Saturday, November 8, 2008

Financial Crisis: Revisited

Hey folks, since I finally finished my series on the financial crisis, and since we now have a new administration - I thought I would re-post the links.

Financial Crisis Part I: The Antebellum - details the fairly immediate domestic historical causes of deregulation and the housing bubble. There is more that could be said here about the impact of international globalization, portfolio account liberalization, parallels with the East Asian crisis of 1997, and if the IMF has a role - but for now I'll leave those issues alone.

Financial Crisis Part II: The Conflagration - details the majority of the major banking collapses (I wrote this before Washington Mutual collapsed and merged with JP Morgan Chase). It also gives a sketch of the bailout and impact on national debt, trying to keep things in perspective. I think, in retrospect, that my critique was a bit conservative in this section, and the move towards actual equity shares in the banks is a good one, because it confers additional and more sustained oversight. One thing to keep in mind: the social role of the financial sector is not to make profits, it is to provide stability, transparency, and liquidity to producers and consumers alike - so that the economy continues to function. It needs to do this efficiently, but we need to remember that financial profits do not generally reflect actual productivity increases or the health of the real economy. In fact, when fueled by speculative investment, they typically prop up bubbles like the one we just saw. If there is any segment of the economy that should be stringently regulated, even to the point of quasi-nationalization, it is the banking sector (I do make this point in part III).

Financial Crisis Part III: A New Regulatory Framework - details my take, based partly on analysis from Dean Baker at CEPR (who, incidentally, is one of the few economists who has legitimately predicted all of this for years), on how we can input smart and targeted regulation to prevent the excesses of speculative activity, provide public oversight, and root the calculus of financial companies in long-term sustainable profits - rather than short-term bubble-burst activity.

So - for those who missed it the first time, or who are new readers, or only read part of it - there is my take on what we should do (roughly).

To come later - I will probably try and provide a framework for the Obama administration - how we should be focusing on changing or restructuring our society to be more dynamic, sustainable, and capable of providing legitimately equal opportunity for all.