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.
Showing posts with label securitised financial products. Show all posts
Showing posts with label securitised financial products. Show all posts
Sunday, March 1, 2009
Sunday, February 15, 2009
STIMULUS PACKAGES GALORE WORLDWIDE, BUT WHAT ABOUT PUNISHING THOSE RESPONSIBLE FOR THIS ECONOMIC MESS?
Two words have become household words all around the globe – 'stimulus package' – as the world tries to grapple with the worst economic situation since the 1930’s. US President Obama made several pit stops to campaign for quick passage of the stimulus package his administration put together. Eventually, a package watered down to USD787 Billion was passed by the US Congress.
Similarly, European countries are also implementing their stimulus packages. Situation in eurozone is also spurring urgent action after some quite dismal economic news. European economies contracted in the fourth quarter of last year, with some countries registering the worst figures in decades. The eurozone economy shrank by 1.5% in Q4 2008 and 1.2% on the year. Germany's economy shrank by 2.1% compared with the previous quarter, its worst quarterly performance since 1990.
Canada announced its own economic stimulus package recently in their parliament. Australia too made known their economic measures. China has already put in to motion a huge two year stimulus package to arrest downward slide of their economy. India has also implemented its own package in two instalments, some more may follow.
The G-7 meeting of its Finance Ministers and heads of the central banks in Rome on 14 Feb agreed to avoid protectionism and work in concert to pull the world out the current economic morass. The next meeting will be of G-20 countries in April to review progress of the steps agreed to by the Group in Dec 2008 meeting in Washington.
The above is a quick recap of steps being taken by the countries, which control more than 80% of world economy, to come out of the economic woes the world has gotten into. All this news is encouraging for the millions who lost their jobs, lost their homes, went in to bankruptcies, and went from a life of hope to despair.
But amidst all the abovementioned frenetic activities and hullabaloo to get the world economy back on track, has the world forgotten about the people who brought about this situation in the first place? What about bringing those blighters to justice and punishing them? How can those ‘canine-offsprings’ just say sorry and wash their hands off the accountabilities they carried with their responsibilities?
Because of the unbridled greed of some money spinning wheeler dealers in US (and to some extent in UK, and Germany) a housing bubble got created and this bubble gobbled up trillions of dollars. Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housing market.
Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages. Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to record levels. The impact of these defaults were felt across the financial system world over as many of the mortgages had been bundled up and sold on to banks and investors.
The questions are: what the hell was the US Fed Chairman doing during the years (2004-2006) when the seeds of the global disaster were being sown? Why could he not get out of his self imposed dogmatic intellectual strait-jacket of free-market mechanism principles? Why the hell was there no oversight of what was going on in the American financial market?
The people who have lost their jobs, their homes, their hard earned savings and probably many years of their future would like to know who were those female parent-fornicators who authorised the sub-prime racket to start! Who were those wedlock-products who encouraged this greed infested activity to engulf the society? Who was authorising the sub-prime mortgage business in Freddie Mac or Fannie May?
Why in God’s name nobody – either from Fed Reserve or SEC or some other Federal agency – bothered to take notice of what was going on in the sub-prime market? The sub-prime racket was not just a 4-6 month event which could have gone unnoticed. It went on for months, and yet nobody took notice?
Why did somebody in the Fed not take notice of the warning bells rung by Prof Krugman (who won Nobel Prize for Economics in 2008)? Prof Krugman was repeatedly warning about the dangerous path US economy was treading on.
And then, who were those female parent-fornicators in the big banks of US and Europe who blindly authorised investing in securitised mortgages? Some of these wedlock-product bank executives took home millions of dollars as bonuses!! Why and how are these canine-offsprings allowed to go scot free and not punished?
So, the question is: why have those people responsible for bringing about this financial mess in US, which caused domino effect world over, not been brought to justice? Why should they not be punished? In fact, why are they not being punished? Why should they not be thrown in to some Gitmo kind of prison and made to ruminate over the cataclysmic financial disaster they caused to happen?
Are these people not some kind of criminals? They may not have committed homicide, or rape. But the truth is that they have ‘raped’ the financial system. Their rapacious greed has robbed millions of innocent investors of their hard earned savings. The sub-prime mortgage can be compared to an organised ‘racket’ to ‘swindle’ millions of ordinary people who were ‘enticed’ by the rosy situations.
These people are responsible for having caused untold miseries to millions around the world, why should they not be flogged - publicly? It would be primitive, is it? Let it be primitive, but at least it will send a strong message to the world. Go ask the laid off worker what is primitive or not primitive – he doesn’t bother for all this intellectual debates which are luxury of the well-heeled. He/she wants secure economic future!
So, what is the plan for bringing these perpetrators of the current financial wrong-doing to justice? Is there no law under which these cold-blooded white collared diabolical schmucks can be tried and punished? Can these female parent-fornicators just say ‘I’m deeply sorry’ and can go un-punished?
The millions of people affected by the current economic upheaval are cursing those rascals day in and day out. Whether or not the actual perpetrators of current economic crisis (and those who were supposed to keep an oversight on them, and didn’t do their job) get punished by the law of this planet only time will say, but one thing is clear that if there is something called ‘natural justice’ these gutter insects will burn in the hell fire during their lifetime.
Similarly, European countries are also implementing their stimulus packages. Situation in eurozone is also spurring urgent action after some quite dismal economic news. European economies contracted in the fourth quarter of last year, with some countries registering the worst figures in decades. The eurozone economy shrank by 1.5% in Q4 2008 and 1.2% on the year. Germany's economy shrank by 2.1% compared with the previous quarter, its worst quarterly performance since 1990.
Canada announced its own economic stimulus package recently in their parliament. Australia too made known their economic measures. China has already put in to motion a huge two year stimulus package to arrest downward slide of their economy. India has also implemented its own package in two instalments, some more may follow.
The G-7 meeting of its Finance Ministers and heads of the central banks in Rome on 14 Feb agreed to avoid protectionism and work in concert to pull the world out the current economic morass. The next meeting will be of G-20 countries in April to review progress of the steps agreed to by the Group in Dec 2008 meeting in Washington.
The above is a quick recap of steps being taken by the countries, which control more than 80% of world economy, to come out of the economic woes the world has gotten into. All this news is encouraging for the millions who lost their jobs, lost their homes, went in to bankruptcies, and went from a life of hope to despair.
But amidst all the abovementioned frenetic activities and hullabaloo to get the world economy back on track, has the world forgotten about the people who brought about this situation in the first place? What about bringing those blighters to justice and punishing them? How can those ‘canine-offsprings’ just say sorry and wash their hands off the accountabilities they carried with their responsibilities?
Because of the unbridled greed of some money spinning wheeler dealers in US (and to some extent in UK, and Germany) a housing bubble got created and this bubble gobbled up trillions of dollars. Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housing market.
Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages. Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to record levels. The impact of these defaults were felt across the financial system world over as many of the mortgages had been bundled up and sold on to banks and investors.
The questions are: what the hell was the US Fed Chairman doing during the years (2004-2006) when the seeds of the global disaster were being sown? Why could he not get out of his self imposed dogmatic intellectual strait-jacket of free-market mechanism principles? Why the hell was there no oversight of what was going on in the American financial market?
The people who have lost their jobs, their homes, their hard earned savings and probably many years of their future would like to know who were those female parent-fornicators who authorised the sub-prime racket to start! Who were those wedlock-products who encouraged this greed infested activity to engulf the society? Who was authorising the sub-prime mortgage business in Freddie Mac or Fannie May?
Why in God’s name nobody – either from Fed Reserve or SEC or some other Federal agency – bothered to take notice of what was going on in the sub-prime market? The sub-prime racket was not just a 4-6 month event which could have gone unnoticed. It went on for months, and yet nobody took notice?
Why did somebody in the Fed not take notice of the warning bells rung by Prof Krugman (who won Nobel Prize for Economics in 2008)? Prof Krugman was repeatedly warning about the dangerous path US economy was treading on.
And then, who were those female parent-fornicators in the big banks of US and Europe who blindly authorised investing in securitised mortgages? Some of these wedlock-product bank executives took home millions of dollars as bonuses!! Why and how are these canine-offsprings allowed to go scot free and not punished?
So, the question is: why have those people responsible for bringing about this financial mess in US, which caused domino effect world over, not been brought to justice? Why should they not be punished? In fact, why are they not being punished? Why should they not be thrown in to some Gitmo kind of prison and made to ruminate over the cataclysmic financial disaster they caused to happen?
Are these people not some kind of criminals? They may not have committed homicide, or rape. But the truth is that they have ‘raped’ the financial system. Their rapacious greed has robbed millions of innocent investors of their hard earned savings. The sub-prime mortgage can be compared to an organised ‘racket’ to ‘swindle’ millions of ordinary people who were ‘enticed’ by the rosy situations.
These people are responsible for having caused untold miseries to millions around the world, why should they not be flogged - publicly? It would be primitive, is it? Let it be primitive, but at least it will send a strong message to the world. Go ask the laid off worker what is primitive or not primitive – he doesn’t bother for all this intellectual debates which are luxury of the well-heeled. He/she wants secure economic future!
So, what is the plan for bringing these perpetrators of the current financial wrong-doing to justice? Is there no law under which these cold-blooded white collared diabolical schmucks can be tried and punished? Can these female parent-fornicators just say ‘I’m deeply sorry’ and can go un-punished?
The millions of people affected by the current economic upheaval are cursing those rascals day in and day out. Whether or not the actual perpetrators of current economic crisis (and those who were supposed to keep an oversight on them, and didn’t do their job) get punished by the law of this planet only time will say, but one thing is clear that if there is something called ‘natural justice’ these gutter insects will burn in the hell fire during their lifetime.
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