- ‹ previous
- 306 of 2798
- next ›
800 Years of Financial Folly
Carmen Reinhart and Kenneth Rogoff have done something that, apparently, no one has done before: rigorously collect data on debt and risk management (or lack thereof) over the past 800 years, rather than only since 1980. Their conclusion: excessive debt accumulation is always and everywhere a very, very bad thing.
Also: credit booms and busts happen over and over throughout history, with only the details changing; public sector debt crises are common and devastating; 
banking crises hit every country, rich and poor alike; and when credit bubble pop, everything pops along with it. And finally, a fifth lesson, as summarized by Martin Wolf:
The final lesson is that financial liberalisation and financial crises go together like a horse and carriage. It is no surprise, therefore, that the last 30 years have seen waves of financial crises, of which the latest one is merely the biggest. The current crisis is the worst since the Great Depression. Yet, argue the authors, no one should have been surprised by this outcome. The US showed all the classic symptoms of a country heading for crisis: a huge current account deficit; soaring house prices; headlong credit growth; and, let us not forget, excessively complacent regulators.
It always comes back to debt and leverage, doesn't it? There are lots of other things to watch out for too, but the bottom line is that if you keep leverage at reasonable levels, your financial crises are likely to be manageable. If not, not. Tim Geithner, please take note.
In other words...
it's human nature to be greedy and selfish. Did we need 800 years of market analysis to tell us this? Can we just admit we need watching and not fall for the fairy tale that the markets will take care of themselves? We've had "new paradigms" and the "elimination of risk", tulip manias, South Seas bubbles, CDOs, and the Great Depression. Can we just use the other sides of our nature, the prudence, the analytical, rational mind to just put real friggin regulation in place?
So where do we find these
So where do we find these robotic/alien beings to craft and implement this regulation?
The answer lies not in more oversight, but in more liability.
Can't have on without the other.
I know you believe all government is inescapably evil, but liability implies that you are liable to uphold some sort of standard. You might even call it a regulation. So, without regulations as a standard to assess liability, you have neither.
Face the fact that human beings are flawed and stop being so childishly disillusioned with government. Government is us. What do you expect from people, perfection?
You said yourself that "it's
You said yourself that "it's human nature to be greedy and selfish." So, why do we want to give those people, who have proven time and again that they are indeed greedy an selfish, the ability and incentive to be greedy and selfish? There has never really been any way to punish the watchmen. Sure, if you accept outright bribes, you might get nailed, but what if you funnel contracts to a company, or craft legislation benefitting one company for years, retire, and then get a multi-million dollar position at that company when you step out of office? This has been going on for decades and is pretty damn hard to stop.
You have to look at incentives. We have plenty of regulation and regulatory bodies. Why has the SEC proven to be such a colossal fuckup? What are the incentives for the guys working there to vigorously do their jobs? If they don't, nothing really bad happens in the short term. If they don't, it's very easy to pass the blame off to someone else. Look how much blame we've put on the SEC for Madoff, a guy who NEVER MADE A TRADE! A guy who people complained to the SEC about for YEARS! It's not that I think they're evil, it's that they have nearly zero incentive to do their job properly.
It's very, very easy to create the incentives for private actors to make better choices. It's very, very, very, very, very, nearly impossible to create incentives for public actors to make better choices.
We find beings to craft and
We find beings to craft and implement this regulation from the Democratic Party of 1932.
That's why we need debtor's
That's why we need debtor's prisons. Real regulation with some teeth.
The debtors had contracts
The debtors had contracts (mortgages) with the banks which stipulated that, if they couldn't pay, the bank got the house -- end of story. So on what basis would you send them to prison? They didn't break any rules.
But how about prison for corporate executives who betrayed the trust of their shareholders for personal gain? That sounds like more of a crime, doesn't it?
... or maybe the pillory
Well, count on Luther to come through with the Middle Age solution. Maybe we could try the pillory before we go for the full-bore prison solution though.
Or maybe
the concept of limited liability needs to be reexamined. Seems like greedy people would take fewer risks with other people's money if they were personally financially liable. No more bubbles, but also little (or no) economic growth: steady state economics for a finite world.
The economic version of climate change denialism will materialize in a matter of months concerning the validity of Carmen Reinhart and Kenneth Rogoff's data and conclusions. Maybe sooner.
Debt
I can define "excessive debt accumulation" in retrospect, but how do one determine debt accumulation is becoming "excessive" before it crashes?
OOPS
How does one.
kevin, nice dig. thanks
kevin, nice dig. thanks
"The final lesson is that
"The final lesson is that financial liberalisation and financial crises go together like a horse and carriage"
I hate to see a good word like liberalisation used when what the author meant is financial deregulation, a lack of oversight, or operating financial markets with the cheerful assumption that greedy bastards are really just creative, exuberant types who will make all of us richer.
Debt has quantity as well as
Debt has quantity as well as quality. When you buy debt (i.e. lend money) the risk you take depends on both its quantity and its quality.
From all that we have heard about the recent meltdown, it had more to do with bad assumptions about the quality of debt purchased by the various investment banks rather than its quantity.
That holds if you are the
That holds if you are the lender. If you are a borrower, of course, what matters is the quantity of your debt and the terms of repayment.
But you can't hold individuals who borrowed beyond their means responsible for Lehman's demise, for example. The systemic risk comes from (Lehman's) bad lending practices. Bad borrowing practices on the part of Joe Shmoe have to be assumed. So again, it's the excessive accumulation of risk (by lenders), not of debt (by borrowers), that was the problem.
One could assume that the
One could assume that the quantity of high-quality debt was limited and finite - there are only so many good credit risks out there. As you get into higher and higher quantities of debt, it's inevitable that the overall quality of the debt declines as well.
I've long thought that a powerful tool for limiting dangerous financial practices is fear, fear based on having seen how catastrophic it can be if things are allowed to get out of hand. The depth and hardship of the Great Depression helped instill the discipline that kept banking boring and prevented the financial system from going off the deep end for 70 years.
But eventually the generations that remember the old catastrophe die out and are replaced by the eager, the fearless and the greedy, who then engineer another collapse. Arguably the bailout has helped mask the enormity of our folly, preventing a healthy fear from being created out of the smoking wreckage of an historic disaster. Which is what we are back to the banks doing the exact same risky things that caused last year's crisis - we prevented a complete meltdown, thus ensuring an even bigger meltdown to come.
The good news is when we finally bottom out we'll at last create enough traumatized fear to give us decades of discipline in the years ahead.
Man this is depressing.
a lot of money sloshing around at the top
Another enabling condition, it seems to me, is more money sloshing around at the top levels of our society than its holders seem to be able to find conventional uses for, or even conventional investments to put it in.
That money has to go *somewhere*, and if people have money beyond the level where playthings for the rich can sop up much of it, then it'll slosh around, looking for the best 'safe' investment possible. The more of it, the more its holders and manipulators will pressure the regulators to dispense with rules.
To a large extent, a more equitable society is its own protection.
THIS is why i check in on
THIS is why i check in on drum everyday. absolutely fantastic find kevin