Even the International Monetary Fund now admits that total deregulation of financial markets was a mistake. The U.S. should take heed.
Joseph E. Stiglitz
Thursday, May 5, 2011
http://www.slate.com/id/2293114
Robalini's Note: Here's an article by economist Joseph Stiglitz before the framing of DSK which tells you the level of radical change he had begun to institute at the IMF...
The annual spring meeting of the International Monetary Fund was notable in marking the fund's effort to distance itself from its own long-standing tenets on capital controls and labor-market flexibility. It appears that a new IMF has gradually, and cautiously, emerged under the leadership of Dominique Strauss-Kahn.
Slightly more than 13 years ago, at the IMF's 1997 Hong Kong meeting, the fund had attempted to amend its charter in order to gain more leeway to push countries toward capital-market liberalization. The timing could not have been worse: The East Asia crisis was just brewing—a crisis that was largely the result of capital-market liberalization in a region that, given its high savings rate, had no need for it.
That 1997 push had been advocated by Western financial markets—and the Western finance ministries that serve them so loyally. Financial deregulation in the United States was a prime cause of the global crisis that erupted in 2008, and financial and capital-market liberalization elsewhere helped spread that "made in the USA" trauma around the world.
The crisis showed that free and unfettered markets are neither efficient nor stable. They also did not necessarily do a good job at setting prices (witness the real-estate bubble), including exchange rates (which are merely the price of one currency in terms of another).
Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact. And the U.S. Federal Reserve's "quantitative easing" made the demise of the ideology of unfettered markets inevitable: Money goes to where markets think returns are highest. With emerging markets booming, and America and Europe in the doldrums, it was clear that much of the new liquidity being created would find its way to emerging markets. This was especially true given that America's credit pipeline remained clogged, with many community and regional banks still in a precarious position.
The resulting surge of money into emerging markets has meant that even finance ministers and central-bank governors who are ideologically opposed to intervening believe that they have no choice but to do so. Indeed, country after country has now chosen to intervene in one way or another to prevent their currencies from skyrocketing in value.
Now the IMF has blessed such interventions—but, as a sop to those who are still not convinced, it suggests that they should be used only as a last resort. On the contrary, we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous. Such regulations should be a key part of any system to ensure financial stability; resorting to them only as a last resort is a recipe for continued instability.
There is a wide range of available capital-account management tools, and it is best if countries use a portfolio of them. Even if they are not fully effective, they are typically far better than nothing.
But an even more important change is the link that the IMF has finally drawn between inequality and instability. This crisis was largely a result of America's effort to bolster an economy weakened by vastly increased inequality, through low interest rates and lax regulation (both of which resulted in many people borrowing far beyond their means). The consequences of this excessive indebtedness will take years to undo. But, as another IMF study reminds us, this is not a new pattern.
The crisis has also put to the test long-standing dogmas that blame labor-market rigidity for unemployment, because countries with more flexible wages, such as the U.S., have fared worse than northern European economies, including Germany. Indeed, as wages weaken, workers will find it even more difficult to pay back what they owe, and problems in the housing market will become worse. Consumption will remain restrained, while strong and sustainable recovery cannot be based on another debt-fueled bubble.
As unequal as America was before the Great Recession, the crisis—and the way it has been managed—has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise.
But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40 percent of U.S. wealth going to the top 1 percent of income earners, America is now less a "land of opportunity" than even "old" Europe.
For progressives, these abysmal facts are part of the standard litany of frustration and justified outrage. What is new is that the IMF has joined the chorus. As Strauss-Kahn concluded in his speech to the Brookings Institution shortly before the fund's recent meeting: "Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF's mandate. It must be placed at the heart of the policy agenda."
Strauss-Kahn is proving himself a sagacious leader of the IMF. We can only hope that governments and financial markets heed his words.
Showing posts with label Joseph Stiglitz. Show all posts
Showing posts with label Joseph Stiglitz. Show all posts
Wednesday, July 20, 2011
Tuesday, May 31, 2011
Great Quotes: Cornell West on Barack Obama
“A black mascot of Wall Street oligarchs and a black puppet of corporate plutocrats. And now he has become head of the American killing machine and is proud of it...
I have to take some responsibility. I could have been reading into it more than was there.
I was thinking maybe he has at least some progressive populist instincts that could become more manifest after the cautious policies of being a senator and working with [Sen. Joe] Lieberman as his mentor. But it became very clear when I looked at the neoliberal economic team. The first announcement of Summers and Geithner I went ballistic. I said, ‘Oh, my God, I have really been misled at a very deep level.’ And the same is true for Dennis Ross and the other neo-imperial elites. I said, ‘I have been thoroughly misled, all this populist language is just a facade. I was under the impression that he might bring in the voices of brother Joseph Stiglitz and brother Paul Krugman. I figured, OK, given the structure of constraints of the capitalist democratic procedure that’s probably the best he could do. But at least he would have some voices concerned about working people, dealing with issues of jobs and downsizing and banks, some semblance of democratic accountability for Wall Street oligarchs and corporate plutocrats who are just running amuck. I was completely wrong.”
The Obama Deception: Why Cornel West Went Ballistic
Chris Hedges
May 16, 2011
http://www.truthdig.com/report/item/the_obama_deception_why_cornel_west_went_ballistic_20110516/
I have to take some responsibility. I could have been reading into it more than was there.
I was thinking maybe he has at least some progressive populist instincts that could become more manifest after the cautious policies of being a senator and working with [Sen. Joe] Lieberman as his mentor. But it became very clear when I looked at the neoliberal economic team. The first announcement of Summers and Geithner I went ballistic. I said, ‘Oh, my God, I have really been misled at a very deep level.’ And the same is true for Dennis Ross and the other neo-imperial elites. I said, ‘I have been thoroughly misled, all this populist language is just a facade. I was under the impression that he might bring in the voices of brother Joseph Stiglitz and brother Paul Krugman. I figured, OK, given the structure of constraints of the capitalist democratic procedure that’s probably the best he could do. But at least he would have some voices concerned about working people, dealing with issues of jobs and downsizing and banks, some semblance of democratic accountability for Wall Street oligarchs and corporate plutocrats who are just running amuck. I was completely wrong.”
The Obama Deception: Why Cornel West Went Ballistic
Chris Hedges
May 16, 2011
http://www.truthdig.com/report/item/the_obama_deception_why_cornel_west_went_ballistic_20110516/
Tuesday, December 28, 2010
The Stiglitz Budget Plan
http://bigthink.com/ideas/25547
The Stiglitz Budget Plan
Robert de Neufville
December 16, 2010
With the Senate voting 81-19 on an $858 billion deal to extend all the Bush tax cuts—as well as extend unemployment benefits and reduce the payroll tax—it’s hard to take seriously the idea that anyone in Congress cares about reducing the deficit. That we shouldn’t worry about cutting the deficit may actually be the one thing both parties can agree on. In short term, as I have argued, this deal may make sense as a way to stimulate the economy. But at the same time, as I have also argued, we shouldn’t pretend that we cutting taxes is a way to reduce the deficit.
Nevertheless, Joseph Stiglitz argues that there should be a way to cut the deficit that would stimulate the economy. Stiglitz, who won the Nobel Prize in economics in 2001, writes that the trick would be to address several key economic inefficiencies. The first is that the defense budget has ballooned, so that we are spending an enormous amount overseas—where it doesn’t do anything for our economy—and on weapons with little use. The second is that we give subsidies to a wide range of businesses, which makes the market less efficient and is often in violation of our treaty obligations. The third is that we invest too little in the public goods like the infrastructure necessary for our economy to function. And the last inefficiency is that an increasingly large share—more than 20%—of our national income goes to the top 1% of earners, which means less money goes to the middle class—the real engine of economic growth.
So, Stiglitz says, the trick to reducing the deficit in a way that benefits the economy is simple:
• cut wasteful military spending, in part by no longer funding wars in Iraq and Afghanistan
• eliminate corporate subsidies, particularly to the banking, agricultural, and pharmaceutical sectors
• spend money on high-return public investments, increasing long-term economic growth
• increase the capital gains tax, which effectively allows the rich to pay a lower tax rate than the middle class
• raise taxes slightly on the rich—who can afford to pay more in taxes—effectively transferring more money back to the middle class
Cutting the defense budget, eliminating corporate subsidies, and raising taxes for the rich are all contractionary taken by themselves, but by spending the money instead on higher-return investments and eliminating market inefficiencies, we can actually save money and stimulate economic growth at the same time. “A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands,” Stiglitz says. “It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.”
The problem with this plan? As Stiglitz himself says, it’s simply not going to happen. The plan works entirely at the expense of wealthy, corporate interests. If you doubt their influence, consider that over the last two years the Republican Party has really fought for just one policy: the extension of Bush tax cuts on income over $250,000. And while extending those tax cuts angered some Democrats, the tax cut deal still passed the Senate with a solid majority of both parties. But if Stiglitz’ plan is a fantasy, it should show us just how much it costs us to cater to the interests of big corporations and the very rich.
The Stiglitz Budget Plan
Robert de Neufville
December 16, 2010
With the Senate voting 81-19 on an $858 billion deal to extend all the Bush tax cuts—as well as extend unemployment benefits and reduce the payroll tax—it’s hard to take seriously the idea that anyone in Congress cares about reducing the deficit. That we shouldn’t worry about cutting the deficit may actually be the one thing both parties can agree on. In short term, as I have argued, this deal may make sense as a way to stimulate the economy. But at the same time, as I have also argued, we shouldn’t pretend that we cutting taxes is a way to reduce the deficit.
Nevertheless, Joseph Stiglitz argues that there should be a way to cut the deficit that would stimulate the economy. Stiglitz, who won the Nobel Prize in economics in 2001, writes that the trick would be to address several key economic inefficiencies. The first is that the defense budget has ballooned, so that we are spending an enormous amount overseas—where it doesn’t do anything for our economy—and on weapons with little use. The second is that we give subsidies to a wide range of businesses, which makes the market less efficient and is often in violation of our treaty obligations. The third is that we invest too little in the public goods like the infrastructure necessary for our economy to function. And the last inefficiency is that an increasingly large share—more than 20%—of our national income goes to the top 1% of earners, which means less money goes to the middle class—the real engine of economic growth.
So, Stiglitz says, the trick to reducing the deficit in a way that benefits the economy is simple:
• cut wasteful military spending, in part by no longer funding wars in Iraq and Afghanistan
• eliminate corporate subsidies, particularly to the banking, agricultural, and pharmaceutical sectors
• spend money on high-return public investments, increasing long-term economic growth
• increase the capital gains tax, which effectively allows the rich to pay a lower tax rate than the middle class
• raise taxes slightly on the rich—who can afford to pay more in taxes—effectively transferring more money back to the middle class
Cutting the defense budget, eliminating corporate subsidies, and raising taxes for the rich are all contractionary taken by themselves, but by spending the money instead on higher-return investments and eliminating market inefficiencies, we can actually save money and stimulate economic growth at the same time. “A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands,” Stiglitz says. “It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.”
The problem with this plan? As Stiglitz himself says, it’s simply not going to happen. The plan works entirely at the expense of wealthy, corporate interests. If you doubt their influence, consider that over the last two years the Republican Party has really fought for just one policy: the extension of Bush tax cuts on income over $250,000. And while extending those tax cuts angered some Democrats, the tax cut deal still passed the Senate with a solid majority of both parties. But if Stiglitz’ plan is a fantasy, it should show us just how much it costs us to cater to the interests of big corporations and the very rich.
Friday, November 26, 2010
Wall Street quietly seeks to undo new financial rules
http://www.mcclatchydc.com/2010/11/16/103833/wall-street-quietly-seeks-to-undo.html
Tuesday, November 16, 2010
Wall Street quietly seeks to undo new financial rules
Kevin G. Hall | McClatchy Newspapers
WASHINGTON — The heavy hitters of finance lost big battles earlier this year during the overhaul of financial regulation, but they're working hard to win the war. They're quietly trying to soften, if not kill, some of the more controversial provisions.
Lobbyists for Big Finance are working hardest to neutralize the so-called Volcker Rule, which would force big banks to spin off their lucrative proprietary trading operations, in which they invest their own capital in speculative deals.
The measure_ named after its proponent, former Federal Reserve Chairman Paul Volcker — seeks to prevent big banks from betting against trades they made on behalf of their customers, a popular practice until the financial crisis exploded in 2008. For example, big investment banks such as Goldman Sachs sold customers overvalued mortgage bonds even as they bet secretly that those bonds would default.
Financial lobbyists also are working to soften requirements that Wall Street firms put more "skin in the game" by retaining more mortgage bonds on their books to guard against shoddy lending. They're also trying to undercut the new Consumer Financial Protection Bureau.
Through Republican lawmakers who will soon hold leadership positions in the House of Representatives, big banks are backing proposals that could lead to its being defunded or subject to conditions that weaken it.
The financial sector is also pushing to have the bureau headed by a board rather than a strong single leader.
"Taken all together, these are all proposals that were considered (by Congress) and rejected . . . these don't look like proposals that were designed to help the agency do better, but rather proposals designed to gut it," said Travis Plunkett, the director of legislative affairs for the Consumer Federation of America. "This agency hasn't opened its doors yet, and already the House Republican leadership is carrying a lot of proposals that Wall Street and big financial interests have offered to eviscerate the consumer agency."
Big global banks already succeeded in softening new global rules that would have required banks to set aside considerably more funds in reserve to guard against future losses — generally called capital requirements or loan-loss reserves.
This happened at international banking negotiations held earlier this year in Basel, Switzerland. There, powerful banks weakened a proposal for a new international standard governing how much banks must keep in reserve.
These big banks also pressured global regulators to back off a mandatory requirement that would have forced banks to set aside even more capital during good times, on the premise that economic booms lead to excessive risk taking. This so-called countercyclical reserve requirement is now voluntary.
"I think the answer is they (global regulators) caved in to the pressures of the industry," said Morris Goldstein, a former top economist at the International Monetary Fund and now a senior researcher at the Peterson Institute for International Economics. "I'd like to say that things are more positive, but I have to say a lot of the momentum is fading. . . . I think on the whole, we're losing steam."
Implementing the Volcker Rule falls to the newly created Financial Stability Oversight Council, whose members include regulators over banks, stock and commodities markets. The Treasury Department is first among equals on the council, which began taking comment in October on how to implement the rule.
Big Finance argues that the new rules are job killers.
"We believe that the Volcker Rule is in fact harmful to the ability of the United States to sustain vibrant capital markets and . . . to create private sector jobs," David Hirschman, the head of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, wrote to the council. "In its current form, the Volcker Rule will likely add to regulatory uncertainty for banking entities and will hurt the global competitiveness of the financial services industry at a time when growth is most needed."
Volcker wrote a letter to the council, urging regulators to stand pat.
"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators," he wrote. "Bankers and their lawyers and lobbyists will no doubt search for and discover seeming ambiguities within the language of the law."
Joseph Stiglitz, a Nobel Prize-winning economist from Columbia University, reminded council members in a letter that proprietary trading helped cause the near meltdown of the U.S. financial system.
"Through the rise of proprietary trading at our nation's banks and the largest non-bank financial firms, firms doubled down on the accumulation of risk, much of it with little benefit to the real economy," Stiglitz wrote. He added that "the financial system in this country and around the world became disconnected from its fundamental purposes."
Some experts warn, however, that the Volcker Rule might be harmful if other countries don't echo it.
"I'm not aware of any other country, certainly of significance, that plans to follow. This is a purely American mistake," said Douglas Elliot, a researcher at Washington's center-left Brookings Institution.
Elliot, a former investment banker, supports most of the sweeping new regulation of finance, but thinks the Volcker Rule is too vague and lacks global support.
"It requires regulators to look into the hearts of bankers and see if their motive for a particular investment was pure or not," he said. "There is a huge subjective element here."
Financial firms are also fighting the requirement that they retain 5 percent of the pool of mortgage bonds that they sell as a way of discouraging excessive risk. They're trying to expand the definition of "plain vanilla" mortgages that would be exempted from the risk-retention requirements.
"I think there's a concern about what would be defined as a plain-vanilla mortgage," said Tom Deutsch, head of the American Securitization Forum, which represents companies that package pools of mortgages into complex mortgage bonds, which now are considered toxic.
The ASF and its members want to exempt interest-only mortgages, which caused many unsophisticated borrowers to lose their homes.
"Certain types of loans aren't standard, but are appropriate for high creditworthy borrowers," Deutsch said in an interview, pointing to wealthy borrowers who seek to maximize their mortgage-interest deductions at tax time.
Tuesday, November 16, 2010
Wall Street quietly seeks to undo new financial rules
Kevin G. Hall | McClatchy Newspapers
WASHINGTON — The heavy hitters of finance lost big battles earlier this year during the overhaul of financial regulation, but they're working hard to win the war. They're quietly trying to soften, if not kill, some of the more controversial provisions.
Lobbyists for Big Finance are working hardest to neutralize the so-called Volcker Rule, which would force big banks to spin off their lucrative proprietary trading operations, in which they invest their own capital in speculative deals.
The measure_ named after its proponent, former Federal Reserve Chairman Paul Volcker — seeks to prevent big banks from betting against trades they made on behalf of their customers, a popular practice until the financial crisis exploded in 2008. For example, big investment banks such as Goldman Sachs sold customers overvalued mortgage bonds even as they bet secretly that those bonds would default.
Financial lobbyists also are working to soften requirements that Wall Street firms put more "skin in the game" by retaining more mortgage bonds on their books to guard against shoddy lending. They're also trying to undercut the new Consumer Financial Protection Bureau.
Through Republican lawmakers who will soon hold leadership positions in the House of Representatives, big banks are backing proposals that could lead to its being defunded or subject to conditions that weaken it.
The financial sector is also pushing to have the bureau headed by a board rather than a strong single leader.
"Taken all together, these are all proposals that were considered (by Congress) and rejected . . . these don't look like proposals that were designed to help the agency do better, but rather proposals designed to gut it," said Travis Plunkett, the director of legislative affairs for the Consumer Federation of America. "This agency hasn't opened its doors yet, and already the House Republican leadership is carrying a lot of proposals that Wall Street and big financial interests have offered to eviscerate the consumer agency."
Big global banks already succeeded in softening new global rules that would have required banks to set aside considerably more funds in reserve to guard against future losses — generally called capital requirements or loan-loss reserves.
This happened at international banking negotiations held earlier this year in Basel, Switzerland. There, powerful banks weakened a proposal for a new international standard governing how much banks must keep in reserve.
These big banks also pressured global regulators to back off a mandatory requirement that would have forced banks to set aside even more capital during good times, on the premise that economic booms lead to excessive risk taking. This so-called countercyclical reserve requirement is now voluntary.
"I think the answer is they (global regulators) caved in to the pressures of the industry," said Morris Goldstein, a former top economist at the International Monetary Fund and now a senior researcher at the Peterson Institute for International Economics. "I'd like to say that things are more positive, but I have to say a lot of the momentum is fading. . . . I think on the whole, we're losing steam."
Implementing the Volcker Rule falls to the newly created Financial Stability Oversight Council, whose members include regulators over banks, stock and commodities markets. The Treasury Department is first among equals on the council, which began taking comment in October on how to implement the rule.
Big Finance argues that the new rules are job killers.
"We believe that the Volcker Rule is in fact harmful to the ability of the United States to sustain vibrant capital markets and . . . to create private sector jobs," David Hirschman, the head of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, wrote to the council. "In its current form, the Volcker Rule will likely add to regulatory uncertainty for banking entities and will hurt the global competitiveness of the financial services industry at a time when growth is most needed."
Volcker wrote a letter to the council, urging regulators to stand pat.
"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators," he wrote. "Bankers and their lawyers and lobbyists will no doubt search for and discover seeming ambiguities within the language of the law."
Joseph Stiglitz, a Nobel Prize-winning economist from Columbia University, reminded council members in a letter that proprietary trading helped cause the near meltdown of the U.S. financial system.
"Through the rise of proprietary trading at our nation's banks and the largest non-bank financial firms, firms doubled down on the accumulation of risk, much of it with little benefit to the real economy," Stiglitz wrote. He added that "the financial system in this country and around the world became disconnected from its fundamental purposes."
Some experts warn, however, that the Volcker Rule might be harmful if other countries don't echo it.
"I'm not aware of any other country, certainly of significance, that plans to follow. This is a purely American mistake," said Douglas Elliot, a researcher at Washington's center-left Brookings Institution.
Elliot, a former investment banker, supports most of the sweeping new regulation of finance, but thinks the Volcker Rule is too vague and lacks global support.
"It requires regulators to look into the hearts of bankers and see if their motive for a particular investment was pure or not," he said. "There is a huge subjective element here."
Financial firms are also fighting the requirement that they retain 5 percent of the pool of mortgage bonds that they sell as a way of discouraging excessive risk. They're trying to expand the definition of "plain vanilla" mortgages that would be exempted from the risk-retention requirements.
"I think there's a concern about what would be defined as a plain-vanilla mortgage," said Tom Deutsch, head of the American Securitization Forum, which represents companies that package pools of mortgages into complex mortgage bonds, which now are considered toxic.
The ASF and its members want to exempt interest-only mortgages, which caused many unsophisticated borrowers to lose their homes.
"Certain types of loans aren't standard, but are appropriate for high creditworthy borrowers," Deutsch said in an interview, pointing to wealthy borrowers who seek to maximize their mortgage-interest deductions at tax time.
Tuesday, November 16, 2010
Foreclosures and banks' debt to society
http://www.guardian.co.uk/commentisfree/cifamerica/2010/nov/05/banking-mortgage-arrears
Foreclosures and banks' debt to society
Rewritten bankruptcy provisions reduce indebted homeowners to servitude. What has become of the rule of law in the US?
Joseph Stiglitz
guardian.co.uk, Friday 5 November 2010
The mortgage debacle in the United States has raised deep questions about "the rule of law", the universally accepted hallmark of an advanced, civilised society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America, in the wake of the subprime mortgage crisis, it has done neither.
Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can't simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts.
To some banks, this is just collateral damage: millions of Americans – in addition to the estimated 4 million in 2008 and 2009 – still have to be thrown out of their homes. Indeed, the pace of foreclosures would be set to increase – were it not for government intervention. The procedural shortcuts, incomplete documentation and rampant fraud that accompanied banks' rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess.
To many bankers, these are just details to be overlooked. Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims. But Americans are not supposed to believe in justice on average. We don't say that most people imprisoned for life committed a crime worthy of that sentence. The US justice system demands more, and we have imposed procedural safeguards to meet these demands.
But banks want to shortcircuit these procedural safeguards. They should not be allowed to do so.
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation, in particular – was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called "corruption, American-style".
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximised fees and imposed enormous risks on the borrowers. (To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.) But banks used all their political muscle to stop states from enacting laws to curtail predatory lending.
When it became clear that people could not pay back what was owed, the rules of the game changed. Bankruptcy laws were amended to introduce a system of "partial indentured servitude". An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because the bank could add on, say, 30% interest each year to what a person owed. In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank.
When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane – and economically rational – bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous.
That knowledge should have given lenders incentives to make loans only to those who could repay. But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor.
With one out of four mortgages in the US under water – more owed than the house is worth – there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed). America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity.
It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth. But it is also important to keep families and communities intact. So, America needs a "homeowners' Chapter 11".
Lenders complain that such a law would violate their property rights. But almost all changes in laws and regulations benefit some at the expense of others. When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn't worry about how the law affected the rights of debtors.
Growing inequality, combined with a flawed system of campaign finance, risks turning America's legal system into a travesty of justice. Some may still call it the "rule of law", but it would not be a rule of law that protects the weak against the powerful. Rather, it would enable the powerful to exploit the weak.
In today's America, the proud claim of "justice for all" is being replaced by the more modest claim of "justice for those who can afford it". And the number of people who can afford it is rapidly diminishing.
Foreclosures and banks' debt to society
Rewritten bankruptcy provisions reduce indebted homeowners to servitude. What has become of the rule of law in the US?
Joseph Stiglitz
guardian.co.uk, Friday 5 November 2010
The mortgage debacle in the United States has raised deep questions about "the rule of law", the universally accepted hallmark of an advanced, civilised society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America, in the wake of the subprime mortgage crisis, it has done neither.
Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can't simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts.
To some banks, this is just collateral damage: millions of Americans – in addition to the estimated 4 million in 2008 and 2009 – still have to be thrown out of their homes. Indeed, the pace of foreclosures would be set to increase – were it not for government intervention. The procedural shortcuts, incomplete documentation and rampant fraud that accompanied banks' rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess.
To many bankers, these are just details to be overlooked. Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims. But Americans are not supposed to believe in justice on average. We don't say that most people imprisoned for life committed a crime worthy of that sentence. The US justice system demands more, and we have imposed procedural safeguards to meet these demands.
But banks want to shortcircuit these procedural safeguards. They should not be allowed to do so.
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation, in particular – was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called "corruption, American-style".
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximised fees and imposed enormous risks on the borrowers. (To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.) But banks used all their political muscle to stop states from enacting laws to curtail predatory lending.
When it became clear that people could not pay back what was owed, the rules of the game changed. Bankruptcy laws were amended to introduce a system of "partial indentured servitude". An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because the bank could add on, say, 30% interest each year to what a person owed. In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank.
When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane – and economically rational – bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous.
That knowledge should have given lenders incentives to make loans only to those who could repay. But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor.
With one out of four mortgages in the US under water – more owed than the house is worth – there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed). America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity.
It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth. But it is also important to keep families and communities intact. So, America needs a "homeowners' Chapter 11".
Lenders complain that such a law would violate their property rights. But almost all changes in laws and regulations benefit some at the expense of others. When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn't worry about how the law affected the rights of debtors.
Growing inequality, combined with a flawed system of campaign finance, risks turning America's legal system into a travesty of justice. Some may still call it the "rule of law", but it would not be a rule of law that protects the weak against the powerful. Rather, it would enable the powerful to exploit the weak.
In today's America, the proud claim of "justice for all" is being replaced by the more modest claim of "justice for those who can afford it". And the number of people who can afford it is rapidly diminishing.
Thursday, September 23, 2010
“Letting Prices Fall” Versus Resetting the Housing Market
http://news.firedoglake.com/2010/09/12/letting-prices-fall-versus-resetting-the-housing-market/
“Letting Prices Fall” Versus Resetting the Housing Market
David Dayen
Sunday September 12, 2010
This week, an argument broke out in the blogosphere and the traditional media over whether “we should let housing prices fall.” Tyler Cowen sums up the argument:
Should we let housing prices fall?
Many smart people say we should. It seems increasingly clear that we must. For how long can the government prop them up? Are we never to have a private market in mortgages again?
Yet what happens if we let them fall? Arguably many banks would once again be “under water.” Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.
I’d like to know what “let” means in this context. Because the government’s actions, with their light touch, avoidance of principal write-downs and handing over of discretion to the banks, have stopped working to prop up the market. Basically the only policy that succeeded in that context (though it was a pure tax giveaway to people who didn’t need it) was the homebuyer’s tax credit, which won’t be coming back. Everything else has neither stabilized housing prices nor kept borrowers in their homes. Rates are near all-time lows and home sales are near all-time bottoms, while foreclosures are at record highs.
The only way to fix this is for everyone to recognize the way out. Joseph Stiglitz explains.
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.
Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home’s value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements.
This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.
By contrast, “letting prices fall” just massively increases the number of homeowners with negative equity and accelerates the problem. And while some of the other ideas on refinancing and short sales may help at the margins, without principal reductions we’re still basically on the margins. You need to reset the market, not allow it to work its “invisible hand” magic that will result in destruction for millions of borrowers.
This latest Administration foreclosure plan would require principal reductions, in exchange for the refinanced loan getting government backing. But again, this comes at the discretion of the investors who hold the mortgage. This amounts to a wish and a hope that investors will make the right decision for borrowers and take the hit rather than foreclosing. And the funding for this, in the form of incentive payments to servicers, totals only $14 billion, maybe enough to reach 300,000 of the 11 million underwater homeowners in the country (a Neighborhood Stabilization Program out of HUD, which would redevelop vacant homes and resell them to low- and middle-income families who get down payment assistance, tacks on just $1 billion more).
The National Community Reinvestment Coalition has the right idea. CEO John Taylor thinks the White House needs to mandate loan principal reductions:
“A civilized country cannot embrace an economic policy that ignores human suffering. We can’t just turn away from the millions of families who are facing foreclosure for reasons beyond their control,” said Taylor, who has been advocating for mandated loan principal reductions since 2007.
“In the past four years we lost $6 trillion in real estate values. Somebody has to eat that, and it shouldn’t be the people who had nothing to do with creating the economic crisis in the first place. We need big solutions for very big problems, not half way measures and certainly not intentional neglect,” said Taylor.
The HAMP program, incidentally, has produced modifications which lower principal for just .1% of all its successful borrowers, which amounts to a grand total of 400 loans.
“Letting Prices Fall” Versus Resetting the Housing Market
David Dayen
Sunday September 12, 2010
This week, an argument broke out in the blogosphere and the traditional media over whether “we should let housing prices fall.” Tyler Cowen sums up the argument:
Should we let housing prices fall?
Many smart people say we should. It seems increasingly clear that we must. For how long can the government prop them up? Are we never to have a private market in mortgages again?
Yet what happens if we let them fall? Arguably many banks would once again be “under water.” Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.
I’d like to know what “let” means in this context. Because the government’s actions, with their light touch, avoidance of principal write-downs and handing over of discretion to the banks, have stopped working to prop up the market. Basically the only policy that succeeded in that context (though it was a pure tax giveaway to people who didn’t need it) was the homebuyer’s tax credit, which won’t be coming back. Everything else has neither stabilized housing prices nor kept borrowers in their homes. Rates are near all-time lows and home sales are near all-time bottoms, while foreclosures are at record highs.
The only way to fix this is for everyone to recognize the way out. Joseph Stiglitz explains.
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.
Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home’s value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements.
This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.
By contrast, “letting prices fall” just massively increases the number of homeowners with negative equity and accelerates the problem. And while some of the other ideas on refinancing and short sales may help at the margins, without principal reductions we’re still basically on the margins. You need to reset the market, not allow it to work its “invisible hand” magic that will result in destruction for millions of borrowers.
This latest Administration foreclosure plan would require principal reductions, in exchange for the refinanced loan getting government backing. But again, this comes at the discretion of the investors who hold the mortgage. This amounts to a wish and a hope that investors will make the right decision for borrowers and take the hit rather than foreclosing. And the funding for this, in the form of incentive payments to servicers, totals only $14 billion, maybe enough to reach 300,000 of the 11 million underwater homeowners in the country (a Neighborhood Stabilization Program out of HUD, which would redevelop vacant homes and resell them to low- and middle-income families who get down payment assistance, tacks on just $1 billion more).
The National Community Reinvestment Coalition has the right idea. CEO John Taylor thinks the White House needs to mandate loan principal reductions:
“A civilized country cannot embrace an economic policy that ignores human suffering. We can’t just turn away from the millions of families who are facing foreclosure for reasons beyond their control,” said Taylor, who has been advocating for mandated loan principal reductions since 2007.
“In the past four years we lost $6 trillion in real estate values. Somebody has to eat that, and it shouldn’t be the people who had nothing to do with creating the economic crisis in the first place. We need big solutions for very big problems, not half way measures and certainly not intentional neglect,” said Taylor.
The HAMP program, incidentally, has produced modifications which lower principal for just .1% of all its successful borrowers, which amounts to a grand total of 400 loans.
Friday, September 17, 2010
Nobel Laureate Stiglitz Says EU Austerity Is Wrong Bet
http://www.commondreams.org/headline/2010/09/07-5
Published on Tuesday, September 7, 2010 by Reuters
Nobel Laureate Stiglitz Says EU Austerity Is Wrong Bet
BUDAPEST - The European Union will prolong the global downturn if policymakers in the bloc's big economies insist on austerity measures to cut budget deficits, Nobel Prize winning economist Joseph Stiglitz said on Tuesday.
Stiglitz, winner of the Nobel Prize for Economics in 2001, said austerity as a policy to end the global crisis was a 'disaster', adding that Europe was heading towards more economic difficulties if politicians meant what they say when they promised to cut back spending rather than just trying to calm down markets. Stiglitz, winner of the Nobel Prize for Economics in 2001, said austerity as a policy to end the global crisis was a 'disaster', adding that Europe was heading towards more economic difficulties if politicians meant what they say when they promised to cut back spending rather than just trying to calm down markets.
'If that (austerity) happens I think it is likely that the economic downturn will last far longer and human suffering will be all the greater,' he said.
Historical evidence showed that increased state spending rather than austerity measures can help economies emerge from recession, he said.
'In spite of all that evidence there is a drumbeat, particularly from many of the economists who were responsible for the crisis ... to focus on austerity,' Stiglitz told reporters on the sidelines of a conference.
He said the example of Ireland, a small economy, showed that austerity leads to declining output, rising unemployment and high bond spreads, instead of renewed investor.
'I feel sorry for the Irish people who have to suffer from this policy ... but it doesn't have global or European consequences,' he said.
'But if the UK, Germany or other countries do it, then it is going to have systemic consequences for Europe and the whole world,' he added.
Stiglitz said the real question Europe and the world faced was not whether the global economy was on track to a double dip.
'From the perspective of the world, or workers, there is very little difference between growth of a quarter point of a percent and a decline of a quarter point of a percent,' he said.
'What workers care about is if growth will be strong enough to reduce the high level of unemployment in the U.S. or Europe.'
(Reporting by Sandor Peto; Editing by Susan Fenton)
Published on Tuesday, September 7, 2010 by Reuters
Nobel Laureate Stiglitz Says EU Austerity Is Wrong Bet
BUDAPEST - The European Union will prolong the global downturn if policymakers in the bloc's big economies insist on austerity measures to cut budget deficits, Nobel Prize winning economist Joseph Stiglitz said on Tuesday.
Stiglitz, winner of the Nobel Prize for Economics in 2001, said austerity as a policy to end the global crisis was a 'disaster', adding that Europe was heading towards more economic difficulties if politicians meant what they say when they promised to cut back spending rather than just trying to calm down markets. Stiglitz, winner of the Nobel Prize for Economics in 2001, said austerity as a policy to end the global crisis was a 'disaster', adding that Europe was heading towards more economic difficulties if politicians meant what they say when they promised to cut back spending rather than just trying to calm down markets.
'If that (austerity) happens I think it is likely that the economic downturn will last far longer and human suffering will be all the greater,' he said.
Historical evidence showed that increased state spending rather than austerity measures can help economies emerge from recession, he said.
'In spite of all that evidence there is a drumbeat, particularly from many of the economists who were responsible for the crisis ... to focus on austerity,' Stiglitz told reporters on the sidelines of a conference.
He said the example of Ireland, a small economy, showed that austerity leads to declining output, rising unemployment and high bond spreads, instead of renewed investor.
'I feel sorry for the Irish people who have to suffer from this policy ... but it doesn't have global or European consequences,' he said.
'But if the UK, Germany or other countries do it, then it is going to have systemic consequences for Europe and the whole world,' he added.
Stiglitz said the real question Europe and the world faced was not whether the global economy was on track to a double dip.
'From the perspective of the world, or workers, there is very little difference between growth of a quarter point of a percent and a decline of a quarter point of a percent,' he said.
'What workers care about is if growth will be strong enough to reduce the high level of unemployment in the U.S. or Europe.'
(Reporting by Sandor Peto; Editing by Susan Fenton)
Tuesday, March 16, 2010
"Freefall: America, Free Markets, and the Sinking of the World Economy"
http://www.buzzflash.com/store/reviews/2102
Noble Prize Winner Joseph Stiglitz's New "Freefall: America, Free Markets, and the Sinking of the World Economy" (Hardcover)
By Joseph Stiglitz
BUZZFLASH REVIEWS
After you read this book, you'll know what a mistake it was not to appoint Stiglitz (or Krugman for that matter -- both Nobel Laureates in economics) to high White House positions, instead of Wall Street Geithner and the gang.
If you want to know what our financial crisis is really about in accessible terms, this is the book for you. Stiglitz and Krugman are the people BuzzFlash would have hoped would have been steering America's economic strategy.
Freefall is a must-read for anyone seeking to understand the roots of the financial crisis. Stiglitz brilliantly analyzes the economic reasons behind the banking collapse, but he goes much further, digging down to the wrongheaded national faith in the power of free markets to regulate themselves and provide wealth for all. (Chuck Leddy - Boston Globe )
Mr. Stiglitz uses his experience teaching to give the lay reader a lucid account of how overleveraged banks, a shoddy mortgage industry, predatory lending and unregulated trading contributed to the meltdown, and how, in his opinion, ill-conceived rescue efforts may have halted the freefall but have failed to grapple with more fundamental problems…. His prescience lends credibility to his trenchant analysis of the causes of the fiscal meltdown. (Michiko Kakutani - The New York Times )
Stiglitz is the world's leading scholarly expert on market failure, and this crisis vindicates his life's work. There have been other broad-spectrum books on the genesis and dynamics of the collapse, but Freefall is the most comprehensive to date, grounded in both theory and factual detail…. the definitive critique to date of how the Summers-Geithner strategy fails, both as economics and as politics…. The tone of this book is good-humored and public-minded. (Robert Kuttner - The American Prospect )
Buy more progressive premiums to support BuzzFlash progressive news and commentary (we accept no advertising, corporate or otherwise to maintain our complete independence) by going to The BuzzFlash Progressive Marketplace.
Stiglitz Says Federal Reserve System 'Corrupt'
http://www.huffingtonpost.com/2010/03/03/stiglitz-nobel-prize-winn_n_484943.html
Stiglitz, Nobel Prize-Winning Economist, Says Federal Reserve System 'Corrupt'
3-3-10
One of the world's leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it's "corrupt."
Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve's -- in which regional Feds are partly governed by the very banks they're supposed to police -- it would have raised alarms.
"If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."
Stiglitz made the remarks at a conference held by the Roosevelt Institute. He and other speakers, including Harvard Law Professor and federal bailout watchdog Elizabeth Warren and legendary investor George Soros, had bold ideas about reforming the nation's financial system.
After the conference, Stiglitz said that his remarks on the Fed were "maybe a little hyperbole," but then again made the case that if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system, "it would have been a big signal that something is wrong."
To Stiglitz, the core issue is that regional Fed banks, such as the New York Fed, have clear conflicts of interest -- a result of the banks being partly governed by a board of directors that includes officers of the very banks they're supposed to be overseeing.
The New York Fed, which was led by current Treasury Secretary Timothy Geithner during the time leading Wall Street firms like Citigroup, JPMorgan Chase, AIG, and Goldman Sachs were given hundreds of billions of dollars in taxpayer bailouts, presently has on its board of directors Jamie Dimon, the head of JPMorgan Chase. He's been there for three years. He replaced former Citigroup chairman Sanford "Sandy" Weill.
"So, these are the guys who appointed the guy who bailed them out," Stiglitz said. "Is that a conflict of interest?" he asked rhetorically.
"They would say, 'no conflict of interest, we were just doing our job,'" he answered. "But you have to look at the conflicts of interest."
A message left for a New York Fed spokeswoman after regular business hours was not returned.
"The reason you talk about governance is because in a democracy you want people to have confidence," Stiglitz said. "This is a structure that will undermine confidence in a democracy."
Stiglitz, Nobel Prize-Winning Economist, Says Federal Reserve System 'Corrupt'
3-3-10
One of the world's leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it's "corrupt."
Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve's -- in which regional Feds are partly governed by the very banks they're supposed to police -- it would have raised alarms.
"If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."
Stiglitz made the remarks at a conference held by the Roosevelt Institute. He and other speakers, including Harvard Law Professor and federal bailout watchdog Elizabeth Warren and legendary investor George Soros, had bold ideas about reforming the nation's financial system.
After the conference, Stiglitz said that his remarks on the Fed were "maybe a little hyperbole," but then again made the case that if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system, "it would have been a big signal that something is wrong."
To Stiglitz, the core issue is that regional Fed banks, such as the New York Fed, have clear conflicts of interest -- a result of the banks being partly governed by a board of directors that includes officers of the very banks they're supposed to be overseeing.
The New York Fed, which was led by current Treasury Secretary Timothy Geithner during the time leading Wall Street firms like Citigroup, JPMorgan Chase, AIG, and Goldman Sachs were given hundreds of billions of dollars in taxpayer bailouts, presently has on its board of directors Jamie Dimon, the head of JPMorgan Chase. He's been there for three years. He replaced former Citigroup chairman Sanford "Sandy" Weill.
"So, these are the guys who appointed the guy who bailed them out," Stiglitz said. "Is that a conflict of interest?" he asked rhetorically.
"They would say, 'no conflict of interest, we were just doing our job,'" he answered. "But you have to look at the conflicts of interest."
A message left for a New York Fed spokeswoman after regular business hours was not returned.
"The reason you talk about governance is because in a democracy you want people to have confidence," Stiglitz said. "This is a structure that will undermine confidence in a democracy."
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