The Dow Jones Industrial Average reached 14,253.77, a record high, going past the 14,198.1 it reached back in 2007, before the financial collapse. Does this mean the stock market, at least is fully recovered, and that the financial collapse can be declared officially over? Well, not necessarily. [Read more…]
Economics columnist Robert J. Samuelson says that the reason economic recovery is so slow in coming and the unemployment rate so high is a shift in the national psychology:
We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. [Read more…]
Some business teachers and managing consultants still use their yellowed notes about Japan’s economic success, but that is way out of date. For decades, Japan’s economy has been in the doldrums. Why? And why hasn’t their economy ever bounced back? Economics columnist Robert J. Samuelson says the problem is that Japan has relied on government stimulus. Which is basically the strategy our government wants to follow. [Read more…]
According to the left, the financial crisis was caused in large measure by the repeal of the Glass-Steagall Act, making it possible for local commercial banks to make risky investments. Business & economics columnist Steven Pearlstein–who is himself a liberal–busts that myth:
I was watching “The Newsroom” last week, the latest hit show by the producer and screenwriter, when the brainy-but-beautiful economics correspondent for the fictional cable news network was explaining to her gutsy-but-impulsive executive producer how the world’s financial system recently came to the brink of collapse.
“So after the Great Depression, Congress wanted to put a firewall between the [banks and the] investment banks. They wanted to make sure that Wall Street could melt to the ground and the commercial banks wouldn’t be touched. They passed a law, the Glass-Steagall Act. Now you could be Gordon Gekko [tycoon in the movie “Wall Street] or George Bailey [small-town banker in the movie classic, “It’s a Wonderful Life”], but you couldn’t be both.”
Then, explains the brainy-but-beautiful correspondent, Ronald Reagan launched a two-decade push toward deregulation, which culminates in the repeal of Glass-Steagall in 1999. Suddenly, Gordon Gekko could make risky bets with George Bailey’s deposits, and the rest, as they say, is history.
It was vintage Sorkin: eloquent, fast-paced dialogue that perfectly channels the liberal political/cultural zeitgeist, transforming what appears to be a complex story into a simple morality play.
The only thing is, it’s not true — not even close. Yet it has been repeated so many times — on PBS and NPR, in the liberal blogosphere, on very-serious Op-Ed pages, in an Oscar-winning documentary — that whenever I give a talk to a group of college students about the financial crisis, the first question predictably is, “Yeah, isn’t it all really about the repeal of Glass-Steagall.”
But why let facts get in the way of a good screenplay?
Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.
The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.
Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.
Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.
Did U.S. investment banks create a shadow banking system and derivatives market outside the normal regulatory framework that encouraged sloppy lending and created what turned out to be toxic securities? You betcha.
And did regular banks make some of those bad loans and buy up some of those toxic securities? Yes, they did.
But that was as much a problem at the banks and investment banks that combined as those that remained independent. More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.
Europeans are torn about the best approach to fix their messed-up economies: austerity (cutting government budgets and deficits) or stimulus (the government spending even more money and running up even bigger deficits in an effort to jump-start economic growth). Austerity, as recommended by Germany, had been the plan, but recent elections in France and Greece have favored the pro-stimulus side. Who is the role model for this position? President Barack Obama and his stewardship of the American economy. See Germany, U.S. head to G-8 summit with starkly different economic policies – The Washington Post.
Historian Richard Striner proposes a solution for our economic woes:
Using the monetary methods of Lincoln, updated to employ the inflation-fighting tools of the Federal Reserve, we could pay for a faster recovery and a great many worthy projects without higher taxes, without more national debt, and believe it or not, without inflation. How? By letting Congress exercise a little-known power that is used (very quietly indeed) by the Federal Reserve: the power to create new money.
If you’re skeptical about this assertion, ask Federal Reserve Chairman Ben S. Bernanke. In an interview with 60 Minutes on March 15, 2009, Scott Pelley asked Bernanke to state the cost to American taxpayers of the Fed’s attempts to prop up banks.
Bernanke: “It’s not tax money. The banks have accounts with the Fed … so, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money.”
Pelley: “You’ve been printing money?”
Bernanke: “Well, effectively.”
If the Federal Reserve can create new money, couldn’t Congress do the very same thing? The answer is yes, and here’s the precedent: the Legal Tender Act of 1862, in which the Republican-controlled Congress authorized creation of “United States Notes,” known as greenbacks, that were printed up and spent into use.
He is serious. His reasoning about how this could work defies excerpt, so read it yourself.