And, as I've noted previously, Robert Shiller agrees with Stiglitz on this.
Similarly, Barry Eichengreen also makes a great point when he argues that it's not only borrowers' frenzy for easy credit that's to blame for these types of problems. This is what Eichengreen has to say about who's at fault for the current European mess:
I’m not too big on the language of culpability. But it takes two to tango. For every reckless borrower there is a reckless lender. The Greeks may have borrowed too much, but someone lent them all that money. German banks and those who regulated them clearly played some role in the crisis.See here for a more detailed analysis on the role of low interest rates during the lead up to the US subprime crisis.
Eichengreen's qualification that both the debtor and creditor are to blame for misjudgments is excellent. Easy money, when well-channeled, is a balm for growth; when in the hands of unqualified individuals and institutions, easy money is a terrible risk burden to the system, and when recklessness of this nature is widespread, the economic contagion is painful for society.
ReplyDeleteIndeed, an important facet to highlight.
Well said. Also, I'd argue that the basic premise is faulty: real long-term interest rates weren't that low from a historical standpoint. We saw lower levels in the 50s and 60s.
ReplyDeleteThe JS insert was timely because it should remind polity that monetary and fiscal operations are not secured success without a strong institutional regulatory mechanism. It is critical to return to the spirit of the Fed and other Central Bankers.
ReplyDeleteIn Mr. Draghi's case, I have my doubts that the ancillary tactics deriving from the EU constitutional appendage on taxation will work in the long run. I hope that investors do not become overly aware of what the projected complicity actually does: it may actually lead to a quicker dismantling of the EZ.
Nice touch on the essentials.
I don't trust You Tube to keep this clip, so just in case, here is the transcript: "Let me begin actually with the question about the low interest rate and the extent to which that is to blame. We've had periods in which we've had low interest rates without bubbles when we had good regulation in the years after WWII. So, low interest rates do not necessarily lead to bubbles. One way I think about it is the following: if a firm came to you and said, "the reason I lost so money and did such a bad job is my workers decided they were willing to work at a low wages and that is why my profits were low and I messed up" what would you to the firm? You would say "what?!, you're complaining about low wages?" Well, what is the major input to banks and the financial system. It's capital. And they are complaining today, they're blaming the Fed because them gave capital at too low a price. That kind of argument is itself a reason why we should be worried about the financial system. If they had done their job -- and they didn't -- if they had done their job, taken that low cost capital and allocated it well to fabricate factories or go into research, we could have been having a boom now all over the world. The money could have channeled to help developing countries, into high-return investments in developing countries. So, the fundamental problem was that they allowed the banks to misallocate the capital and to channel it, didn't see the bubble was forming. Because they believed there was no such thing as bubbles. So, it was the failure of the Fed, but in its role as a regulatory authority, not in its role in failing to follow the Taylor rule."
ReplyDelete