Category: Politics

Slate magazine is running a series on  Making sense of the credit debacle. Recently Barry Ritholtz of The Big Picture blog, listed a couple of key decisions that he thinks contributed to the crisis.

What led to the current situation were numerous legislative, ideological, and business decisions that worked together to create a systemic failure. Consider each of the following:

• The Commodities Futures Modernization Act 2000 allowed unregulated derivatives to run wild.
• The repeal of Glass-Steagall 1999 allowed depository banks to become far more intertwined with Wall Street.
• From 2001-03, Fed Chair Alan Greenspan took rates down to unprecedented levels, causing 1 a mad scramble for yield and 2 an enormous housing boom.
• In 2004 the SEC allowed the five big investment banks to leverage up from 12-to-1 to 35-to-1 or more.

Lately, I’ve been listening to a lot of podcasts from National Public Radio. One of my favorites is “Planet Money“, which is the best practical explanation I’ve heard of what’s going on in the economy. They don’t track the market, or hype investments, or all that stuff you get on CNBC.

But they ask much more interesting questions like:
“How should a bailout work?”
“What is money, really?”
“How did Madoff do it?”

Just like in physics, sometimes, it’s the simplest questions that really have deep answers.

After listening to some recent podcasts, I’m now convinced that all economists are political.
When you don’t have scientific experiments to rely on, and the facts are all open to interpretation, academics tend to group by ideology. Back when I got disgusted with macro-economics back in the early eighties, it was during a battle royal between the Keynesian school and the Chicago school of economics. The Chicago school won, and dominated US economic policy for about 25 years. Now that federal monetary policy has failed, politicians are turning to those forgotten Keynesians again.

Planet Money was started last year by the guys who did “The Giant Pool of Money” episode for This American Life. And if you haven’t heard that program, it’s definitely worth an hour of your time.They recorded it back in May of 2008, as the sub-prime crisis was taking down more and more of the financial industry.

They somehow managed to make the entire mortgage industry comprehensible – by following the money trail. They talk to a guy with no income who got a $700,000 mortgage, and to a vet who was tricked into taking a sub-prime loan. They interview a kid who worked for a sleazy mortgage broker in Las Vegas, and got bigger bonuses for worse loans. At the top of the chain was the young turk working for an investment bank, who earned $50-$70K a month, and partied with celebrities. He says he knew things were bad the month he only pulled in $25K. “And that didn’t even cover my expenses”. In the end, he lost his penthouse to foreclosure, and ended up moving in with his parents.

Yeah, I know, it’s hard to feel sorry for a guy like that. I just hope Paulsen didn’t pay his bonus with my bailout dollars.

Making America Stupid

Why would Republicans, the party of business, want to focus our country on breathing life into a 19th-century technology — fossil fuels — rather than giving birth to a 21st-century technology — renewable energy? As I have argued before, it reminds me of someone who, on the eve of the I.T. revolution — on the eve of PCs and the Internet — is pounding the table for America to make more I.B.M. typewriters and carbon paper. “Typewriters, baby, typewriters.”

Of course, we’re going to need oil for many years, but instead of exalting that — with “drill, baby, drill” — why not throw all our energy into innovating a whole new industry of clean power with the mantra “invent, baby, invent?” That is what a party committed to “change” would really be doing.