Friday, November 14, 2008

another fine mess - and what to do about it

I haven't linked to articles by Steven Pearlstein in a while. That's certainly not because they aren't worth reading. Here's a compilation of excerpts from the last four of them.

Toward a New International Capitalism, by Steven Pearlstein, Friday, November 14, 2008; Page D01
There is also no denying that American-style capitalism has been undermined by its own success. In its present incarnation, it rewards manipulation over innovation and speculation over genuine value creation, resulting in massive misallocations of capital and the accumulation of unheard-of wealth in the hands of money managers and top corporate executives who are more lucky than they are skilled. No longer is it the entrepreneurial capitalism of Google and Amazon and Nucor Steel that animates the American imagination -- it is the financial capitalism of Enron and Drexel Burnham Lambert, of Goldman Sachs and the Blackstone Group, of publicly traded real estate investment trusts and multibillion-dollar hedge funds. Here in the United States, they have sucked up a disproportionate share of talent and capital, distorted compensation systems, and helped to perpetuate the false notion that companies exist solely to enrich their investors and investment bankers. And now, through the marvels of global financial markets, they have spread their toxic culture and products to economies across the globe.

As they arrive in Washington, the challenge for global leaders is to find a way to tame a financial system that has not only corrupted American-style capitalism but also brought unwelcome instability to the global economy. The flaw in the old "Washington consensus" is that an unfettered flow of investment capital, particularly among countries with different currencies, is not the idea. While product and labor markets work remarkably well when they are left open and lightly-regulated, experience has now demonstrated that a different approach needs to be taken toward financial markets, which suffer from imperfect information, an abundance of moral hazard, and a tendency toward herd behavior and speculative excess.

Creating a new architecture and regulatory framework for the global financial system is complicated and wonky and won't win anyone the next election. After the Asian financial crisis in 1998, there was a lot of brave talk about updating the old Bretton Woods institutions, but petty politics and an improving economy got in the way, and nothing was ever done. Perhaps this time, the prospect of another global depression will focus the minds of world leaders and lead them to create a new model of capitalism that everyone can live with.
Pressure Is on for Obama, but This Rescue Relies on All of Us, November 12, 2008
There is extraordinary pressure on Barack Obama -- from the public, the news media, Congress and even from other world leaders -- to move quickly and decisively "fix" the U.S. economy.

Most economists agree that government now has an urgent role to play in managing that adjustment, preventing markets from spinning out of control and turning what is a necessary recession into a prolonged depression. And most Americans want government to take steps to see that the pain of that adjustment is shared somewhat fairly and equitably, and ensure that the poor and vulnerable are protected.

But as Obama is quickly discovering, there is little consensus on what a fair and equitable adjustment looks like.

There is little in Obama's campaign platform, and his oft-stated promise to "restore the middle class," to suggest how he will answer these questions or where he will draw the lines. But it won't be long before he is forced to acknowledge that even the federal government, with its unmatched capacity to borrow and spend huge sums, cannot rescue every important industry, save or replace every job, prevent every foreclosure and restore every budget cut. The sooner he levels with us about those limits and the extent of shared sacrifice that will be necessary, the sooner the new president will be able to establish confidence in his leadership and restore faith in our economic future.
Obama's Hurdles Down the Track, November 7, 2008
Obama needs to avoid the instinct to try to undo the past or refight the same pitched battles among interest groups and ideologues that have stymied action for much of the past decade. The current crisis offers a rare opportunity to reframe the questions, challenge old assumptions and bring a new vocabulary to the economic conversation.

Obama now has a golden opportunity to reframe the stale debate over taxes and spending. Offering another round of tax rebates would only be an invitation to compound past mistakes. It was overspending by households that largely got us into this mess, and the only way we are going to get out of it is by having households live within their means.

Much better to take the same borrowed money and invest it in public goods -- not just roads and bridges, but things like public transit, basic scientific research, a modern air-traffic-control system, expansion of state college and university systems and a big push on early childhood education.

Any careful review of what went wrong in financial markets would quickly reveal that the problem wasn't primarily that regulators had too little authority but rather that they had neither the resources nor the political backing to use it. The goal needs to be better regulation, not more.
Hank Paulson's $125 Billion Mistake, October 31, 2008
It was only a few weeks ago that most right-thinking economists and left-leaning bloggers were jumping on Treasury Secretary Hank Paulson for his plan to jump-start the markets in asset-backed securities by having the government buy them up at auction. Much better, they argued, to use the $700 billion to "recapitalize" the banking system, just as Gordon Brown was doing in Britain. Even the Federal Reserve thought that a better idea. So Paulson changed course, called in the nine biggest banks and "forced" them as a group to accept $125 billon in new capital. The critics patted themselves on the back for having been right all along.

Now, many of the same people are shocked -- shocked! -- to discover that the banks aren't using the money to make new loans to households and businesses, as they had assumed, but are using it to maintain dividend payments to shareholders, pay this year's bonuses to executives and traders, or squirrel it away for future acquisitions.

Perhaps the worst part of this misguided effort to recapitalize the banking system is that it has prompted other industries to line up for similar sweetheart deals. Automakers, insurers, auto finance companies and local governments are already besieging the Treasury, and you can be sure that others are refining their pitch. One can only hope that the terms of future deals will be sufficiently onerous that going to the Treasury will be become a last resort, not a first instinct, for industries in trouble.

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