Friday, September 19, 2008

"the end of capitalism in the US" ????

Watching Treasury Secretary Paulson was far more reassuring that listing to Pres. Bush. The BBC, on which I watch international events here in India, said we perhaps were seeing the end of pure capitalism in the US. Well, we haven't have pure capitalism in the US for a very long time. But this certainly is a big step in the other direction. To watch Mr. Bush decry partisanship when he has invoked it repeatedly, and to watch him say that the government needs to intervene, makes me wonder if we have been catapulted to a parallel universe, and the answer is that yes, we have. I was fairly calm about all of this until this morning -- somehow hearing about the ban on short selling of financial stocks as well as the guarantees on money market funds shocked me out of complacency.

Some of you probably don't know that I have been teaching a course on International Banking for almost 15 years. In it, we regularly talk about the silly structure of US financial regulation (both before and after Financial Modernization that repealed Glass Steagal) and how the rapid movement of capital around the world makes any kind of national regulation less effective. In the past few days I've gotten lots of emails from former students talking about discussions from our class over the years, which is tremendously gratifying. Unfortunately, this is a hard problem to solve both economically and especially politically.

Paying for all of this will be yet another of the sad legacies of this Administration. But I think that they probably did need to propose this kind of massive intervention. Now that I am an old person, I actually have lived through (and, in some cases, worked on) several of these financial crises and bail-outs. I was also out of the US (that time in Mexico) for much of the discussion on the Savings and Loan bailout, but I was working in banking during the first Latin American debt crisis, working at the State Department during the Mexican peso crisis, and working at a small firm providing analysis to the financial services industry during the Asian crisis, and one does see certain parallels. But each time, as soon as the crisis passes and the next boom occurs, the need for substantial reform seems to recede. Several times now we have heard about how the credit rating agencies either were villains (or, in rare cases, saviors); how regulators have been asleep yet are expected to be the saviors; how you need an overwhelming response (which I actually believe) in order to prevent a panic; how capital markets are far more important to "save" than anything in the "real" economy; and how the end of world is near. As mentioned in a previous post, I hope that we are least able to use some forensic accounting to figure out what happened, but we clearly need to find a better way to align the life of rewards and payments. If we can do that, hopefully the financial sector will return to its important yet not inflated role in the economy, and allow other sectors to attract (and reward) talented people who are producing things for the good of society.

I'm looking forward to seeing the details of this rescue plan. And yes, you'll get more comments on my Chennai trip some time soon, although I probably will write about my fascinating day interviewing job candidates at the prestigious Indian Institute of Science.

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