Jeffry and Menzie,
The audience here is likely going to be engaged, both in trying to figure out what has happened with Wall Street and how to prevent it in the future, and in terms of getting our budget to better reflect our values in the long run (table how to do it for this question). I’d be curious as to what you’d encourage people to take away from your book, something you believe it adds to the conservations, for those who pay attention and participate in these debates.
But as I read your book, the current account balance – driven by the supply and demand of credit that I mentioned in the book summary – is playing some major in the lead-up to the crash. Hiding leverage is a major problem, but there’s a sense in which Wall Street does it in this narrative to create instruments that get AAA-ratings – which is to say meet the demands and supply mechanisms of global trade balances.
Speaking of masterminds….let’s chat about Wall Street. Right now there’s some 18000+ people watching the arrests of the Occupy Wall Street marchers on the Brooklyn Bridge.
As opposed to most narratives on the crash, Wall Street doesn’t take on an incredibly important or interesting role in the generation of the housing bubble in your book. They aren’t greedy banksters finding ways to rig the game or noble John Galts pushed around by community organizers. They are largely middle-men, intermediaries in the battles of international capital flows.
To use a blunt, but fun, analogy you do not, Wall Street functions sort of like drug dealers in this model. Drug dealers can be immoral and shady, yet they don’t fundamentally create the supply of drugs – that’s the result of factors in South America and Afghanistan and run by higher-ups like “The Greek” from the show The Wire – or the demand for drugs, which comes from consumers. They can be bad human beings but, unless you are a neocon drug warrior, attacking drug dealers can only make a temporary dent in the ultimate trade of drugs.
Two things to complicate that. (i) As I read your argument, it is at least partially predicated on the idea that the marginal unit of foreign capital that came into the United States couldn’t find productive uses – implying that the financial sector is a massive allocative failure. And (ii) there are many stories coming out about how Wall Street was able to create instruments simply to bet against them, stories like the hedge-fund Magnetar, which kept much of the securitization market working post 2005. Thoughts on these?
It might be useful here to explain the mechanisms on how the current account balance lead to the housing bubble? The most obvious mechanism is by driving down the interest rate. But wouldn’t the major benefit of cutting the Federal deficit during the 2000s have also been causing lower interest rates? And how much of the capital from countries we had an current account balance with went towards mortgage securitization, as opposed to treasuries?
This would lead to the idea that the Federal deficit wasn’t large enough in the 2000s…..
I’d be curious to hear your thoughts on the summary of the above I tried to provide above.
And here’s second question to get things going: A meta-metaphor for your book is that the United States went through an event like the East Asian crisis in the 1990s. There was a boom but then there was also a crash. But in that crisis, interest rates rose very steeply and exchange rate plummeted in the relevant countries. This forced the governments to curtail domestic expenditures – our favorite word “austerity” – causing even more havoc.
We are experiencing the opposite of that in the United States – the econoblogosphere has contests to see who can find the most creative way of describing to a general audience how low interest rates actually are (Karl Smith is winning with pointing out negative reals rates on 5-years). Has the current account deficit actually imposed a macroeconomic problem in the United States and are things like the East Asian crisis the best model?
BevW and the firedoglake community, thanks for hosting this great opportunity, and Menzie and Jeff, welcome to the discussion. The first question is right above.
Thanks for hosting this. A few questions:
1. What countries have a fully private mortgage market? What lessons can we draw from them?
2. What were the benefits of the GSEs during their mid-century tenure, and has innovations in the private market replaced them?
2.a. Related I think the idea that the role of the GSEs were simply a (distorting) “subsidy” to the housing market misses that another analysis would say that they created a deeply-liquid, standardized secondary market for housing. Rather than an already existing market that the government adding or subtracted from at the margins, the government here is creating the actual market. Without this, the private market would replicate the PLS market we saw during the 2000s – a deeply dysfunctional market we are now seeing. What do you make of this argument?
3. If the 30-year fixed-rate mortgage disappears in a private market, and if the mortgage market looks more like the subprime mortgage market (or the pre-New Deal mortgage market) – bullet loans, volatility, risk-transfered to households, macro-instability, etc. – is that a problem?
Thanks for doing this Bernard and George. Two quick questions:
1. Befitting an online book salon: a lot of the discussion on how regulation creates marketplaces goes to laws surrounding property rights and labor exchange. As more and more of our activities move online, I’m wondering if you see the net as a potential battleground for the “naturalness” of market activities to be challenged? The area of online property rights, patent abuses and who does labor are very obviously being constructed, with distributional results, in real-time (the criminal charges against Aaron Schwartz for copying files off of JSTOR brought this to mind for me).
2. My pet theory is that the political ideology of mass incarceration was one of the cores that fused the resurgence of the Right over the past 40 years. The social conservatives pointed to the breakdown of the nuclear family, female-headed households and lack of reflected patriarchal structures as a reason to get tough on crime. As Bernard has written well, the neoconservatives took their ideas of the battle between Order and Disorder and fashioned theory of maximal police force (“Wicked people exist” might as well be the neocon foreign policy over the past 10 years too). And libertarians looked to the Keynesian-Fordist Welfare State as the reason why poor communities were victims of the state.
Bernard’s book has really filled in the vacuum for why libertarian market fundamentalism links with our current carceal state, but I’m curious how you compare and contrast this thought process with other conservative thoughts on crime.
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