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April 20, 2010
My position is that the failure of financial markets is at the centre of this global financial crisis and that financial markets are not necessarily rational. Hence the need to regulate them (to prevent deliberate fraud ) so that those who make mistakes bear more of the consequences of their decisions – and that others bear less.
This reform will be difficult given the power of financial capital (Wall Street) in the US, whose policy agenda favours deregulation, growing inequality, weakening social protection and bank bailouts
In his The Non-Existent Hand in the London Review of Books Joseph Stiglitz says that he shares the view that most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities) and that a considerable portion of the blame lies with the economics profession. He adds:
The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era.
He adds that the present crisis should lay to rest any belief in ‘rational’ markets. The irrationalities evident in mortgage markets, in securitisation, in derivatives and in banking are mind-boggling; our supposed financial wizards have exhibited behaviour which, to use the vernacular, seemed ‘stupid’ even at the time.
He adds that:
markets are not necessarily rational, and even when they are, they are not always well intentioned. The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to the rest of society. They can make money by inducing panic and then feel pleased with their ‘insight’: their concerns were justified, but only because of the responses to which their actions gave rise. Since the time of Keynes, the ability of markets to mount such speculative attacks has increased enormously.
The result is the multitude of other bubbles, booms and crashes that have marked the past quarter-century. Western banks have repeatedly had to be bailed out because of their bad lending decisions.
Hence Wall Street's agenda foir more bailouts. more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.
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I see that the SEC is charging that Goldman Sachs created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure--by betting on that failure.