in hopes of accruing to themselves a role in fixing that which should be left alone.
In a recent article for Vanity Fair, Stiglitz engaged in falsehoods and contradictions in order to blame capitalism for our present troubles. It would perhaps be better for him and other elite economists to simply look in the mirror.
Indeed, while Alan Greenspan’s light trashing of free markets has surely earned him a place in economic purgatory, the blame being passed his way for the housing boom and bust is not rooted in reality. Many even on the Right blame low nominal rates of interest on Greenspan’s watch for the latter, but then history shows housing has traditionally done best when interest rates are rising.
More realistically, weak currencies are the biggest drivers of nominal home-price gains, and for evidence we need only study Richard Nixon’s second presidential term and Jimmy Carter’s lone term to find that much like this decade, housing was frothy under both. Stiglitz argues that Greenspan had a role here for turning on “the money spigot” with “full force” earlier in the decade, but then money supply is vastly overrated as an indicator of a currency’s direction. For evidence, we need only compare the ‘70s and ‘80s when money creation by the Fed was the same, but achieved opposite results. If Stiglitz is looking for someone to blame here, he would do better to finger a Bush Treasury that embraced a weak dollar with great vigor.
Stiglitz says Greenspan should have been more vigilant about curbing “predatory” lending to low-income households and “liar loans”, but when we consider how the Right talked up “America’s Ownership Society” in concert with politicians from the Left eager for Fannie and Freddie to expand their mandate into the subprime space, it seems folly to assume that Greenspan could have blunted this bipartisan bout with political correctness. Stiglitz decries the innovation that made these loans possible, but then loans are always risky, and they’re only problematic when the very regulators and politicians whose actions he espouses seek to privatize the gains from same, while socializing the losses.
While he served President Clinton, Stiglitz claimed he did not support the repeal of Glass-Steagall, and that repeal changed the culture of banking, thus making way for the various failures in our midst. What he ignores is that with the exception of Citigroup, the majority of financial failures involved investment banks lacking a commercial-bank affiliation. Indeed, imagine what might have happened if regulations had kept commercial banks from serving as White Knights in this whole financial mess (see J.P. Morgan & Bank of America), and more broadly, what a shame that regulations kept other cash rich companies such as Wal-Mart from buying greatly weakened financial institutions in order to enter the banking space themselves.
Stiglitz regularly seeks to elevate regulation as the path to financial health, but then contradicts himself in decrying a 2004 SEC decision in which investment banks were allowed to increase their debt-to-capital ratios “from 12:1 to 30:1, or higher”. The question Stiglitz fails to ask is whether regulation was in fact the problem. Indeed, the ’04 SEC decree essentially allowed risk-oriented banks to hide behind the very regulations that Stiglitz would like more of. Did it ever occur to him that absent a muscular SEC, self-interested investors with their money on the line might have regulated the investment banks themselves; allowing firms with a history of investment success higher debt-to-capital ratios, while curbing the activities of those thought to be unworthy?
On the tax front, Stiglitz claims that the 2001 and 2003 Bush tax cuts “played a pivotal role in shaping the background conditions of the current crisis.” According to him, “they did very little to stimulate the economy.” About the 2001 “reductions”, he would have a point in that stimulus and tax breaks for select industries are by definition an economic retardant. But there again lies a contradiction in that while he correctly decries the imposition of Henry Paulson’s awful TARP, his reasoning has to do with Paulson’s failure to do anything “about the source of the problem, namely all those foreclosures.” Put simply, Stiglitz didn’t like the welfare that characterized Bush's Stimulus I, but somehow welfare for irresponsible homebuyers is a good thing.
Regarding the ’03 cuts, if economic growth is the certain result of productive work effort bolstered by investment, and it is, how is it that lower penalties on both would harm ours or any economy? More important, Stiglitz contradicts himself again in noting the massive amount of “foreign” oil that reached our shores in subsequent years. Indeed, imports of any kind are merely a reward for productive economic activity. If the ’03 cuts had hurt the economy, this would have revealed itself through less, not more in the way of imports. Stiglitz would also do well to remember that we’re not “independent” when it comes to all manner of goods, but far from economically enervating, this lack of self-sufficiency is a positive for Americans mostly doing that which they do best. Put simply, self-sufficiency of the economic variety is merely a kind term for poverty.
Stiglitz argues that “if you can’t have faith in a company’s numbers, then you can’t have faith about a company at all.” He notes that company issuance of stock options exacerbated the latter, and that the SEC failed to rein this practice in. While this writer would disagree with his position on options, if they’re toxic as he says then the discussion is irrelevant. If stock options give management “every incentive to provide distorted information”, why would CEOs need regulators to tell them to stop issuing them if investor faith is of paramount importance?
With regard to TARP, Stiglitz correctly notes that the whole concept “was an act of extraordinary arrogance” on the part of Paulson and the Bush administration. So true, but in a piece rife with contradictions, Stiglitz contradicts himself yet again. Indeed, in the same paragraph in which he decries banks that “made too many bad loans” he notes that the Paulson plan was faulty for failing to ensure that those same “banks would use the money to re-start lending.”
Stiglitz concludes by drilling down to the supposed “one” mistake that caused this crisis. To him it resulted from the “belief that markets are self-adjusting and that the role of government should be minimal.” What he misses in a column full of misses is that markets were never free to begin with, and they certainly were never allowed to adjust.
A better conclusion would be that free markets are best for wrenching capital away from the destroyers of it so that it can be placed in the hands of those who will treat it well. Put simply, in a true free market there would never be government bailouts precisely because a system of free exchange is too important to be wrecked by the blunt hand of government.