Will Marshall: Let’s Turn Back the Clock
I was developing some concern that some recent conversations I’d been a part of were based around a straw man—the guy who just wanted to turn back the clock ten years to before the bubbles and for some reason hope for a better results. But no. Will Marshall definitely thinks this:
In short, Obama and Geithner are working to restore the financial sector as it existed roughly a decade ago, before the frenzied run-up in real estate prices and the bubble in securitized loans. But as the president has said, the regulatory minimalism of the Bush years must be replaced with a new regime that extends oversight to hedge funds and derivatives and ensures that we never again face the necessity of bailing out companies that are too big or too interlaced to fail.
The administration’s critics envision a more fundamental restructuring: a dramatic shrinking of the financial-services sector; an end to easy credit; a tight corset around any lending practices that might smack of seduction or predation; the permanent intrusion of government into matters of firm strategy and compensation; and, somewhat ironically, a return to the old, black-and-white days when conservative bankers took modest risks for modest profits.
I’m glad that someone is willing to explicitly defend this position, because it might make a straightforward dialogue about it easier. From where I sit, ten years ago it was March of 1999 and the dot-com madness was building. The NASDAQ was rising, but it had not yet made its real ascent:
But soon thereafter, it went into hyperdrive bubble mode (note that the graph above is in logarithmic scale) before eventually crashing hard. And then out of the crash came the housing bubble, and now the current crash. Under the circumstances, I wonder what good is supposed to come of turning the clock back 10 years? It seems like if we somehow just manage to rewind things, that we’ll just replay the same story of bubble and bust. I think Bill Clinton was a dramatically better president than George W. Bush, but it’s simply not possible to claim that the bubble-based nature of the economy was caused by Bush-era regulatory measures—the first go-round of bubble-led growth clearly got under way when Clinton was president.
I think the most compelling argument against the “restructure” camp is that you actually can’t put humpty-dumpty back together again so there’s no point in worrying about it. A big event like this changes investor psychology and the structure of the economy enough that even absent a deliberate effort at restructuring you come out of the crisis looking different than you went in.
33 Responses to “Will Marshall: Let’s Turn Back the Clock”
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March 27th, 2009 at 5:58 pm
You realize your image is that of a clock being turned forward.
Right?
March 27th, 2009 at 6:02 pm
A big event like this changes investor psychology and the structure of the economy enough that even absent a deliberate effort at restructuring you come out of the crisis looking different than you went in.
Right. And this is the main reason I’m not so troubled by an absence of root-and-branch pruning of bank executive suites (which is alleged to be one of the problems of avoiding nationalization). Sure, a lot of the guys (and they are mostly guys) who contributed to the massive troubles of the financial services sector still go to work in those same executive suites. But the reality is, we’re in a different world now. It’s inconceivable to me that they’ll act in precisely the same manner as they did five or ten years ago — especially if they’re much more tightly regulated. Similarly, it’s therefore inconceivable that there exists this large pool of “enlightened” financial executives waiting in the wings who would be so much better. Nope. There’s just people of varying levels of effectiveness, all of whom now possess the 20/20 vision of hindsight.
March 27th, 2009 at 6:18 pm
Where does Sarbanes-Oxley fit into the Bush Administration’s “regulatory minimalism”? If anything, the Bush Administration represented a move to stronger regulation from the laxity of the Clinton Administration.
March 27th, 2009 at 6:21 pm
And Marshall agrees with those folks. He is an idiot.
That system ALLOWED and ENCOURAGED what happened. The notion that “It’s inconceivable … they’ll [presumably bankers] act in precisely the same manner as they did five or ten years ago — especially if they’re much more tightly regulated” is fucking ridiculous. THEY WILL — as soon as they can.
Regulation is only PART of the answer her. Banks have to be returned to their proper function — legally. Allowing them to be one and the same with investment banks, and hoping to “regulate” them is just ridiculous.
It reminds me of the argument that folks in the suburbs should be able to have tigers in their backyard — but they should be regulated. NO, folks shouldn’t be allowed to have tigers to begin with.
March 27th, 2009 at 6:24 pm
“…we’ll just replay the same story of bubble and bust.”
Otherwise known as capitalism.
March 27th, 2009 at 6:26 pm
This does not change investor psychology… once the economy is rolling again and people have money we will get a bubble in whatever is hot… People want money and that is not changing
March 27th, 2009 at 6:29 pm
This does not change investor psychology… once the economy is rolling again and people have money we will get a bubble in whatever is hot… People want money and that is not changing.
I doubt it. Human psychology may not change, but perceptions of conditions do change, and therefor so will the response. To put it another way, people who grew up in the 30s possess a different outlook on money and credit than people who came along later. Similarly, people who end up being scarred by The Great Recession will likely respond differently to money and credit than people too young to remember it.
March 27th, 2009 at 6:30 pm
This argument about the extent of restructuring and regulation is frustrating because neither side gives any specifics, they just complain about either the inadequacy or impossibility of the other’s suggestions.
How exactly would you shrink the financial sector and go back to good ol’ fashion lending OTHER than by doing what Obama seems to have proposed (of which I repeat I know little of the specifics?) Aren’t corsets around easy credit and regulation of non-bank financial services the cornerstone of their plan?
Having the government mandate compensation levels in the pure private sector doesn’t seem right, though they could make participation in certain gov’t programs contingent on some self-regulation.
March 27th, 2009 at 6:39 pm
I think this may be the dumbest fucking thing you’ve ever written. WTF?
This is EASY — not hard like Timmeh is making out. You restructure banks FIRST. If the top ten banks had behaved like the middle 50%, there would only be a recession — not a recession compounded by big bank failures.
March 27th, 2009 at 6:48 pm
The idea that Geithner et al see the current crisis as an aberration within a fundamentally sound system has been discussed, and criticized, by others, most notably Krugman.
March 27th, 2009 at 6:57 pm
ссылки…
I was developing some concern that some recent conversations I’d been a part of were based around a straw man—the guy who just wanted to[...]…
March 27th, 2009 at 7:06 pm
“Where does Sarbanes-Oxley fit into the Bush Administration’s “regulatory minimalism”?”
Another point that doesn’t fit with that meme is the Bush Administration’s (and Congressional Republicans’) efforts to tighten regulation of Fannie and Freddie. It was Congressional Dems* who gave those GSEs’ regulator the Enemy of the People treatment.
*To be fair, one Democrat, Rep. Maurice Hinchey of New York, did support tougher regulation of the GSEs. And, aside from his position on the GSEs, President Bush shared the Democrats’ zeal for extending credit to marginal borrowers, in order to increase home ownership levels, particularly among minorities.
March 27th, 2009 at 7:18 pm
So, why did they come out with the post-1929 bank regulations anyway, if restructuring is too late and it’s about investor psychological changes? A lot of people in the 1930’s thought it was a good idea to change the laws to be saner anyway. What could they have been thinking?
March 27th, 2009 at 7:38 pm
But the reality is, we’re in a different world now. It’s inconceivable to me that they’ll act in precisely the same manner as they did five or ten years ago — especially if they’re much more tightly regulated.
Why is it inconceivable? It was inconceivable to Alan Greenspan that it could happen in the first place, yet it did. It was inconceivable to him because he expected bankers to act rationally (and take into consideration systemic consideration), which they did not. Why would they begin to act rationally even if the world has changed; especially when the part of the world they are concerned with (regulated finance) is only attempting to return to a situation in which thing are only out-of-control and not totally out-of-control?
The essential social problem of banking, in whatever form the problem assumes, is that the more irrationally (i.e. optimistically) bankers behave, the more money they make. This doesn’t just apply to compensation, it applies to the bank as a unit. Borrowing from the future is an optimistic (i.e. irrational) act. Taking a given amount of deposits and loaning out 20 times as much money is an optimistic (i.e. irrational) act. Loading up on the leverage is just a bigger version of the same irrational act. We tolerate this because it’s socially useful (i.e. rational, at least maybe) for us as a group to have a sub-group of people who behave this way. The people in that group do irrational for a living; the correct thing for bankers to have done long before now would have been to beg the regulators to come down on them hard, but that would reduce the amount of money they were going to make. Ah, you say, but the bankers come from nice schools and wear expensive suits. That mean they’re respectably well-dressed, NOT that they are rational.
The entire bubble series (that is, the super-bubble) 1987-2008 basically consisted of a bunch of guys daring each other to greater acts of irrationality. They didn’t learn from the S&L crisis, they didn’t learn from the Peso crisis, they didn’t learn from LTCM, they didn’t learn from the stock bubble, they didn’t learn from Enron or Worldcom. Why would they learn now? After all, the big brains have told them that all these problems were caused by government regulation, or improper performance by regulators, so obviously, it’s someone else’s fault and so that someone else can fix it. The big brains such as Larry Summers, clearly haven’t learned anything either, and they’re in charge! Thus: give us your money.
The part of the saga where bankers actually start behaving rationally is called a liquidity trap, BTW.
But soon thereafter, it went into hyperdrive bubble mode (note that the graph above is in logarithmic scale) before eventually crashing hard. And then out of the crash came the housing bubble, and now the current crash. Under the circumstances, I wonder what good is supposed to come of turning the clock back 10 years? It seems like if we somehow just manage to rewind things, that we’ll just replay the same story of bubble and bust.
But Matthew! Nobody was in power then, or Will Marshall, thinks the 90’s were bad. (They all thought that Iraq thing was pretty nifty to, at least to start with.) After all, as you said yourself, nothing really bad happened after the collapse of the stock bubble. We got through it by… blowing a ginourmous bubble in finance. And that’s why Daniel Davies said we just need to start another bubble in say, Beanie Babies. Baseball trading cards! Belly button lint!
I think the most compelling argument against the “restructure” camp is that you actually can’t put humpty-dumpty back together again so there’s no point in worrying about it.
I think that Brad DeLong’s argument about PPIP boils down to ‘Let’s do the Time Warp agaaiiiiinnnnnnnnn!’ And they might be able to make it work again. Briefly.
max
['They're going to keep trying until the system breaks down so throughly that they cannot.']
March 27th, 2009 at 7:38 pm
Econobuzz (@9) is right — just because there’s no chance the future will look exactly like the past is no reason to not try to shape the future.
One of the core problems this crisis has highlighted is the imbalance of power (read wealth) in this country. While it may have had little to do with creating the problem, the inappropriate influence of the rich is making repairs take longer and cost billions more than necessary.
If that’s to be fixed, it’s sure going to take a leader with more vision than Obama, who appears to want to make sure nothing he does can be criticized for being too bold.
March 27th, 2009 at 7:45 pm
Matt, it’s a bit disingenuous to claim that the tech bubble “proves” that Republican deregulation was somehow not responsible for the financial and real estate debacles. They’re different beasts, based on different things, and the existence of one doesn’t prove OR disprove the other.
After all, rising housing prices weren’t responsible for pets.com, either.
March 27th, 2009 at 8:08 pm
I’m a little confused by this “Obama just wants everything to be the way it was” meme that has sort of exploded lately. Yeah, they’re trying to return the financial system to its pre-meltdown state… and also, add an entirely new and existence regulatory structure that prevents banks and other firms from creating the sort of systemic risks that put us through this crisis. You can debate the effectiveness of these regulations, but I sure don’t see how adding them reaffirms the administration’s preference for the status quo.
March 27th, 2009 at 8:08 pm
It’s because Paul Krugman said it, isn’t it?
March 27th, 2009 at 8:55 pm
As long as Congress fails to deal with the economic constraint, the farther back we regress, until, say…, 1981. But I fear Obama might be going for 1969.
March 27th, 2009 at 9:30 pm
“In short, Obama and Geithner are working to restore the financial sector as it existed roughly a decade ago, before the frenzied run-up in real estate prices and the bubble in securitized loans.”
Huh? Are they?
Is Geithner trying to repeal the repeal of Glass-Steagall and force the re-separation of regular banks and iBanks?
If don’t think so, if I’m wrong tell me.
If I’m right, then in fact Geithner is NOT trying to rewind to a decade ago, as much as I might like him to.
March 27th, 2009 at 11:13 pm
You’re right: we can’t blame Bush alone for the bubbling economy, nor for the lack of regulatory oversight. It simply BLOWS MY MIND that progressive commentators turn a blind eye to the fact that the Enron fiasco took place under Clinton’s SEC, and that it was prosecuted by the Bush Justice Department! Ditto a number of others.
To paraphrase some Latin dude, who will regulate the regulators?
Trying hard not to sink into despair here…
March 28th, 2009 at 12:18 am
Very smart indeed, you are. But…Is it possible to fashion a financial environ using the Federal/US Govt intervention that will prevent bubblish meltdowns and depressions or at least ameiliorate them so as to be less disruptive and painful? We got where we are today because (fill in the blanks). With hindsight can we say with an appropriate level of certainty that if we (i.e. FedGov, the Fed, Treasure) do this, enact that, regulate them that then we can effectively defeat the powers of greed and corruption that ae always looking to beat the system e.g. Madoff/Ponzi’s/AIG? What does the brave new world of finance look like from your esteemed position? Has the US govt done anything to correct/change the game other than massive cash buyouts?
March 28th, 2009 at 12:52 am
I think the most compelling argument against the “restructure” camp is that you actually can’t put humpty-dumpty back together again so there’s no point in worrying about it.
We broke up Standard Oil, and John D. Rockefeller was merely monopolizing a market. I wouldn’t count on investor psychology having been kicked in the nuts hard enough. Break the big boys up, already.
March 28th, 2009 at 1:23 am
к прочтению…
I was developing some concern that some recent conversations I’d been a part of were based around a straw[...]…
March 28th, 2009 at 7:43 am
If you reset to 1999 with a stringent new regulatory regime, less leverage, etc., you probably have a happier outcome. It is as though the dumb mistakes of Summers, Rubin, Gramm, Greenspan, et. al., were never committed.
I am saving some outrage for the day when the big banks try to neuter the new regulations.
March 28th, 2009 at 7:54 am
я прочитал сегодня…
I was developing some concern that some recent conversations I’d been a part of were based around a straw man—the guy[...]…
March 28th, 2009 at 9:56 am
This doesn’t properly distinguish between two bad outcomes.
1.bubble and crash
2. huge taxpayer bailouts of foundational financial institutions needed.
Better regulations (e.g New Deal-style) maybe will just somewhat ameliorate (1). But for a long time they nearly eliminated (2).
March 28th, 2009 at 12:06 pm
a return to the old, black-and-white days when conservative bankers took modest risks for modest profits.
Oh, you mean those bad old days like 1945-75, when the middle class was largely created and average income and living standards skyrocketed? Oh, the horrors of economic Marxism (as the valiant and wise freedom fighter Michele Bachmann might (or did) say). By all means, let’s return to those wonderful and freedom filled last three decades when wages and living standards have stagnated for all but the upper few percent of the population. (Or in other words, yet another installment of like Paul Krugman said.)
March 28th, 2009 at 12:14 pm
Re: Matt, it’s a bit disingenuous to claim that the tech bubble “proves” that Republican deregulation was somehow not responsible for the financial and real estate debacles. They’re different beasts, based on different things
Indeed. The tech bubble was an epiphenomenon, not a primary action at all. It was based on out-of-control, indeed hysterical, levels of spending on the Y2K bug fix, and on the rush by everyone to get online (which generally involved major hardware and software upgrades too). Yes, it was a speculative bubble, but it grew out of a solid base of prosperity and a technological revolution. The housing bubble on the other hand grew out of nothing but financial chicanery: the underlying economy of the 00’s was always anemic, which is why this crash is so much worse than the tech bubble crash.
March 28th, 2009 at 1:32 pm
Oh, you mean those bad old days like 1945-75, when the middle class was largely created and average income and living standards skyrocketed? Oh, the horrors of economic Marxism (as the valiant and wise freedom fighter Michele Bachmann might (or did) say).
Yes, indeed! Everyone knows that (say) the 1950s in America marked the height of Communist domination over our society, under which Marxist-Leninism dogma controlled nearly every sector of our economy.
After all, wasn’t it well know even at the time that Eisenhower was a card-carrying Party member?…
March 28th, 2009 at 3:44 pm
After all, wasn’t it well know even at the time that Eisenhower was a card-carrying Party member?…
Actually that was the position of the John Birch Society, some of who’s descendants now run, or speak for, the GOP.