The housing boom and bust

The housing boom and bust

What good are economists anyway?

 What good are economists anyway?

More nuanced answer to failure……….

Mr.GURCHARAN DAS has piece in WSJ titled “The Dharma of Capitalism” in which he writes:

• “President Barack Obama's reaction to the crisis, among other things, was to seek to claw back bank bonuses. Congressional Democrats suggested an extortionate tax on bonus recipients at banks that received federal bailout money. To want to punish someone in this crisis is understandable but it is a dangerous path. What the world needs instead is the calm and principled voice of King Yudhishthira. He would have appealed for a voluntary return of bonuses while explaining to the public that Wall Street had been bailed out to save Main Street's pain. Furthermore, honoring bonus contracts is necessary to support the rule of law.
  
• If envy is the sin of socialism, greed is the sin of capitalism. As capitalist nations grow, the resulting wealth creates enervating influences. Generations of savers are replaced by spenders. Ferocious competition is a feature of the free market and it can be corrosive. But it is also an economic stimulant that promotes human welfare. The subtle art of dharma tries to strike the right balance between healthy and unhealthy competition.
  
• The choice for policy makers today is not between free markets and central planning but in getting the mix of regulation right. No one wants state ownership of production where the absence of competition corrodes the character even more. Dharma's approach is not to seek moral perfection, which leads inevitably to theocracy or dictatorship. It recognizes that it is in man's nature to want more and it seeks to give coherence to our desires by containing them within the discipline of an ordered existence.
  
• We must learn to live with imperfection but seek the sort of regulation that not only catches crooks but also rewards dharma-like behavior and nobility of character.”
  

In the ET Mr Swaminathan S Anklesaria Aiyar says “… the problem as Obama’s cowardice rather than corruption. I don’t expect another Great Depression: at worst, the US will suffer stagnation of the sort Japan had in the 1990s. Most likely, we will see a long, weak recovery. Either way, it’s bad news for India, which badly needs US resurgence.”

Bubbles Warding off……….

Christopher Lingle has valid point “For its part, the Obama team increased the climate of uncertainty to stampede the general public into accepting the stimulus package and the mushrooming deficit. While successful entrepreneurs can deal with uncertainty from market conditions and even thrive with it, uncertainty created by politicians tends to stifle business activity. And so, fear-mongering and negative remarks about the economy to spook the electorate into supporting his spending plans have undermined overall confidence.”

Inequality geniuses….

“The problem is never with the economic system or the ideology. The problem is always with human beings who get intoxicated with wealth and power and corrupt the system whatever it is. Our present global economic crisis is the result of human foibles, cronyism, power mongering, greed, selfishness, corruption and bureaucracy. ” 

Actually it is never serious or insensitive “human beings” who become bombard in civil society for forever. 

Interestingly people argue in the present world financial crisis like what Mr Deepak says “To create the new paradigm we do not need to resuscitate a dying patient, we need to let the patient die and reincarnate ourselves as a new humanity. ”. 

This is what some liberals argue if a particular company failed by its own wrong decision making let them fail so that they will be more cautious in future with their wealth management. In fact this will pave a way to other companies also. The Economist says perhaps more aptly that “the rich created a new form of heads-I-win-tails-you-lose capitalism. Traders and fund managers got huge rewards for speculating with other people’s money, but when they failed the parent company, the client and ultimately the taxpayer had to pay the bill. Monetary policy contributed to this asymmetry of risk: when markets faltered central banks usually rescued them by cutting interest rates.”

Friedman’s Plucking

It seems to be interesting I mean what Mr Kevin Hassett says the “Butterfly at Ceiling” and reversing the depressed economy and less unemployment all that stuffs. 

He says that “I find it useful when thinking about the Friedman model to use an alternate analogy. Imagine that you are in a room with an upward sloping ceiling. There is a butterfly in the room that wants to escape, and it follows the ceiling up and up over time.

If the height of the butterfly represents gross domestic product, we can say that the economy is generally trending higher. If it happens to flutter down far away from the ceiling, that means its next movement is likely to be steeply back up. 

The hard part, of course, is figuring out whether a given decline is lasting bad news or a temporary pluck.”

Who will correct the misunderstanding cycle?

The fundamental understanding of word ‘reform’ is somehow missed out from its original path. Secondly, several of economists, policy analysts understood wrongly by relating US financial crisis and present Indian financial inclusion development. 

Of course, the economic agents and policy makers ‘intentionality’ is nowhere close. 

Mr Rakesh Mohan in his interview says “There are also some overlaps with the Percy Mistry lot, and with Raghu’s crew. So I think these panels were independent. Second, we had international peer reviewers who are amongst the most respected in each of their fields and therefore the process was designed to address the issue of impartiality.” 

However, Mr Jaideep Mishra says “the policy debate to chalk out a suitable road-map for financial sector reforms. And here, the CFSA report does not seem to materially differ from the earlier Percy Mistry and the more recent Raghuram Rajan committee reports in terms of direction and scope, although there are differences in terms of nuances and emphasis on the way ahead. ” 

And A V Rajwade blames in his BS article that “the political class that relaxed rules and supervision to allow bankers to create the mess they did.” 

But who will correct the misunderstanding cycle?

The benefits of failure

Peter T. Leeson has a nice article on The benefits of failure

The State, after all a Public Good

Kiran Karnik says in his Economic Times article “In India, as in much of the world, we have witnessed nearly two decades of steady de-regulation. Many controls have been dismantled and government has stepped out of some areas. The private sector has been permitted into many previously-closed sectors and has even attained dominance — aviation and mobile telephony are good examples. Even in areas like education and health-care, the government has been playing an ever-smaller role. The influence of corporate leaders within government has vastly increased and government has, clearly, been on the wane.” 

That is not the case wherever government has “dismantled” its nose is still keeping for smelling the taste for its own ‘evil’. In fact it is interesting to see how private agency is also becoming more ‘evil’ for example the Satyam case. Why does Satyam Company do such a bad mistake which will cost much more than the company aims to achieve in short term profit? Think of its employee and their family, already there is a new that about 16000 employees left the company. 

Think of US financial crisis, why do companies don’t take precaution about dangerous actions and then ask government to help their balance sheet on which the government had no business in the past. Why to government give helpline for these companies by funding tax payer’s money and mad printing. 

Only one reason may be valid to think more than twice is the case of employee of that company. If the government does not help the employee of that particular company will be in dangerous situation, it may lead to cost many lives also. 

All is ok, why do these so called companies top management take such a causal look on their ‘decisions’ or their precise actions? 

It is not only who mad the situation in US and other counties but it is Perfect Time think about Private Property of Decision Making in big corporations. 

So it is absurdly to think at least at this point of time that the “state has dismantled”.

21st Century: Conflict of liberalism

I have been observing in India and abroad how the present stand of liberalism moves forward. I find increasingly diluted even among the well experienced liberals. For instance, in today’s Business Standard Professor Deepal Lal argues “….US banks urgently need to be restored to health, perhaps through temporary nationalisation as in Sweden in 1992”. This is a dangerous suggestion. I have no idea how he reached this conclusion. Though, he gives some explanation in the article essentially the major difference between Hayek, Keynes and Fisher and Wicksell theory.

But I remember what Anna Schwartz said "we won't have a capitalist system . . . People are responsible for the decisions they make. If they've made wrong decisions, lost money and don't have the funds to operate, well, it's time to leave the market. And that's what the Fed's responsibility is, not to shore up firms that have no reason to continue." 

The concerns of MPS president……..

Professor Deepak Lal was called a urgent meeting of The Mont Pelerin Society to discuss the global crisis and in his address to the meeting said:

• “My greatest fear is that this crisis- and the responses to it- will stall or reverse the wholly benign process of globalization, which dates from the China's opening by Deng Tsiao Ping in 1978, and the reversal of India's Permit Raj in 1991. This has lifted more people from abject poverty than has ever been seen in human history. 
  
• It is notable that unlike the bowdlerized Keynes in the back pockets of Western politicians, the Chinese premier Wen Jiabao in an interview with the Financial Times at Davos said his bedtime reading was Adam Smith's The Moral Sentiments! 
  
• As will questions about the moral basis of capitalism. The shameless greed shown by many bankers- who have smashed the institutions they were charged to nurture on the rocks- is leading to a popular backlash against capitalism. This takes us back to questions raised by the great thinkers of the Scottish Enlightenment, who saw a common morality as providing the cement of society. A morality primarily dependent on a society's traditions and forms of socialization, based on using the moral emotions of shame and guilt, and not reliant on either God or Reason for their acceptance. How can the Victorian virtues embodied in the notion of the English gentleman which are today to be found more often amongst the burghers of Bombay and Shanghai than the denizens of Wall Street “The City” and Hollywood be inculcated? These are virtues which denoted a distinction of character rather than class, and consisted of 'integrity, honesty, generosity, courage, graciousness, politeness, consideration of others."21 They constituted the 'sympathy' which Adam Smith considered the highest virtue which allowed healthy ambition to be combined with an empathetic conscience to promote social stability and order. 
  
• …..what is the way to challenge the political correctness which is leading to the abuse of reason in the humanities and many social sciences in our citadels of higher learning and which increasingly provides the intellectual lens through which most politicians view numerous public policy issues? Last but not least, how can the growth of the Nanny State's undermining of Mill's principle of liberty be countered? These are some of the many questions raised by the current crisis which fall within the mandate of the society as seen by its founders”.
  

Underlying propagator………….

John Carney explains how the present financial crisis came in into exist in US. And he defends the Milton Friedman and Anna Schwartz works. 

But what is important to note here is what Anna Schwartz said "we won't have a capitalist system . . . People are responsible for the decisions they make. If they've made wrong decisions, lost money and don't have the funds to operate, well, it's time to leave the market. And that's what the Fed's responsibility is, not to shore up firms that have no reason to continue." 

The other articles are 1 2 and Anna Schwartz interview to WSJ.

Attained Azadi………. destroy them………

I and my friend Jayakamal have attended a Nani Nani Palkhivala memorial lecture in 2002 after our undergraduate examination in economics in Madras University. The Lecture was delivered by Mr Ram Jethmalani on “Law Commission And Uniform Civil code”.

But ironically Mr Ram Jethmalani now says “…Our Finance Ministry must now study the principles of Keynesian economics which worked for the US during the 1930s and for almost all European countries during World War II.” 

 Why should a layer bend on wrong Keynesian economics?

Good life for new president………….

Christopher Lingle says in the Korea Times “there is the elephant in the room that nobody wants to notice: rising price inflation. But myth making about this being a redux of the Great Depression induces the Federal Reserve to orient monetary policy toward warding off deflation. 

But this is not your grandfather's recession. It is more like the one conjured up by Jimmy Carter. In a single term of office, President Carter oversaw double-digit inflation, double-digit unemployment, double-digit interest rates, shrinking incomes and increasing poverty. ”

Crisis almost in all level

On 12 February 2009 Mr Shankar Acharya wrote a article in the Business Standard saying “In the field of financial economics I can think of no other Asian who combines serious policy experience with academic rigour so effectively”. Yes he praised Andrew Sheng who delivered Third K B Lall Memorial Lecture on “From Asian to Global Financial Crisis” at ICRIER in Delhi recently. 

The lecture has almost all usual citing and verbatim etc. at least   what was interesting to me was his concluding part as Sheng writes “The three key functions of financial sector are to protect property rights, reduce transaction costs and have high transparency. These are Western concepts that were not understood well within the Asian experience”.

see other post here

World financial crisis: State vs Market

Whether any argument is true or not often economists and experts try to escape by claiming two routes one is blaming politicians and the other one is government institutional system. But it is like wounded people try to look for first-aid. Simply that is the situation of government institutions and the politicians around the world. Of course there are others who look at things in radical way. But how these wounded are managing their role in the debate is altogether different issue. It is almost a mess now in the debate of who created world financial crisis, and every one will agree it is the US but how it has created? Different pundits look at it in different way. Some are here:

Swaminathan S Anklesaria Aiyar says:

• “Political measures to subsidise ownership and discourage renting have contributed to terrible lending and borrowing practices that caused the current crisis. Instead of reforming these, the Obama Plan provides billions to subsidise those same terrible practices”. 
  

Deepak Lal writes:

• “Obama is planning to enlarge. Walker also warned that the crisis could not be solved by growing out of the problem, eliminating earmarks, wiping out fraud, ending the Iraq war or cutting defence expenditures, restraining discretionary spending or letting the Bush tax cuts expire (US, GAO-07-389T, p.18). These are the very policies that Obama is hoping will reverse exploding future deficits. With projected reductions in military spending, it seems likely that the US, like its Roman predecessor, will find it difficult to maintain the sinews of the forces that have held the global order together. With no obvious alternative to provide this global public good, I fear the ensuing erosion of the global order, which is so essential for the processes of globalization to work, is likely to be the most serious long-term consequence of the global financial crisis.” 
  

Importantly, Percy S Mistry pointed out more like argumentative:

• “It is obvious that we are reposing too much faith in governments. Because we are convinced that markets have failed, we assume that talking heads know better. They don’t. They just talk louder. As a result of flawed government actions, what was a liquidity problem has now become a solvency crisis with secondary and tertiary effects. In 2007-08 the size of bank insolvency kept increasing as governments fumbled. It has exploded as government actions turned what started out as an American financial crisis into a global economic crisis. Government failure has converted what might have been a short recession into a long depression. The assumption that, when markets and banks fail, governments will automatically succeed, is wrong. Evidence suggests that governments have failed even more; because of the nature of political (and legislative approval) processes, bureaucracy, inefficiency, and compromised delivery that is endemic in governments, more than in the private sector! What’s the evidence?” 
  
• In the current scenario the public choice theorist are seems to be balanced but Mr Mistry says it does not “The fantastic sums mounting in the black hole of bank balance sheets are resulting in wet diapers, and screams for triggering the nuclear option: i.e. nationalising global banks! This is advocated by Greenspan (who, with Bush Jr., is more responsible than bankers for the mess we are in), senior members of the US, UK and EU parliaments, as well as ‘public choice’ academics. Based on experience with nationalised banks around the world over time, and the UK’s experience since August 2007, that proposition is insane; even if it is advocated as temporary, for nursing the banking system through intensive care!”

MBAs Killed Wall Street

MBAs Killed Wall Street: Kevin Hassett 

Blame mess is over……..

Now pundits begin to recognize the mercy created by regulatory functions rather than blaming the “unfettered market” including Mr Nitin Desai who writes may be rightly so: 

• “John Taylor, the man who devised and gave his name to the rule for setting policy interest rates, posed three questions in a recent NBER paper*: What caused the financial crisis? What prolonged it? Why did it worsen so dramatically more than a year after it began? He concludes that specific government actions and interventions should be first on the list of answers to all three. 
  
• The policy failure that caused the crisis is the low interest rate regime in 2001-2006 which is the major factor behind the housing boom and bust. The US Fed Fund rate fell from around 2 per cent to 1 per cent by mid-2004 while the Taylor rule required it to rise to 4 per cent. Between June 2004 and June 2006 a drastic correction was attempted and the Fed Fund rate was raised by 425 basis points. This burst the housing bubble. A counterfactual simulation shows that if the Taylor rule had been followed, the amplitude of the housing cycle would have been greatly reduced and we may even have avoided the worst of the sub-prime crisis. 
  
• Some of these policy failures are a product of a change in regulatory culture that was ushered in by the Ayn Rand acolyte, Alan Greenspan. He believed that regulators should not try and correct asset price bubbles but only cope with the consequences when they burst. This is what led to the low interest regime after 2001 when the dot.com bubble burst”. 
  

But one may ask why did he believe (or do his personal belief) when he is accountable to public interest and discharging his duties in Fed.

First understand the history …… to reinvent

Unless we understand the history is no use. 

• TT Ram Mohan says "There is talk now, as in previous economic crises, of having to reinvent capitalism. What this generally means is that we need to redefine the roles of state and market. But there are people who think this is not enough. The time may also have come to remake key institutions of capitalism".  
  
• And C. Gopinath says "It is time we gave up all the terms like capitalism, socialism, free trade, privatisation, nationalisation, and so on. They carry too much baggage and mean different things to different people. Let's start afresh!" 
  

Both are more or less similar line including their management profession. But what is the other alternative? after all these many “ism” prevail for a while. If they try...... actually they can’t without understanding history.

Is this the New Deal II?

Niranjan Rajadhyaksha writes in the Mint that the “..banks and other financial institutions are inherently unstable animals that can pull an entire economy down with them—and hence need tight regulation. There is a growing global consensus on this right now”.