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The Rosenkranz Foundation debate | Blame Washington more than Wall Street for the financial crisis

This is just plain fun.  Some of my own economist hero’s (Roubini, Ferguson) and others debating the blame for the crisis.  The result was a vote in favour of for the motion, that Washington is to blame, but the humour and the threads are fascinating for those interested – particularly the Ferguson / Minow, (Government is corrupt / Government are victims) bits.  I highlighted summary points, and full transcript is here.  financial-crisis-031709


For the motion: Niall Ferguson, John Steele Gordon, Nouriel Roubini
Against the motion: Alex Berenson, Jim Chanos, Nell Minow

The full transcript of this debate is available online at this link; the debate will also be broadcast in a few days on National Public Radio. Here is below a press release on this debate and its main themes and results followed by a brief commentary on the debate by John Fund of the WSJ:

As Ferguson eloquently puts it:

Not only were the bankers greedy, we would agree. They were also, in many cases, incompetent. But I and my colleagues are not here to praise them, or  to defend them. We blame them for much of what has gone wrong. It’s just that we blame the politicians…more. [LAUGHTER, APPLAUSE]

It’s just too easy. And if you noticed, that’s exactly what the politicians do. I couldn’t help but notice, in President Obama’s inaugural
address, an allusion to greed, and irresponsibility. And only yesterday, he was denouncing, and I quote, “The recklessness and greed of the bonuses paid to executives at the insurance company AIG.” It was just the same in the last Great Depression, [I think of this as the Slight Depression].
[LAUGHTER] FDR in his inaugural address, heaped scorn on the rulers of the exchange and the unscrupulous money-changers. Ladies and gentlemen, you have to ask yourselves…why do the politicians always wax so indignant about finance at times like these? Could it just possibly be that they’re trying to divert our attention away from Washington’s own responsibility for the debacle?

He goes on to cite the actions of the:

  1. Federal Reserve’s expansionary activities on interest rates while house price inflation ran between 15% and 17%
  2. Securities and Exchange Commission (SEC) which allowed banking leverage to increase from some 12 : 1 to some 20 and 30 : 1.
  3. Congress who “wholly failed to supervise Fannie Mae, and Freddie Mac. Those two essential institutions, which underpin the United States mortgage market” – On the eve of their destruction, Fannie and Freddie had core capital, as defined by their regulator, of $83 billion, and supported around $5.2 trillion of debt and guarantees. In other words they were leveraged 65-to-1.
  4. White House “We want everybody in America to own their own home,” declared President George W. Bush, in October in 2002. Everybody, in America.  He challenged lenders to create 5.5 million new minority homeowners, by the end of the decade. He signed the American Dream Down Payment Act, in 2003.

He makes these points while humourously noting the address for the four culprits is in fact Washington.  Seriously worth the read for a fairly light yet insightful view of how we got to where we are today.

Next best quote is Alex Berenson:

And I have to say I’m at a great disadvantage because, Niall Ferguson has
that accent, he could read the phone book to you and it would sound a lot smarter than I do. [LAUGHTER]

He continues to make the point in that regulation cannot improve on individual decision making.

if you think about your own life, if you think about your own business as you know, whether you’re a lawyer or a doctor or whether you work in retail, whether you—a landlord, whatever it is that you may do, you probably have a better idea where the opportunities are, but also where
the problems are, where you can take advantage of your customers, where you can cut corners, than any regulator could no matter closely they monitored you. It’s your business, it’s your life. And so the regulator needs to set the rules, but in the end—you succeed or fail on your own.

… Compensation is a crucial, crucial part of understanding what went  wrong on Wall Street in the last 10 years. When you can make a million or 10 million or in some cases $100 million for a year’s work, you don’t have very much incentive to run your business for the long term.

… Could we and should we have had a much more robust regulatory system? Absolutely. Regulation is vital, regulation sets the playing field, it sets the rules. But in the end, you have to put blame where blame is due. And, blame is due on the firms. It’s due on the owners, it’s due on the managers, it’s due on the executives, it’s due on the employees.

John Steele Gordon in favour:

we have had panics on Wall Street roughly every 20 years. Now
the Constitution came into effect in April of 1789, we had the first crash on Wall Street in April of 1792. Then we had another one 1819, 1837, 1857, 1873, 1893, 1907, 1929, 1987, and now 2008. It seems to be just part of the beast, I mean could any of these panics have been prevented by Wall Street?

… So, blaming Wall Street is like blaming the atmosphere for thunderstorms

There’s still one great big player in the financial world in the United States, that is not subject to these commonsense rules. It’s called the government. For instance, you remember those budget surpluses in the later years of the Clinton administration between 1998 and 2001?
They amounted to $558 billion. So the national debt went down by $558 billion, right? Uh, no, it went up by $400 billion. The reason is that Social Security was put on budget. And that means that the revenues that flow into Social Security over and above what is paid out to recipients of Social Security becomes part of the government revenue, it’s called an intra-governmental transfer. Of course the money that’s taken out of the Social Security trust fund is replaced with newly minted federal bonds.
Which is why the debt went up. Now, if a private company or publicly-traded company, tried to take employee contributions to the company pension fund, and call it revenue in order to perk up the bottom line, the managers of that corporation would all this very minute be playing volleyball in Club Fed. [LAUGHTER]

Nouriel Roubini from RGE is the last I will summarise here.  He argued in favour:

Zero down payment, no verification of income, assets and jobs, they
called them ninja loans or liar loans. Interest-only mortgages, negative amortization, teaser rates, all this toxic stuff or subprime, near-prime, prime. The Fed and Greenspan actively said was the best thing that have happened to mortgages. Free market, they could control it, they had the law, the power to do it, they didn’t do it.

… Big McMansion can give you utility but doesn’t increase the stock of capital in the real way of productivity of capital and labor, like, physical capital does. We have subsidized housing in 20 different ways. That has led to the bubble as well. There was an ideology for the last decade in Washington, that was critical to this financial crisis. Was an ideology of laissez-faire, Wild West unregulated capitalists. The base of this ideology was the idea that banks and financial institutions will self-regulate. And as we know, self-regulation means no regulation. It was the ideology of relying on market discipline, and we know when there is irrational exuberance, there is  zero market discipline.

… So every element of our regulatory system, has failed, you know, this Basel accord that relied on this principle, has failed even before it was implemented. Relying on principle rather than rules, relying on light touch, rather than tough rules, a light touch means no touch at all.

…  Shareholders are gonna be able to control the behavior of bankers and so on. This was the belief in deregulation. Elements of it, actions were taken. The repeal of Glass-Steagall that separated investment banking from commercial banking. Now we let them essentially, use deposit insurance and deposits to do 30 times leverage prop trading, that’s what was allowed. Essentially deregulation of credit derivatives and derivatives, over the counter with systemic risk. Things of that sort were going on. The SEC deciding the level ratios, 30 to 1 was okay.

And the final quote de jour goes to Nell Minow:

Past performance is no guarantee of future performance. And who is it that requires them to say that? That is Washington. Wall Street has expected us to bet on them for a long time. They have not lived up to our trust in them and they are more responsible than Washington for this mess. Thank you. [APPLAUSE]

And the result:

the results of the final vote, 60 percent of you are for the motion, 31  percent against… [APPLAUSE] 9 percent undecided, the side for the  motion wins… congratulations to them

Written by Colin Henderson

March 19, 2009 at 23:19

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