12 January 2010

Joe, It's So Good to Know Ya

"The China Daily" published a bit of Stiglitz on New Year's Eve, and I've just now come across it. As the name of this endeavor says, distribution matters. In the piece, he lists the major screw ups of the last year, and this time around, I'm going to quote a bit more than usual. Here we go.

... markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society...

This is his first point, and with good reason; the free market of Adam Smith was a fantasy even then, and he knew it. Smith was proposing a better way to structure an economy and society, but felt that contemporary governments were too autocratic. He posited that an economy made up of small actors would function smoothly, and fairly. But the key assumption, and it was just an assumption, is that there can be an economy of small actors. That's never been true, and now that the too big to fail banks are fewer and bigger, preposterously less so. Bush/Gramm/Paulson simply made it worse, absent stringent controls on their behaviour.

Another point, given that I'm a Keynesian:

... Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Those who condemn Roosevelt as not having ended the Great Depression with his fiscal policies (modulo the 1937 screw up), conveniently ignore the fact the World War II, which they do credit with ending the Depression, was just Keynesian with lots more dead bodies. Hypocrites, as usual.

Last quote:

... while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them - both economic and social - are apparent and enormous.

Many, humble self included, have been calling for a restructuring of finance to Yenta status; just match making between savers and borrowers. The "innovations" have done nothing but transfer wealth from the many to the few. In recent years 40% of corporate profits have been due to financial manipulation, not production of goods. This is just Bad. It should be against the law to do Bad Things.

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