Thursday, October 29, 2009

Der Whopper (Real Title: Stiglitz and the Banks)

Posted by Neil H. Buchanan

[Note: The first billboard that I saw when I arrived in Austria earlier this week was for Burger King (advertising Der Whopper), which was grimly funny from the standpoint of American cultural imperialism but simply grim for me as a vegan. I am tempted to write this post about being a vegan in a foreign land, but I'll save that for perhaps another day.]

This month's issue of The Progressive (contents apparently unavailable online to non-subscribers) includes an interview with Joseph Stliglitz, the Columbia economist who is perhaps best known for his fierce attacks on the economic orthodoxy known as the IMF-Washington Consensus. Stiglitz, who also won the quasi-Nobel prize for his brilliant work on the shortcomings of markets due to imperfect information, has spent the last few years arguing that the neoliberal prescriptions (deregulating financial markets, radically reducing social safety nets, etc.) that the US and its international arms impose on other countries are both immoral and ineffective.

Perhaps of more current interest, Stiglitz has been an unrelenting critic of the Obama economic team, in particular Larry Summers. Stiglitz recently said of the Obama team that they are "either in the pocket of the banks or they're incompetent." He explains further in the interview that "in the pocket of the banks" need not mean "on the take" but simply describes having adopted a mindset that sees the world the way bankers would like policymakers to see it. That certainly does seem an apt description of Geithner, et al.

Stiglitz makes two further points that I found especially interesting:

(1) "Wall Street banks have used the same tactic that Bush used in the war on terror -- fear -- and they've basically said that if you don't do what we tell you ... it will be the end of capitalism as we know it." The interesting thing about this provocative comparison is that the analogy works not just on the initial level -- two broad policy mistakes that were perpetrated by taking advantage of mass panic -- but it carries through to deeper levels as well. In both the terror situation and the financial crisis, there really is something horrible going on, and it thus makes sense to fear for our continued existence.

That is why, for example, I have defended the TARP and the Fed's actions, because they were (I continue to believe) absolutely necessary to stop the economy from going into freefall. Similarly, many people believe (though I do not, for reasons not pertinent here) that the Afghan war was "the good war" and that things like near-strip-searches at airports are acceptable. The question is not whether doing nothing at all is an option, because it was not in either case.

Stiglitz does not actually disagree that the financial bailouts were necessary. He does argue, however, that the problems were misdiagnosed. For example, the bailout of Citibank pretty much said to the world that Citi was in huge trouble. If, instead, we had forced Citi to restructure, that would not have sent any worse message to the markets or the public, Stiglitz points out. Still, our leaders chose the route that maximized the happiness of the bankers. Stiglitz, in fact, argues generally that the problem is that the government simply did not extract enough concessions from the banking system in exchange for the trillions that we gave them.

(2) Stiglitz endorses the notion of a two-tiered banking system, with a government component. That is, he argues that banks have incentives to prey on the poor, to serve them badly (if at all), and to charge exorbitant fees. He thus suggests that the government could simply set up a banking system to provide basic financial services to the poor (check cashing, etc.), while allowing private banks to deal with people who actually have some ability to protect themselves from predation. Do you think Chuck Grassley and Max Baucus would like that idea? For that matter, what would Chuck Schumer (guardian of New York's financial class, though a progressive on most other issues) spew upon hearing this?

I argued during the Presidential transition in January that Stiglitz would have been a great choice for Obama's chief economist. He keeps proving it.

Auf wiedersehen!


Michael C. Dorf said...

Perhaps the comparison is unfair to the Bush Administration. After all, Bush, Cheney and Rumsfeld almost certainly believed that what they were doing was really in the national interest and that scaring people was simply a way to get us to go along. (That's not entirely true of the political arm, led by Rove, which did see terrorism fear as a means to win elections, regardless of the merits of the policy.) I doubt very much that the leading bankers really care whether various policy measures are in the overall national economic interest, so long as what happens serves their own economic interest. So the parallel should be drawn between the banks and the defense contractors who stood to benefit from war. The Obama team itself (Summers, Geithner), as opposed to the banks whose water they are carrying, are like the Bush team, in sincerely thinking that they are serving the national interest. The mystery is why they think that.

Bob Hockett said...

Great post, Neil -- many thanks again. Just a quick thought for now on the two-tiered banking system idea: It's a terrific idea, and indeed we have at least implicitly maintained that sort of system time and again from the earliest days of the repbulic.

The problem thus far is that each time we go through a round of deregulation, we chip away at the wall that's most salient at the time of that round. In the two most recent rounds, for example, we first eviscerated the distinction between S&Ls on the one hand, commercial banks on the other in the early 80s, and many still recall what happened. (Indeed the unregulated "mortgage banks" -- not really banks at all -- that got us into subprime trouble in recent years had stepped into the S&L vacuum during the 90s.)

We then removed the restrictions on affliating between commercial banks and insurance companies on the one hand, investment banks on the other at the end of the 90s, and are now living with fallout traceable partly to that. Intriguingly, morevoer, in connection with our most recent crisis, it is mainly the smaller, more local banks (like Thompkins County Bank here in Ithaca) that have weathered the current storm best.

(It also bears noting that the historically most important banking system in Japan -- the postal savings institutions that conveniently catered to millions of small savers -- was in the process of losing its uniqueness in the opening years of Japan's early 90s crash and ensuing slump.)

In view of the depressing regularity with which our implicit division between Mom & Pop banks on the one hand and other financial institutions on the other is eroded in times of deregulation, I find it tempting to think that one thing we ought do is render this distinction explicit, and sort of enshrine it in our legal and regulatory rhetoric henceforth. Were we to make of this distinction a full-blown cultural artifact of the "don't touch my Medicare" variety, as distinguished from just another bit of financial arcana, we might better insulate financial non-fastlaners in future.

michael a. livingston said...

Something I agree with Neil about! But a question: my sense, from an earlier project, is that Stiglitz is something of a contrarian, that is, he tends to take positions against the orthodox view whatever it is at the time. Is he doing this here, or do you believe it is more of a coherent, long-term critique?

Bob Hockett said...

By way of part of an answer to Michael L, my own impression is that Stiglitz has been articulating a fairly coherent, if nonetheless piecemeal, critique of orthodox micro- and "Washington Consensus"-style international economics for a good while now. I'd date it at least as far back as his work on asymmetric-information-rooted pathologies in credit markets from the later 70s and early 80s, to which Neil alluded.

On Stig's gripe with the "Washington Consensus" in particular, an anecdote from a decade ago might be of some interest here:

It has been received wisdom for decades among World Bank and IMF folk that global capital flows should be free of government-imposed frictions. The guiding idea, of course, is that in the absence of such frictions, capital will flow to its "most valued uses" worldwide, thereby optimizing global GDP growth.

A contrary line of thought, associated since the mid-40s with Keynes and the early-60s with Triffin and Tobin, has it that not all cross-border flows are prompted by economic fundamentals, and that in any event there might often be very good domestic reasons to impose capital controls of one sort or another even *were* all cross-border flows prompted by fundamentals.

One proposal along these latter, more heterodox lines, which began to be discussed in the 60s not long before the "Bretton Woods I" gold-anchored par value system broke down, was so-called "transaction-," or "Tobin- taxation" -- the taxation of cross-border capital transactions with a view to tamping down the often harmful *speculative* component of gross cross-border capital flows.

The Tobin proposal tended to wax and wane, according as the global financial economy oscillated between greater and lesser turbulance, over the decades that followed Tobin's first proposing it. The proposers, however, were always considered heterodox. You didn't tend to find them in high places at the Bretton Woods institutions.

Now fast-forward to the summer of 1999. I had just begun working at the Fund, and Stiglitz was Chief Economist across the street at the Bank. I still remember the day -- in August, I think -- that Stiglitz formally announced, in the wake of the then winding-down Asian financial crisis, that he believed Tobin-taxation would be a good idea. It would "throw needed sand in the wheels" of the new "global volatility machine," and the proceeds could be used to finance social safety nets for those harmed by the associated economic slumps.

Nobody as highly placed as Stig then was ever had proposed such a thing. It was virtual heresy.

I recall that the news of this announcement was immediately sent out to all desktops at the Fund as an email "news flash," and immediately there was a great hubbub in the hallways. Stig left the Bank soon thereafter. Hard to believe this was over a decade ago now.

In any event, while I don't think Stiglitz to be nearly as radical as he's sometimes made out to be, he does seem to me to have been at least mildly heterodox, pursuant to a coherehtly theorized skepticism about the allocative efficiency of capital markets, for a good 40 years or so now. And I wish he were still at the Bank -- or the Fund -- if he can't be at the White House. He's not all that radical, but he's probably as radical as we might nowadays plausibly hope for!

BDG said...

Interesting. As an aside on the last point, Neil, mutuals (e.g., credit unions) are arguably the equivalent of government-run banks for the poor, in that they have reasonably muted profit incentives and may be dependent for business on a reputation for fairness.

There's a little bit of empirics on this, as well.