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Krugman: "A not-so-funny thing happened on the way to economic recovery. Over the last two...

Krugman: "A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater."
Comments (14)
  • Yep, we are screwed.
    6 Feb 2009, 02:28 PM Reply Like
  • The "non-partisan" Krugman refuses to admit that the problem started well before Bush.

     

    For instance, the Glass-Steagal act was repealed during the Clinton administration.
    6 Feb 2009, 02:31 PM Reply Like
  • Harry, can you explain how Glass-Steagal is relevant? All it did was allow holding companies to be created that could own different types of financial entity, but each holding company subsidiary was regulated separately. As far as I can tell, the only practical relevants repealing G-S had was enabling companies to consolidate back offices and cross-sell products to consumers.

     

    I could be wrong, of course, and my knowledge of the effects isn't encyclopedic, but people throw it around like it was something significant and I'm just not seeing it.
    6 Feb 2009, 02:39 PM Reply Like
  • President Obama is trapped between his instincts to go for the middle ground and an economy calling for something more extreme. Mr. Obama must do what no politician finds easy. He must throw aside caution and use every bit political power he has to assure passage of an aggressive spending package to stimulate the economy.

     

    The debate is not serious, because the Republican minority insists on talking about a balanced budget and the inefficiency of government spending. Two comments: We can address how to balance the budget later. Perhaps, government investment and spending is not the most efficient, but at the moment private industry is not spending so we turn to our government.

     

    I split my time between the United States and Japan. My emotional barometer now is probably lower than it was in the early and mid 90's in Japan.
    6 Feb 2009, 02:44 PM Reply Like
  • I don't know which planet Krugman lives on.... it's the same politicians, with their same agendas and idealogies, in the same political system - why does he expect it to be different?
    6 Feb 2009, 02:54 PM Reply Like
  • The comment that the Glass-Steagal act was repealed during the Clinton administration is factually correct, and is frequently cited on many web sites without clarification.

     

    However, there are a few facts related to the repeal of Glass-Steagall that seem to have been forgotten.

     

    The bill that ultimately repealed the Glass-Steagall Act was introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA) in 1999. The bills were passed by a 54-44 vote along party lines with Republican support in the Senate and by a 343-86 vote in the House of Representatives Nov 4, 1999. Both houses of congress were under complete Republican control from 1994 to 2006.

     

    The finance, insurance and real estate industries are regularly among the largest campaign contributors and biggest spenders on lobbying of all business sectors. It was these industries that succeeded in their two decades long effort to repeal the Glass-Steagall Act. Those special interest financial institutions got what they wanted, got rich, and now, when its time to pay the bill, it’s the American tax payers that have to get out their check books.

     

    The fact of the matter is that both of the political parties are puppets of the special interest groups. We are just here to line their pockets. Our representatives provide the illusion that the American people are in charge, while I am sad to say, the reality appears to be quite another matter.
    6 Feb 2009, 03:32 PM Reply Like
  • This is just Krugman being Krugman, a Keyensian mouthpiece for the Democratic Party. He wants the federal government to spend money that it does not have, the Federal Reserve to debase the currency, and consumers to spend money that is best used to pay down debts. Of course, he's using the typical Keyensian tactic with regard to this "stimulus" package: when all the money is spent and we get only anemic (if that) economic and employment growth, he'll argue that the package should've been bigger.
    6 Feb 2009, 03:32 PM Reply Like
  • This is just Krugman being Krugman, a Keyensian mouthpiece for the Democratic Party. He wants the federal government to spend money that it does not have, the Federal Reserve to debase the currency, and consumers to spend money that is best used to pay down debts. Of course, he's using the typical Keyensian tactic with regard to this "stimulus" package: when all the money is spent and we get only anemic (if that) economic and employment growth, he'll argue that the package should've been bigger.
    6 Feb 2009, 03:32 PM Reply Like
  • It's political theater because all the assholes in congress are self serving ACTORS..they are idiots and con men the likes of P.T.Barnum..the suckers born every minute are us..the citizens. Thank God they are "PUBLIC SERVANTS" doing their selfless" peoples work" or we would really be screwed
    6 Feb 2009, 03:35 PM Reply Like
  • Wikipedia Krugman for the low-down on this political socialist hack. Yet another big-mouth academician who has never had any real job, met a payroll, produced anything other than hot air.
    6 Feb 2009, 03:37 PM Reply Like
  • Bob,

     

    That's a factually correct history lesson, but what was the impact of the repeal? People are throwing it around like companies were using depositor money from one subsidiary to fund purchases of ABSs in another subsidiary or something, when all the subsidiaries still had to abide by their own regulatory regimes. My own most direct expertise is in insurance and regardless of whether an insurance company stands alone or is a subsidiary of a larger holding company across many financial sectors, that insurance subsidiary is regulated the same. The only place they may get a "break" is at the ratings agencies, which do look at diversification benefits when rating a company, as well as holding company support.

     

    Increasing the amount of leverage available, which I think was the Fed's decision, seems like a more relevant regulatory change to me than Glass-Steagal's repeal, regardless of whose administration was in power at the time.
    6 Feb 2009, 03:40 PM Reply Like
  • Glass Stiegel allowed Citi to buy Salomon Bros and Smith Barney so that the three could originate, securitize, and distribute debt products e.g. MBS

     

    This allowed dis-intemediation of risk and allowed bankers and brokers to take sh**** credits and package them in perfume. Add Greenspan's low interest rate orgy and investors turned into crack addicts for yield. A willing buyer for this toxin.
    A recipe for disaster ....

     

    On Feb 06 02:39 PM user344210 wrote:

     

    > Harry, can you explain how Glass-Steagal is relevant? All it did
    > was allow holding companies to be created that could own different
    > types of financial entity, but each holding company subsidiary was
    > regulated separately. As far as I can tell, the only practical relevants
    > repealing G-S had was enabling companies to consolidate back offices
    > and cross-sell products to consumers.
    >
    > I could be wrong, of course, and my knowledge of the effects isn't
    > encyclopedic, but people throw it around like it was something significant
    > and I'm just not seeing it.
    6 Feb 2009, 03:52 PM Reply Like
  • Dojosan,

     

    Even if Citi, Saloman and Smith Barney were separate entities without a common holding company parent, they could have formed a joint venture to do the same things. Risk isn't disintermediated with the repeal of Glass-Steagal, it becomes a transfer pricing issue instead of a market pricing issue, but transfer prices oftem track market prices where inputs can be obtained outside of the corporate structure, which is certainly the case with asset-backed securities.

     

    Again, I know people who are extremely adamant on this Glass-Steagal issue, but where's the beef?

     

    I'm personally more focused on the leverage constraints and lack thereof and the "originate to distribute" securitization model.

     

    Anyway, Krugman's article is his typical stuff. I guess he's completely oblivious to the CBO report that says GDP will shrink down the road because of the enormous debt load to finance the stimulus. So much for long-term thinking.
    6 Feb 2009, 04:07 PM Reply Like
  • What was Glass-Steagail?
    As a consequence of the 1929 stock market crash and subsequent nationwide commercial bank failure, the Glass-Steagall Act (GSA) was created. The intent of GSA was to separate investment and commercial banking activities. When GSA was created, it was felt that commercial banks had acted in a highly speculative way with depositor's funds. Not only were the commercial banks investing the depositors assets, they were also creating new issues for resale to the public. (new issues = derivatives?)

     

    Proponents of Glass-Steagail reasoned that banks, blinded by greed, took on ever increasing levels of risk in the hope of earning ever increasing rewards. As a consequence, the normally conservative criteria surrounding commercial banking operations were mostly removed. Unsound loans were issued to companies in which the banks themselves had investments, and depositors were themselves encouraged to invest in those same companies.

     

    The GSAs intent was to create a regulatory firewall between commercial and investment banking activities which were both supposed to be regulated. In effect, GSA was supposed to guard against banks making speculative investments in situations where the involved risk was outside of the realm of conservative investments.

     

    The limitations of GSA on the banking sector sparked a debate over how much restriction is healthy for the banking sector. Many argued that allowing banks to diversify in moderation would allow the banking industry to reduce risk. It was further argued that big banks are likely to be more transparent, lessening the possibility of assuming too much risk or masking unsound investment decisions. The argument was that since brand reputation was so critically important in modern markets, that would be enough to motivate banks to regulate themselves. (I suggest the current meltdown in financials provides a relevant counterpoint with respect to the utility of self regulation, or the use of fuzzly defined limitations such as "in moderation").

     

    User344210 says that even if Citi, Saloman and Smith Barney were separate entities outside of a common holding company they could have formed a joint venture to do the same thing.

     

    I am not a lawyer, so I don't know about that 344210. That's something that lawyers need to weigh in on. However, from a deal making perspective, I know there is a world of difference between making a deal between three separate business entities, and three components of a common holding company. If Citi was a separate business entity, its senior executives would be focused differently then if they were given marching orders to make a deal by the big dogs running the holding company. You can clearly see the effects of conflicts of interest when rating companies are internal to investment banks.

     

    There is also a difference in doing a deal where the GSA is active, and its not. Intent is a major component of legal proceedings. The intent of the GSA was to clearly separate the behavioural boundary between commercial and investment banks. So even if you did do the deal, it would have to inspected by the regulatory agency. While political appointments to head the SEC can look the other way even if GSA was on the books, the SEC could be forced to enforce it. Removal of GSA removes that possibility, and makes the SEC more of an unregulated political pawn.

     

    So in summary, I would say the repeal of GSA was a contributory factor with respect to the current mess in our financial markets.
    7 Feb 2009, 01:11 PM Reply Like
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