Through this blog I want to raise a conceptual discussion amongst economists of all stripes as to how the markets should run or be made to run. Why can this world not have an economic model which is more inclusive of the frailties of human nature? The motive for this conceptual discussion came from reading Berkshire Hathaway Inc’s annual report of 2008, and an article on Bloomberg.
Warrant Buffet is one of the richest persons on this planet, and his perspective on money matters has always been very insightful. His narrative in Berkshire’s annual report is always a treat for its readers – its report for 2008 was no exception. But then, what has Oracle of Omaha’s document got to do with the heading of this blog? Plead read on, you will see the connection.
Let me quote Buffet from page 11 of the report which deals with home mortgages: “At that time (Y2008?, italics added), much of the industry employed sales practices that were atrocious. Writing about the period somewhat later, I described it as involving 'borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent'”.
He further states on same page: “To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved……..The resulting mortgages were usually packaged (“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and it did.”
Wait! What the hell was going on in the United States – lenders happily making out loans that borrowers couldn’t repay out of their incomes?! And, Wall Street selling mortgages to unsuspecting investors?! Is this what free market is supposed to be – that any organisation can do anything to rack up huge profits, at least in the short-term, and the top executives can fill their pockets with millions of ill-gotten bonuses?
Is free market concept supposed to have no oversight on the diabolical and self-serving CEOs who may be going berserk in the market tearing down ethics and honesty to shreds? Is this what economist Milton Friedman’s concept of free markets was or is? Is Friedman feeling happy in his grave watching what unbridled greed of human nature has done to the world?
Did it never occur to the ‘great’ Friedman that free market concept should also bequeath on the top executives (of organisations which deal with tonnes of money) some kind of responsibility towards the millions of people working in hundreds of thousands of organisations which could directly or indirectly get potentially exposed to risks and losses due to the shenanigans of the people who run the said (financial) organisations?!!
Today millions and millions of people have lost jobs because of an imploding market around the globe caused by the shameless, villainous ‘confidence tricksters’ of United States (and some of their ilk in Europe) who funnelled hundreds of billions of dollars in a housing bubble. Do these immoral wicked rotten executives of the mortgage lending companies and the various banks realise the pain, the tears and the suffering of the millions – the shattered dreams, disrupted future, lost opportunities of those hapless people?
Why did the policy makers in US in different periods of 1900s not pay heed to the sane concept of another top economist – James Tobin? It seems Tobin’s experience of the depression as a teenager in the 1930s gave him a lifelong loathing of unemployment.
The Bloomberg article, referred to above, writes: “As a young professor I did a paper where I analyzed the optimal unemployment rate,” said Joseph Stiglitz, a professor at Columbia University in New York, who knew Tobin at Yale. “Tobin went livid over the idea. To him the optimal unemployment rate was zero.”
The article mentions at another place: “Like Keynes, Tobin was an advocate for the role of government in maintaining full employment, said James Galbraith, an economist at the University of Texas in Austin. The current economic and financial crisis has validated that philosophy, said Galbraith, a former Tobin student and the son of the late John Kenneth Galbraith, who was a friend of Tobin.”
“It’s clear that the position that the federal government has a responsibility for the level of employment, for the economy, has prevailed,” Galbraith said. “The position that the Fed can walk away from the level of employment has completely collapsed….”
My question is: why couldn’t Friedman’s and Tobin’s ideas be married and a governing economic model more inclusive of the frailties of human nature be developed and implemented – in US and other economies? Has the current economic crisis not demonstrated that any economic model ignoring the role of frailties of human nature is incomplete and flawed, if I may?
The issue is not whether Friedman is great or Tobin is greater. The issue is there got to be a economic model that is practical in nature, and not one which is predicated on idealistic premises – idealistic premises, like, humans will always act responsibly, humans will never succumb to greed, self-aggrandisement etc.
Tobin (Nobel Prize winner in 1981) in an essay written for the Nobel committee mentioned, “The miserable failures of capitalist economies in the Great Depression were root causes of worldwide social and political disasters.” Economics “offered the hope, as it still does, that improved understanding could better the lot of mankind.”
Tobin’s friend and colleague William Brainard says, “He (Tobin) believed financial markets could serve a valuable service in diversifying risk and moving capital in efficient ways.” “But he was not someone who believed the market always got it right and that private incentives were always aligned with the public good.”
Almost a clairvoyant, Tobin seems to be now in hindsight. But what he said and believed in appears to be more prescriptive and applicable for the ways we humans behave. We must keep in mind that this world is still not made up of people like Mr. Spock of Star Trek who was paragon of logical mind.
After this massive economic bloodletting can we now decide to mend our thinking and redefine the way the markets ought to run so that people don't lose jobs again at such a massive scale? Or, will we again relapse in complacency once we are out of this horrible downturn?
Mistakes teach us to learn from it so that we don’t repeat them. Ideology of any political party or of an individual should not be allowed to cloud the objectivity of human thinking. The greater good of the society is supreme and should be so. Let the political leaders of the present realise this and lay the foundation for the future.
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