Copyright Vanity Fair
Very much worth clicking the link and reading the whole piece.
…How Did We Get into This Mess?
A unique combination of ideology, special-interest pressure, populist politics, bad economics, and sheer incompetence has brought us to our present condition.
Ideology proclaimed that markets were always good and government always bad. While George W. Bush has done as much as he can to ensure that government lives up to that reputationâ€šÃ„Ã®it is the one area where he has overperformedâ€šÃ„Ã®the fact is that key problems facing our society cannot be addressed without an effective government, whether itâ€šÃ„Ã´s maintaining national security or protecting the environment. Our economy rests on public investments in technology, such as the Internet. While Bushâ€šÃ„Ã´s ideology led him to underestimate the importance of government, it also led him to underestimate the limitations of markets. We learned from the Depression that markets are not self-adjustingâ€šÃ„Ã®at least, not in a time frame that matters to living people. Today everyoneâ€šÃ„Ã®even the presidentâ€šÃ„Ã®accepts the need for macro-economic policy, for government to try to maintain the economy at near-full employment. But in a sleight of hand, free-market economists promoted the idea that, once the economy was restored to full employment, markets would always allocate resources efficiently. The best regulation, in their view, was no regulation at all, and if that didnâ€šÃ„Ã´t sell, then â€šÃ„Ãºself-regulationâ€šÃ„Ã¹ was almost as good.
The underlying idea was, on the face of it, absurd: that market failures come only in macro doses, in the form of the recessions and depressions that have periodically plagued capitalist economies for the past several hundred years. Isnâ€šÃ„Ã´t it more reasonable to assume that these failures are just the tip of the iceberg? That beneath the surface lie a myriad of smaller but harder-to-assess inefficiencies? Let me venture an analogy from biology: A patient arrives at a hospital in serious condition. Now, it may be that the patient has simply fallen victim to one of those debilitating ailments that go around from time to time and can be cured by a massive dose of antibiotics. In this case we have a macro problem with a macro solution. But it could instead be that the patient is suffering from a decade of serious abuseâ€šÃ„Ã®smoking, drinking, overeating, lack of exercise, a fondness for crystal methâ€šÃ„Ã®and that it has not only taken a catastrophic toll but also left him open to opportunistic infections of every kind. In other words, a buildup of micro problems has led to a macro problem, and no cure is possible without addressing the underlying issues. The American economy today is a patient of the second kind.
We are in the midst of micro-economic failure on a grand scale. Financial markets receive generous compensationâ€šÃ„Ã®in the form of more than 30 percent of all corporate profitsâ€šÃ„Ã®presumably for performing two critical tasks: allocating savings and managing risk. But the financial markets have failed laughably at both. Hundreds of billions of dollars were allocated to home loans beyond Americansâ€šÃ„Ã´ ability to pay. And rather than managing risk, the financial markets created more risk. The failure of our financial system to do what it is supposed to do matches in destructive grandeur the macro-economic failures of the Great Depression.
Economic theoryâ€šÃ„Ã®and historical experienceâ€šÃ„Ã®long ago proved the need for regulation of financial markets. But ever since the Reagan presidency, deregulation has been the prevailing religion. Never mind that the few times â€šÃ„Ãºfree bankingâ€šÃ„Ã¹ has been triedâ€šÃ„Ã®most recently in Pinochetâ€šÃ„Ã´s Chile, under the influence of the doctrinaire free-market theorist Milton Friedmanâ€šÃ„Ã®the experiment has ended in disaster. Chile is still paying back the debts from its misadventure. With massive problems in 1987 (remember Black Friday, when stock markets plunged almost 25 percent), 1989 (the savings-and-loan debacle), 1997 (the East Asia financial crisis), 1998 (the bailout of Long Term Capital Management), and 2001â€šÃ„Ã¬02 (the collapses of Enron and WorldCom), one might think there would be more skepticism about the wisdom of leaving markets to themselves.
Click to read more
Joseph E. Stiglitz – Vanity Fair
Copyright Vanity Fair