Skuldfrågan Finanskrisen Who is responsible for the Financial Crisis?

Innan ett kreditinstitut beslutar att bevilja en kredit skall det pröva risken
för att de förpliktelser som följer av kreditavtalet inte kan fullgöras.
Institutet får bevilja en kredit bara om förpliktelserna på goda grunder kan förväntas bli fullgjorda.
Banklagen 8 kap. 1 §

Populism is the true legacy of the global financial crisis
The ‘hard working classes’ so beloved of politicians were the victims of the crash
Philip Stephens FT 30 August 2018

The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders.

The culprits, who include bankers, central bankers and regulators, politicians and economists, have shrugged off responsibility.

Populism was not sparked by the financial crisis
If there has been a rupture or inflection point in the postwar history of the republic, it was the Vietnam war,
with its compound traumas of bloodshed abroad and rancour at home.
Janan Ganesh FT 29 August 2018

Ten years after Lehman collapse few lessons have been heeded
Rating agencies still wield huge influence and investment executives remain unaccountable
To be clear, nobody expects economic models to predict crises, future prices and recessions with total accuracy.
But at least they should be able to explain the basic functioning of the economy.
Arturo Cifuentes FT 22 August 2018

Western businesses have slipped jobs overseas to countries with low labor costs,
while the middle class has been pushed into debt in order to try to keep up.
The Glass-Steagall law and other brakes on American banks were abolished by a cheerleader for globalization, Bill Clinton,
and these banks subsequently lost all restraints in their enthusiasm to lend.
The cherry on top of the sundae was the real estate bubble and ensuing crash of 2008
Enrico Verga via nakedcapitalism.com 20 July 2018

What really went wrong in 2008?
"Even people who have followed this story closely will learn a great deal."
Crashed: How a Decade of Financial Crisis Changed the World, Book by Adam Tooze
Martin Wolf FT’s chief economics commentator 17 July 2018

We are still groping for truth about the financial crisis
It has been eight years since Lehman Brothers went bankrupt and still it defines the calendar.
For anyone in the financial world, time is divided into Before Lehman, and After Lehman.
John Authers, FT 16 September 2016

Senator Elizabeth Warren wants law enforcement officials to tell her
why none of the individuals referred to them by the Financial Crisis Inquiry Commission
for potential law-breaking related to the crisis were ever prosecuted.
MarketWatch 15 September 2016

Some people never learn. They follow the same path that destroyed their finances in the past.
Wall Street is desperately packaging the increasing amounts of subprime slime in new derivatives of mass destruction and peddling them to clients, while shorting those same derivatives.
It’s called the Goldman Sachs method. When home prices begin to tumble, these derivatives will self-destruct again.
What is happening today is nothing more than rearranging the deck chairs on the Titanic.
zerohedge 25 September 2015

One of the things that occurred to me is the consequence of the 2008 crisis.
I knew something was brewing, but I missed the actual date as frankly did everybody else.
Alan Greenspan, Telegraph 10 August 2015

As far as I can find, almost no one in the profession – not even luminaries like John Maynard Keynes, Friedrich Hayek, or Irving Fisher – made public statements anticipating the Great Depression.
As the historian Douglas Irwin has documented, a major exception was the Swedish economist Gustav Cassel.
Robert J. Shiller, Project Syndicate 15 January 2015

A month before the start of the financial crisis,
the Bank of England was apparently unaware of the impending danger, new documents reveal.
In a unique insight into its workings, the Bank has published minutes of top-secret meetings of its governing body, the Court, between 2007 and 2009.
BBC 7 January 2015

The minutes show that the Bank did identify liquidity as a "central concern" in July 2007.
However no action was taken as a result.

Lord John McFall, chairman of the treasury select committee at the time, told the BBC: "They all missed wider picture.
"They missed the interconnectedness of the whole financial system...when Lehman went down it was a real catastrophe."

The mismanaged collapse of Northern Rock before it collapsed into public hands.
Before the crisis, the Bank did not have oversight of individual institutions, and there was no mechanism for banks at risk of failure.
Telegraph 7 January 2015

In my book The Shifts and the Shocks, I argue that pre-crisis trends
– huge global current account imbalances, rising inequality and weak propensity to invest –
had already created weak underlying demand in high-income countries.

The de facto response of policy makers was toleration, if not promotion, of credit booms.

When these collapsed, extraordinary policy easing was needed both to replace the lost demand impetus from the credit bubbles and to
offset the drag on demand from debt overhangs, predominantly in private sectors:

too many people had borrowed too much.

Martin Wolf, FT October 9, 2014

Why Weren’t Alarm Bells Ringing?
The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis by Martin Wolf
Paul Krugman, New York Review of Books, October 23, 2014 Issue

Almost nobody predicted the immense economic crisis that overtook the United States and Europe in 2008.
If someone claims that he did, ask how many other crises he predicted that didn’t end up happening.
Stopped clocks are right twice a day, and chronic doomsayers sometimes find themselves living through doomsday.

But while prediction is hard, especially about the future, this doesn’t let our economic policy elite off the hook.

On the eve of crisis in 2007 the officials, analysts, and pundits who shape economic policy were deeply, wrongly complacent.
They didn’t see 2008 coming; but what is more important is the fact that they even didn’t believe in the possibility of such a catastrophe.

Greenspans bok om finanskrisen sågas
”The map and the territory”
Den är tänkt som en analys av vad som gick snett före krisen
men slutar med försvaret att alla missade varningssignalerna.
SvD Näringsliv 22 oktober 2013

Resorting all too freely to the first person plural, Greenspan describes the book as “an effort to understand how we all got it so wrong, and what we can learn from the fact that we did.”
The remarkable thing is that Greenspan continues to get it wrong.
Daniel Akst, Bloomberg, Oct 17, 2013

It’s time to pounce on Alan. That’s Alan as in Greenspan, whose new book — “The Map and the Territory: Risk, Human Nature, and the Future of Forecasting ” — has just appeared. It provides a fresh opportunity for critics to attack the former chairman of the Federal Reserve Board (1987-2006).
Here are some samples.
Robert J. Samuelson, October 28, 2013

"One thing that shocked me is that
not only did the Federal Reserve's very sophisticated model completely miss (the Lehman crash on) September 15th, 2008,
but so did the IMF, so did JP Morgan, which was forecasting American economic growth three days before the crisis hit, going up all through 2009 and 2010."
Alan Greenspan, BBC, 20 October 2013

There is a difference between predicting economic bubbles, and predicting when they might burst, he said.

Who Predicted The Global Financial Crisis?
Michael J. Panzner, Financial Armageddon

When the Queen asked asked an academic at the LSE why the economics profession had failed to predict the credit crunch, she raised a topic which continues to resonate.
Although many answers have been given to Her Majesty’s question, I suspect that none of them has really settled the issue. Her question is disarmingly simple, but the answer is not.
Gavyn Davies blog, February 10, 2011

Way back in 2009, I gave 10 reasons Why Economists Missed the Crises.
About economists in general, and the failure of economics the discipline specifically.
Barry Ritholtz, August 6th, 2013

Note that I find economists to be intelligent, engaging and often charming. My references here are not to the people who call themselves economists, but rather to their work product that we call “economics.”

To what extent was the economics profession to blame for the financial crisis?
Misunderstanding Financial Crises: Why We Don’t See Them Coming, by Gary B. Gorton, Oxford University Press
Review by John Plender, FT January 13, 2013

Many would agree with Paul Volcker, former chairman of the US Federal Reserve, when he pointed in The New York Review of Books in 2011 to “an unjustified faith in rational expectations, market efficiencies and the techniques of modern finance”.

It needs to be clearly and widely understood that
the City is trying to destroy King's reputation for the simple reason that he is pretty much the only senior UK policy-maker still arguing for the kind of robust bank regulations,
much tougher than those currently proposed, that are needed to prevent another serious financial meltdown.
Liam Halligan, Telegraph 5 May 2012

The negative-publicity campaign against King, years in the making but seriously escalated last week, is being staged by the same "vested interests" which he, almost alone among Western central bankers, has dared to face-down. As such, the investment banks drip their poison, the PR agencies punt it and knocking-copy sells papers – not least when times are tough.

The Governor is determined to do everything he can, before his term expires in June 2013, to rein-in UK banks. The City doesn't want that, of course. So history is being re-written, with King being accused of all manner of things in order to undermine his authority.

Sir Mervyn King has said - in a rare admission
- that the Bank of England failed to do enough to warn about the risks building up in the banking sector ahead of the financial crisis.
"We did preach sermons about the risks. But we didn't imagine the scale of the disaster that would occur when the risks crystallised,"
Telegraph 3 May 2012

"With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called 'light-touch' regulation hadn't prevented any of this ...
He said the Bank "tried, but should have tried harder" to persuade everyone of the need to recapitalise the banks sooner and by more.

Remove the punch bowl
Sir Mervyn (nice picture) is wrong to imply the Bank had no policy tools to intervene effectively.
There was a boom before the bust – a credit boom, as we all know.
It could have been curbed with higher interest rates.
Damian Reece, Telegraph 2 May 2012

The risk of slowing growth, or even a mild recession, would have been preferable to the disaster that befell us. Raising rates would have sent a very obvious signal and would have removed the punch bowl from an already rowdy party.

Sir Mervyn is keen on the punch bowl cliche to describe how the Bank will act in future, but he's failed here before.

The boom and bust of Mervyn King
It looks like a powerful admission of error on his part. But...
When any of us say "if I knew then what I know now", we are excusing ourselves, rather than apologising.
Robert Peston, BBC Business editor, 3 May 2012

I had heard all of that before, in his speeches, evidence to the Treasury Select Committee and briefings, as a recurring theme since the banking and finance debacle of four years ago that has hobbled our economy.

In a way, I underestimated the power of the BBC's Today programme, in that it provides a megaphone that turns almost anything he (or perhaps anyone) says into news.

His phrase that seems to have caught much of the media's imagination was: "We should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so called 'light-touch' regulation hadn't prevented any of this."

Sir Mervyn put it this way: "Whether in this country, the United States, or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom".
The moment he said it, he raised a few hackles. His former colleague from the BoE's Monetary Policy Committee, Andrew Sentance, tweeted: "disagree with Mervyn King that fin crisis was bust without a boom...it was just very long boom!"
Mr Sentance added: "Boom in areas where central bankers not looking!"

How Sir Mervyn King has rewritten history
“Our banking system is much more resilient than in the past,”
the Governor declared on August 8, 2007, the day before the credit crunch struck.
Philip Aldrick, Economics Editor, Daily Telegraph 3 May 2012

In his version of events, had the Bank been in charge of financial regulation, Britain would not be where it is today. It was powerless, though, because Gordon Brown had stripped it of every tool bar the megaphone.
“We did preach about the risks,” he said, seeming to add silently that it wasn’t the Bank’s fault if no one listened.

En del bedömare /däribland Lars Jonung/ tror att Greenspan i USA
skulle ha kunnat undvika finanskrisen genom att hålla högre styrränta.
Men kapitalet från Kina hade sannolikt ändå sänkt räntan.
Danne Nordling, 7 september 2011

Den stabiliseringspolitiska diskussionen kompliceras av att många inte kan hålla isär de långsiktiga frågorna från vad som borde göras om man redan råkat ut för en konjunkturnedgång, speciellt om den också utlöst en finanskris.

Ett exempel på detta är de motstridiga synpunkter som kommer på den amerikanska återhämtningen, som nu går oväntat knackigt.

RE: Kapitalet från Kina anges som en förklaring till det som brukade kallas "Conundrum"

38 olika förklaringar till krisen
Greenspans politik var nödvändig och tillräcklig för finanskraschen.
Lars Jonung, professor i nationalekonomi vid Lunds universitet och ny ordförande för Finanspolitiska rådet, DN 7 september 2011

Med början 2007 gled den amerikanska ekonomin ned i den mest allvarliga krisen sedan 1930-talets depression: vem eller vad vållade krisen?
I en översikt vaskar Howard Davies vid London School of Economics fram 38 olika förklaringar till krisen;

Kommissionen resonerar som om den amerikanska krisen skulle vara unik – utan föregångare. Så är inte fallet. Den följer det traditionella mönstret för finanskriser.

Först kommer en period med alltför snabb ökning i kreditvolymen i förhållande till tillväxten i samhällsekonomin. Priset på olika tillgångar som hus och aktier pressas upp till ohållbara nivåer.

De övriga krisförklaringarna förutsätter nämligen att penningpolitiken är starkt expansiv under lång tid. Tillsammans med Feds politik blev de till slut delar av en explosiv cocktail.

Greenspan - en gång ”maestron”– framstår i dag som en misslyckad centralbankschef som alltför länge berusade sitt land med billiga krediter.

Nationalekonomi i kris.
Eurokrisen fördjupas och Tyskland räknar på en grekisk konkurs.
Men samtidens stora orakel, ekonomerna, som med hjälp av sina modeller satte den politiska agendan i 25 år, har nu tystnat.
Claes Lönegård, Fokus, 16 september 2011

"Nu har jag försökt göra mig till ovän med så många grupper av ekonomer som möjligt. Jag tror att jag har fått med de flesta: andra makroekonomer, finansiella ekonomer, ekonomhistoriker, centralbanksekonomer, ekonometriker plus alla andra som inte vill prata om samma saker som jag själv på kafferasterna. Jag har även varit lite kritisk mot mig själv."

Kollegorna i panelen tittade på honom. Kollegorna i publiken tittade på honom.

Vad var det Lars Calmfors, den svenska nationalekonomins enda fixstjärna, just hade sagt?

2003 kunde nobelpristagaren och en av de mest betydelsefulla nationalekonomerna genom tiderna, Robert Lucas, som kallats »The Keynes Killer«, i ett tal hos amerikanska ekonomföreningen, stolt deklarera:

– Makroekonomin har i sin ursprungliga mening uppnått sitt mål: det centrala problemet med att förhindra depressioner är i praktiken löst, och har faktiskt varit löst i flera decennier.

I ett kvarts sekel såg ekonomerna ut att ha det mesta under kontroll. Men det fanns ett stort problem, vilket skulle visa sig med all kraft hösten 2008. Modellerna – så kallade DSGE-modeller – som de bräckta ekonomerna arbetade med, oavsett vilken skola de i grunden tillhörde, saknade i nästan samtliga fall en sak.

Där fanns ingen finansmarknad, och således inga banker, och därmed inget Lehman Brothers.

Enligt teorierna om jämvikt kunde ju inte finansmarknaden hamna i kris, och skulle den mot förmodan hamna i kris skulle den inte dra med sig resten av ekonomin.

Dagen då Lehman Brothers föll blev därför också dagen då den nationalekonomiska makroteorin föll från sin piedestal. Eller som domen från den kanske mest kända nationalekonomen av dem alla i dag, den amerikanska nobelpristagaren Paul Krugman, lyder:

– Det mesta av de senaste trettio årens arbete inom makroekonomi har som bäst varit uppseendeväckande värdelöst, och som sämst direkt skadligt.

Lars Pålsson Syll är en »one man show« – som han själv beskriver det – inom svensk nationalekonomi. Om rådande nationalekonomin säger han:
– I den framställs ekonomin i grunden som en bytesekonomi, då missar man det helt avgörande inslaget av pengar, finanser och osäkerhet.

Lars Pålsson Sylls kamp mot allt vad rationella förväntningar och effektiva marknader heter var länge tröstlös. Liksom hans försök att få kåren att börja läsa Keynes klassiker och inte bara urvattnade nykeynesianer. Så kom den ekonomiska krisen, som i Lars Pålsson Sylls ögon gav honom rätt. Men nej, inte började man lyssna på honom för det.

På samma tema har Vetenskapsradion diskuterat 16 mars 2010 (Tson Söderström och de Vylder).
En sorts uppföljning av ekonommötet finns dessutom i Ekonomisk debatt 4/10 som jag skrev om 11/6-10.
Allmänheten är tydligen missnöjd med att ekonomerna varken kunde förutse den stora recessionen 2008 eller hur den skulle bekämpas.
Danne Nordling 19 sept 2011

Men vare sig man är makroekonom av lucasianskt eller keynesianskt snitt borde man ha haft ögon att se med. År 2007 hade det uppdrivna bostadsbyggandet i USA oavbrutet, kvartal för kvartal, i två år fallit motsvarande 2,5 procent av BNP.
Det borde ha fått alarmklockorna att ringa hos alla makroekonomer.

Flytande krona mer stabil än euron
Bengt Kriström Jonas Ljungberg Birgitta Swedenborg Lars Pålsson Syll
SvD 3/6 2003

Keynes
Finding the human causes of this financial crisis can set us on the road to recovery
The starting point is to recognise that this proto-depression is not natural or inevitable. It is not the result of destruction through earthquake, or famine.
It results from human actions and inactions.
Roger Bootle, Daily Telegraph 9 Oct 2011

Although there have been recessions ever since the beginnings of the industrial economy, the natural state of the modern world is for demand to grow roughly in line with potential output, thus producing sustained economic growth.

Indeed, precisely because of this, for two centuries, economists were unaware of the problem of chronically deficient aggregate demand and they developed economics pretty much without any reference to it. Until Keynes.

Confronting the painful reality of depression conditions in the 1930s, he explained how this happened, why it might persist and what needed to be done to overcome it.

The reputation of economists, never high, has been a casualty of the global crisis.
Ever since the world’s financial system teetered on the abyss following the collapse of Lehman Brothers three years ago next month, critics from Queen Elizabeth II downwards have posed one uncomfortable yet highly pertinent question:
are economists of any use at all?
John Kay, FT 25 August 2011

Economic systems are typically dynamic and non-linear.
This means that outcomes are likely to be very sensitive to small changes in the parameters that determine their evolution. These systems are also reflexive, in the sense that beliefs about what will happen influence what does happen.

A vocal minority who have responded cynically to the insatiable public demand for forecasts. Mostly they are employed in the financial sector – for their entertainment value rather than their advice.

Even if sharp predictions of individual economic outcomes are rarely possible, it should be possible to describe the general character of economic events, the ways in which these events are likely to develop, the broad nature of policy options and their consequences.
It should be possible to call on a broad consensus on the interpretation of empirical data to support such analysis.
This is very far from being the case.

The reckless masters of "economic armageddon"?
There have been many books written about the financial crisis: What caused it, who’s to blame and how it could have – and should have – been prevented
This new one, “Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon,” lives up to its lengthy title and gets deep into the weeds of who did what, when and how.
In short, Gretchen Morgenson and Joshua Rosner name names and connect the dots.
CNN 27 May 2011 with nice pic

Financial Armageddon:
Protecting Your Future from Four Impending Catastrophes
Crash Proof: How to Profit from the Coming Economic Collapse
Time 30/3 2007

"I wrote the software that turned mortgages into bonds"
Michael Osinski’s reflection on his Wall Street days when he created the software program
that turned mortgages into mortgage backed securities, enabling them to be traded around the world.
via Tim Iacono, May 18, 2011

In the depths of the financial crisis, many analysts pointed to the role of economics in causing the debacle.
Since then, though, whereas the bankers have been subject to continual harassment and threats of reform, the economists have managed to slip away into the night.
The searchlight needs to pick them out again. Having played a major role in causing the financial crisis, heaven knows what future disasters they will spring on us.
Roger Bootle, Daily Telegraph 24 Apr 2011

25 People to Blame for the Financial Crisis
The good intentions, bad managers and greed behind the meltdown
Time Magazine January 2011

A Senate panel issued a scathing report that describes
Goldman Sachs as a "case study" of the recklessness and greed on Wall Street
that set off the 2008 financial crisis.
CNN 14/4 2011

The 600-page report also blames the lending practices of big commercial banks, such as the now-defunct Washington Mutual, for plunging the U.S. economy into a painful recession.

It is a question asked repeatedly across America:
why, in the aftermath of a financial mess that generated hundreds of billions in losses,
have no high-profile participants in the disaster been prosecuted?
New York Times, 14 Apr 2011

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

The unpopularity of very low interest rates leads to what is known in financial circles as “the search for yield”.
It is this that lies behind the banking scandals, the epidemic of frauds and, on a lesser level,
the public toleration for bankers’ refusal to pass on to their customers the very low “policy interest rates” established by central bankers
Samuel Brittan, FT March 31 2011

We economists are charged with understanding and protecting the economy; we´re supposed to spot economic disasters before arise and recommend solutions. Unfortunately, we failed in our fiduciary duty.

With rare exceptions, those of us manning the watch - the economists hired by the government and the business world - missed what was coming, were shocked when it happened, exacerbated the public´s fear, and are now helping resurrect the system that failed so miserably.

The rest of us - academic economists like myself - were perched in ivory towers, too high above the deck to see the pervasive financial malfeasance that was underway. We had a clear view had we looked, but we were researching our imaginary world in which people play by the rules. Consequently, we had even less clue that the nation´s largest financial companies, aided and abetted by the rating companies, politicians and regulators, were madly driving our economy straight toward the rocks.

They reached their destinati on. The economy is now firmly on the shoals and in ongoing danger of completely breaking up.

Given that our economy is in DEFCOM 1 or very close to that condition, it´s all economic hands on deck. Every economist has an obligation, regardless of her or his specialization, to focus on this economic emergency - to understand what really went wrong and to help make sure this never, ever happens again.

According to Bethany McLean and Joe Nocera, two of America's most acclaimed business journalists, no-one has put all the pieces of the financial crisis together.
The finger was pointed at greedy traders, cowardly legislators and clueless home buyers, but many devils helped bring hell to the economy.
"All The Devils Are Here" goes back several decades to explore the motivations of everyone from CEOs and politicians to anonymous lenders, borrowers and Wall Street traders.
It exposes the hidden role of companies including AIG and Goldman Sachs. It delves into the powerful mythology of homeownership.
And it proves that the crisis ultimately wasn't about finance at all; it was about human nature.
' Bethany McLean's "The Smartest Guys in the Room" was the best Enron book on a crowded shelf.
"All the Devils Are Here" will be remembered for finally making sense of the meltdown.
Says the publisher

The International Monetary Fund badly missed the risks that led to the global financial crisis
because of a naive admiration of light-touch US and UK financial regulation and a “groupthink” mentality
FT February 9 2011

A sharply critical report from the fund’s independent evaluation office, published on Wednesday, said that the IMF was very late to spot the severe interconnected problems in the world’s advanced economies.

As late as the summer of 2008, the IMF’s management was confident that “the US has avoided a hard landing” and “the worst news are [sic] behind us”, the report said.

Gordon Brown told a US conference he had not realised the "entanglements" of global institutions
BBC 11/4 2011

He said: "We set up the FSA [the City regulator] believing the problem would come from the failure of an individual institution. That was the big mistake.

Mr Brown said he had to "accept my responsibility" but added he was not the only one who had made mistakes.

The most interesting moment at a recent conference held in Bretton Woods economic came when Martin Wolf quizzed Larry Summers
"[Doesn’t] what has happened in the past few years, simply suggest that [academic] economists did not understand what was going on?”
Here is the most interesting part of Summers’ long answer:
“There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.”
That may sound obscure to a non-economist, but it was a devastating indictment.
J. Bradford DeLong, 2011-04-29

Summers then enlarged his answer to include living economists: “Eichengreen, Akerlof, Shiller, many, many others.” He talked about “the revolution in finance as it was realized that asset prices show large volatility that does not reflect anything about fundamentals,” but added that
“macroeconomics [did not] keep up with [this] revolution.” As a result,

“to the great detriment of contemporary macroeconomics,” his fellow economists did not understand asset prices, manias, panics, and liquidity.

The Sorrow and the Pity of Another Liquidity Trap
I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed.
Brad DeLong, Bloomberg 5 July

As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money.
Bill Gross, Pimco, February 2011

Hang your heads, moneychangers. And no, it is not yet time to move on, as many banking CEOs suggest. How can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance?

Central bankers have lowered the cost of money for 30 years now, legitimately following global disinflationary forces downward, but also validating increased leverage via lower real interest rates.

Today’s rock-bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset-based economy that promotes unsustainable wealth creation and a false confidence in perpetual capital gains.

The Black-Scholes equation was the mathematical justification
for the trading that plunged the world's banks into catastrophe
Ian Stewart, The Observer, 12 February 2012

The equation itself wasn't the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren't appropriate. The trouble was its potential for abuse. It allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.

“Economics is a science of fashions – Keynes and ‘pump-priming’ at one time, Friedman and monetarism at another,”
the Franco-American mathematician, Benoît Mandelbrot, who died last week at 85, wrote in "The (Mis)behaviour of Markets", a book he co-authored with Richard L. Hudson in 2004.
By Christopher Caldwell, FT October 22 2010

“The profession burns through new theories the way a teenager hops from one new date to another:
it meets them, spends some time with them, examines them, finds what it thinks are flaws, and then drops them for a newer face.”

Eugene Fama, developer of the efficient market hypothesis, was one of his students, but Mandelbrot grew less impressed with such theories as years went on. The capital asset pricing model developed by several analysts in the 1960s, Harry Markowitz’s modern portfolio theory, the Black-Scholes equation for pricing options – all of these came in for Mandelbrot’s scorn

This item from June 11, 2007
Are most economists naive?
Tim Iacono On October 5, 2010

The conclusion that most economists are naive, sometimes dangerously so, is something that has been hinted around at here for years, but now that the Wall Street Journal seems to concur, maybe it’s time to stop asking the question and just say it.

Rädsla och girighet blev HQ:s fall
en stor, etablerad revisionsfirma som KPMG medverkat
Björn Elmbrant, Dagens Arena 30 augusti, 2010

HQ Banks fall tydliggör också två av skälen till varför vi hamnade i finanskrisen – att myndigheternas tillsyn är för snäll och att revisorer ofta ser mellan fingrarna.

Redan 2007 skrevs det mycket om HQ Banks affärer, året efter fick man en varning av Finansinspektionen.
Ändå har det dröjt till nu innan myndigheten vaknat på allvar.
Och vad ska man säga om att en stor, etablerad revisionsfirma som KPMG medverkat i att dölja HQ Bank svaga affärer?
Man anar att också revisorerna kan ha styrts av den rädsla och girighet som Mats Qviberg brukar tala om.

HQ:s revisor synas
Revisorsnämnden har beslutat att granska HQ:s revisor Johan Dyrefors.
Det är andra gången på kort tid som revisionsbyrån KPMG är inblandad i en tradingskandal.
SvD Näringsliv 31 augusti 2010

Or maybe it’s become just too obvious that we created the financial crisis.
As even Oliver Stone showed in his movie, we borrowed all that money and thought the housing boom would never end.
We saw the risks in the disclosure documents but ignored them, or refused even to look. We heard the doomsayers and preferred to ignore them. We elected the politicians who subsidized the housing bubble, and decided which firms should live and which should die.
Maybe we have seen the face of the financial crisis. In the mirror.
Larry Ribstein.THE CREATIVE DESTROYER blogs.forbes.com Sep. 26, 2010

As the third anniversary of the credit crunch approaches, I have been doing some reflecting on where I went wrong as an economist.
As the greenest student of economics will tell you, there are counter-examples to the principle that markets work and the financial system of the past five years has made a compelling case to be added to the list.
Tim Harford, FT August 3 2010

Many elements of the crisis were provoked not by irrational behaviour but by rational responses to perverse incentives. Too many people were able to take the following bet: “Heads I win, tails the financial system loses.”

True, the crisis has provided yet another feather in the cap of the behavioural economist Robert Shiller.

The crisis provided just as much vindication for Raghuram Rajan, an eminent but perfectly orthodox Chicago-school economist, who in 2005 pointed to elevated house prices

Similarly, my colleague Gillian Tett made headway because she asked simple but probing questions: Where had all these derivatives come from?

what I got so wrong: I thought that the details did not much matter. Derivatives sounded like a sensible idea in principle and that was all I needed to know.

I sometimes joke that although I didn’t know anything about banking when the credit crunch began, at least the people running the banks didn’t know anything about banking either. The joke always gets a laugh. I wonder if it is really that funny.

Claremont Review of Books Spring 2010
Bubbles, Bubbles, Toils and Troubles
Robert J. Samuelson in the Spring 2010 issue of the Claremont Review

This Time Is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth S. Rogoff
Manias, Panics, and Crashes: A History of Financial Crises (5th Edition), by Charles P. Kindleberger and Robert Aliber
The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, by Justin Fox
Slapped by the Invisible Hand: The Panic of 2007, by Gary B. Gorton
In Fed We Trust: Ben Bernanke's War on the Great Panic, How the Federal Reserve Became the Fourth Branch of Government, by David Wessel

In 1984, I bought my London house. I estimate that the land on which it sits was worth £100,000 in today’s prices. Today, the value is perhaps ten times as great.
The people of the US, UK, Spain and Ireland became feverish speculators in land.
Today, the toxic waste poisons the entire world economy.

Martin Wolf, FT July 8 2010

Conundrum
After numerous boom-bust cycles driven by domestic safe asset shortages,
emerging markets learned to export rational bubbles to economies with a comparative advantage in generating safe assets.
Mike Story (hm), FT July 14 2010
Highly recommended

Sverige, Estland och Luxemburg
Den ekonomiska krisen har slagit sönder många länders offentliga finanser.
3 av 27 länder som inte är föremål för EU:s underskottsförfarande
Anders Borg DN Debatt 2010-07-13

Det är en historiskt kraftig kris vi upplevt. Vi vet var den hade sina rötter. Den grodde i en jordmån av global makroekonomisk obalans, nya komplexa värdepapper, otillräckliga regleringar, bristande tillsyn av finansmarknaderna samt girighet och ansvarslöshet hos aktörer som ständigt gapade efter mer.

I återgången till hållbara offentliga finanser är implementeringen av stabilitets- och tillväxtpakten avgörande.

I dag kommer vi att fatta beslut om att inleda underskottsförfarande för Finland, Danmark, Bulgarien och Cypern. Därmed kommer det bara att vara 3 av 27 länder som inte är föremål för underskottsförfarande (Sverige, Estland och Luxemburg).

"Den ekonomiska krisen har slagit sönder många länders offentliga finanser"
Det skriver Anders Borg. Det var alltså krisen som orsakade underskotten, inte tvärtom.
För mer härom se Stabiliseringspolitik.

En vanlig uppfattning inom ekonomisk forskning är att bubblor är svåra, eller omöjliga, att peka ut innan de brister.
Egenskaperna hos bubblor brukar vara desamma oavsett om det handlar om tulpaner, bopriser eller aktier.
Edward Chancellor, DI 2010-06-04

Morgan Stanley’s former Asia chief Stephen Roach:
“Alan Greenspan kept the policy rate too low for too long, set us up for credit and property bubbles that led to an enormous crisis, [and] I think Ben Bernanke is just rerunning the Greenspan movie of seven or eight years ago.”
You’ll read much the same thing from Roach on this very first TMTGM post from about five-and-a-half years ago
July 9, 2010, by Tim Iacono

Member countries share a common currency, but when it comes to sovereign credit they are on their own.
This fact was obscured until recently by the willingness of the European Central Bank (ECB) to accept the sovereign debt of all member countries on equal terms at its discount window.
This allowed the member countries to borrow at practically the same interest rate as Germany,
and the banks were happy to earn a few extra pennies on supposedly risk-free assets by loading up their balance sheets with the government debt of the weaker countries.
These positions now endanger the creditworthiness of the European banking system.
"The Crisis & the Euro", George Soros, New York Review of Books, August 19, 2010

For instance, European banks hold nearly a trillion euros of Spanish debt, of which half is held by German and French banks. It can be seen that the European sovereign debt crisis is intricately interconnected with a European bank crisis.

The Fund is guaranteed not jointly but only severally, so that the weaker countries will in fact be guaranteeing a portion of their own debt. The Fund will be raised by selling bonds to the market and charging a fee on top. It is difficult to see how these bonds will merit an AAA-rating.

The European Union was built by a process of piecemeal social engineering: indeed it is probably the most successful feat of social engineering in history. The architects recognized that perfection is unattainable. They set limited objectives and firm deadlines. They mobilized the political will for a small step forward, knowing full well that when it was accomplished its inadequacy would become apparent and require further steps. That is how the six-nation Coal and Steel Community was gradually developed into the European Union, step by step.

The Maastricht Treaty contained a clause that expressly prohibited bailouts and that ban has been reaffirmed by the German constitutional court. It is this clause that has made the current situation so difficult to deal with.

Now that several countries are far away from the Maastricht criteria, there is neither an adjustment mechanism nor an exit mechanism. Now these countries are expected to return to the Maastricht criteria even if such a move sets in motion a deflationary spiral. This is in direct conflict with the lessons learned from the Great Depression of the 1930s, and is liable to push Europe into a period of prolonged stagnation or worse. That will, in turn, generate discontent and social unrest. It is difficult to predict how the anger and frustration will express itself.

When all the member countries try to be like Germany they are bound to send the eurozone into a deflationary spiral.

First, the current crisis is more a banking crisis than a fiscal one. The continental European banking system was never properly cleansed after the crash of 2008. Bad assets have not been marked-to-market—i.e., valued according to current market price— but are being held to maturity.

Second, a tightening of fiscal policy must be offset by a loosening of monetary policy. Specifically, the ECB could buy Spanish treasury bills,

Third, this is the time to put idle resources to work by investing in education and infrastructure.

Supporting Merkel’s approach, the G-20 endorsed a halving of budget deficits by 2013 as the target. This has extended the threat of a deflationary spiral to the global economy, making the experience of the 1930s even more relevant than it was when I gave much of the preceding text as a speech at Humboldt University.

The euro was meant to be a monetary union but not a political one. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro.
George Soros FT February 21 2010

It was the banks and other financial institutions (e.g. pension funds, insurance companies) that facilitated the boom at the periphery of the eurozone by lending huge sums to Spain, Greece, Ireland and Portugal under virtually the same conditions as those applicable to Germany and the Netherlands.
In doing so they failed to charge a realistic risk margin. One of the consequences was that European leaders were lulled into a false sense of security. After all, if the financial markets didn’t envisage any problems, why would Europe’s leaders – themselves mere mortals – be troubled? Surely the markets are always right?
Heleen Mees, Eurointelligence 10 June 2010

Bra film av Johan Norberg om finanskrisen, men utan svar
"överdos - en film om nästa finanskris"
Rolf Englund blog 2010-05-04

Dagens globala finanskris har utlöst en kris för ämnet nationalekonomi.
Sökandet efter bättre ekonomisk analys pågår för fullt.
Lars Jonung kolumn DN 29/4 2010

Everyone has a theory about the financial crisis.
But what do we really know?
Paul Krugman March 7, 2010

Everyone has a theory about the financial crisis. These theories range from the absurd to the plausible — from claims that liberal Democrats somehow forced banks to lend to the undeserving poor (even though Republicans controlled Congress) to the belief that exotic financial instruments fostered confusion and fraud.

As a new research paper by the Irish economists Gregory Connor, Thomas Flavin and Brian O’Kelly points out, “Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case,” and vice versa.

Yet the shape of Ireland’s crisis was very similar: a huge real estate bubble — prices rose more in Dublin than in Los Angeles or Miami — followed by a severe banking bust that was contained only via an expensive bailout.

Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance:

Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.

In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter.

But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs.

By all means, let’s limit both leverage and the use of securitization — which were part of what Canada did right. But such measures won’t matter unless they’re enforced by people who see it as their duty to say no to powerful bankers.

One fascinating idea now provoking a chorus of behind-the-scenes debate among regulators and central banks
to force creditors – not taxpayers – to swallow losses if disaster strikes
Gillian Tett, FT July 15 2010

a so-called “bail-in”.
This idea, mooted by Credit Suisse in an essay this year, argues that in essence the best way to handle a crisis at a large, systemically important bank is to force creditors – not taxpayers – to swallow losses if disaster strikes; and, more importantly, to do this while the bank is still operating as a going concern, so it does not collapse – and cause Lehman-style havoc.

In some respects, this echoes another set of ideas on the table around contingent capital, or “cocos”. This suggests banks should issue bonds that would automatically convert into equity when certain triggers were breached, a long time before the point of potential collapse.

But there is a crucial distinction: the “bail-in” scheme does not use automatic triggers, but instead lets regulators decide when to wipe out creditors, just before the moment of collapse (or “one minute to midnight”, as traders say).

How the market can control the banks
bondholders keep bank risk-taking under control - and bear the costs if they fail
James Mackintosh FT-blog January 24, 2010

Barack Obama has decided to side with a state solution, if not yet a well-thought-out one, to preventing bank failures bringing down the world economy. But there is a market alternative: fix the banks so the bondholders keep bank risk-taking under control - and bear the costs if they fail in that task.

This important debate is not being framed as a state vs market discussion, but it should be.

Remember state control has a dismal record in general, and in the finance sector in particular. Regulators entirely missed the bubble, missed the banks’ reliance on short-term financing and missed the fact that so much regulatory arbitrage was going on.

The problem is the banks (and potentially non-banks) being too big to fail, creating perverse incentives to take risks and leaving the taxpayer paying for mistakes.

This can be done, using contingently convertible bonds - “CoCos” - which turn into shares when capital falls below a specified level. The legal documents backing CoCos explicitly lay out these risks, but that would not be enough. What is needed is the regular use of CoCos. I would suggest that banks are forced - yes, I know, regulation - to raise all their debt through CoCos, and to have a ladder of capital ratios at which debt converts.

We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north. Right now,
Canada is a very important role model.
PAUL KRUGMAN January 31, 2010

The cause of our crises has not gone away
We should listen to /Iceland/ before the same message is conveyed in much more violent form, in another place and at another time.
John Kay FT January 5 2010

Let the finger-pointing begin.
This week the commission to investigate the causes of the financial crisis will hold its first public hearing.
First up to be accused of causing massive foreclosures, nearly bankrupting our financial system and robbing us all of our retirement savings: Wall Street CEOs.
TIME 11/1 2010

Some economists have even questioned whether there was a credit crunch. Economic professor René Stulz of Ohio State University, for one, has written papers trying to clear Wall Street pay and credit-default swaps of any blame. Despite recent apologies, Goldman Sachs executives, too, say that they are no more to blame than anyone else in the financial markets.

In simple terms, the prevailing consensus is to view the post-2007 crisis as the result of an external shock which could not have been anticipated.
In fact, the world’s problems did not come from an external shock but were created within the various economies
Derek Scott, economic adviser to Tony Blair from 1997 to 2003, FT December 22 2009

A series of monetary policy mistakes in the late 1990s meant that interest rates were too low, creating in several countries what Austrian economists such as Friedrich Hayek, called an “inter-temporal” problem. It is no coincidence that economists who did predict the crisis, notably in Britain the estimable Bernard Connolly, looked at economics in a similar way.

In essence what happens is that inappropriately low rates of interest bring forward investment spending by households and business (adding to demand when it takes place) from “tomorrow” to “today” so that when “tomorrow” arrives, budget constraints reduce spending at precisely the time when “yesterday’s” investment comes on stream, adding to supply.

The only way to keep things going is even lower interest rates, bringing forward even more spending, so establishing the international Ponzi game that eventually burst in 2007.

Monetary Policy and the Housing Bubble
Chairman Ben S. Bernanke
"Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices"
January 3, 2010

What is the use of economics if it cannot answer even such a basic question?
Two years ago at the height of the financial crisis, the Queen challenged staff of the London School of Economics with a simple but devastating question:
“Why did no one foresee this?”
the inability of professional economists in Britain and America to agree on something as important as whether
reductions in government deficits will accelerate or slow growth
Anatole Kaletsky, The Times September 29 2010

About six months later the cream of the British economics profession responded with a mealy-mouthed letter of self-justification from the British Academy, waffling on about “a failure of the collective imagination” and “the psychology of denial”.

Since then the intellectual confusion has only intensified, as we can see by the inability of professional economists in Britain and America to agree on something as important as whether reductions in government deficits will accelerate or slow growth.

The latest academic attempt to tackle the question is this piece by Raghuram Rajan. He is well qualified to write on the matter, having delivered a very perceptive warning about a possible crisis to the entire senior cast of global central banking at Jackson Hole in 2005. They politely ignored him. Prof Rajan now argues that economists had all of the models required to understand the credit crisis, but that the subject suffers from being segregated into increasingly narrow fields. It therefore lacks people with the broad overall view necessary to connect all of the diverse strands. This is indeed a problem, but it may not be the whole answer to the Queen’s question.

In fact, the IMF’s watchdog criticised the organisation on exactly those grounds yesterday.

Tetlock systematically collected a vast number of individual forecasts about political and economic events, made by recognised experts over a period of more than 20 years. He showed that these forecasts were not very much better than making predictions by chance, and also that experts performed only slightly better than the average person who was casually informed about the subject in hand.

It is easy to see that the hedgehogs are by far the more likely group to predict a very big disruptive event like the credit crisis. By temperament, they are willing to be continuously wrong for very long periods in order to be right periodically on very big issues. And that did indeed happen to the relatively few economists who predicted the onset of the credit crisis, often many years before it happened.

So one answer to the Queen’s question about why economists failed to predict the crisis could be: “Because economists are rational, ma’am”. But I am not sure she would be terribly impressed.

In 2008, as the global financial crisis unfolded, the reputation of economics as a discipline and economists as useful policy practitioners seemed to be irredeemably sunk,
Queen Elizabeth captured the mood when she asked pointedly why no one (in particular economists) had seen the crisis coming.
There was no doubt that, notwithstanding the few Cassandras who correctly prophesied gloom and doom, the profession had failed colossally.
The totemic symbols of this failure were, of course, the two most important policymakers, Alan Greenspan and his successor as chairman of the US Federal Reserve, Ben Bernanke. They, among many others, helped create a belief system that elevated markets beyond criticism.
Arvind Subramanian, FT December 27 2009

The writer is senior fellow at the Peterson Institute for International Economics and the Center for Global Development, and senior research professor at Johns Hopkins University

Most crises, notably the big ones, creep up on us from unsuspected quarters. As Keynes wisely observed: “The inevitable never happens. It is the unexpected always.” So, if the value of economics in preventing crises will always be limited (although hopefully not non-existent), perhaps a fairer and more realistic yardstick should be its value as a guide in responding to them. Here, one year on, we can say that economics stands vindicated.

Arvind Subramanian argues that economics has redeemed itself by rescuing the world economy from the crisis. I agree, but only up to a point.
These extraordinary interventions have not returned the patient to health. They have merely prevented him from dying.
We now must heal five chronic conditions, instead of survive last year’s brutal heart attack.
Martin Wolf, December 29 2009

Central bank money printing and the mystery of soaring shares
'Why did nobody see it coming?", the Queen asked four years ago on a visit to the London School of Economics,
a brilliantly faux naïve question that cruelly exposed the failings of modern economics.
Well, here's another in a similar vein she might like to ask when she next returns to matters financial.
"How come the stock market is going up, when the economy keeps tanking?"
Jeremy Warner, Telegraph 7 March 2013

Bernanke was as clueless as Greenspan about the coming storm.
He dismissed warnings of a housing bubble. He insisted that economic fundamentals remained strong.
In March 2007, he assured Congress that "the problems in the subprime market seem likely to be contained."
Time Magazine december 2009

At Lehman, the top five executives received cash bonuses and proceeds from stock sales
totaling $1 billion between 2000 and 2008,
and at Bear, the top five received more than $1.4 billion,
according to Harvard Law School.
CNBC 23 Nov 2009

About Richard A. Posner, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression
Were a lot of people reckless and stupid? Of course! But that cannot explain why the whole system crashed, since a lot of people are always reckless and stupid.
The problem, fundamentally, is that markets cannot, and rationally should not, anticipate their own collapse
Jonathan Rauch, NYT, May 14, 2009

The headline /Mishkin in FT/ sort of says it all:
"Not all bubbles present a risk to the economy."
That is completely false.
Any genuine bubble poses great risk, which is why they should be avoided, as I have warned repeatedly since at least 1997.
Bill Fleckenstein, MSN Money, 13/11 2009

“Why did no one see the crisis coming?” Queen Elizabeth asked last year.
If the economics profession could not warn the public about the credit crunch and the recession,
what is the profession’s raison d’etre? FT writers and outside experts will set out their views in the posts below.
July 28, 2009 by FT

Did this reflect, as some claim, that economics has gone astray with models that no longer help understand economic reality but rather distort it? Did such models even contribute to the crisis?

A blogger who left Britain 20 years ago for rural bliss in Spain has become an unlikely economic sage whose advice has been sought by the International Monetary Fund.
Edward Hugh counts Nobel Prize winner and American economist Paul Krugman among his avid followers.
CNN June 10, 2010

Hugh attended the London School of Economics in the late 1960s but says he "wasn't learning a lot" and his interest in the subject waned until Japan's economic woes captured his attention, decades later.

By May, Hugh was speaking at the Círculo de Economía, a respected annual meeting of business minds in Barcelona. And just this week a profile in the New York Times pushed his Facebook page to the limit of 5,000 friends. Around 1,000 people tried to "add him" as a friend in one day.

I put forward this idea is that maybe the simplest and quickest solution is for Germany to go back to the mark," he said.
Germany abandoned the Deutschemark in 2002 when it joined the single currency.
The theory is that Germany's exit would prompt a steep fall in the euro, which would go some way to restoring the competitiveness of Germany's debt-strapped neighbors including Spain, Portugal, Greece and Ireland. Exports would rise, allowing them to put money aside to pay their debts and to service the future needs of their ageing populations.

About Krugmans NYT article “How Did Economists Get It All So Wrong”
The Spanish economist Luis Garicano made himself famous for a day because he was asked by the Queen of England the very question
Paul Krugman: I think that what happened was a combination of two things.
Edward Hugh, Fistfulofeuros, January 3, 2010

First, the academic side of economics fell too much in love with beautiful mathematical models, which created a bias toward assuming perfect markets.
(Perfect markets lead to nice math; imperfect markets are a lot messier).

Second, the same forces that lead to financial bubbles – prolonged good news tends to silence the skeptics – also applied to economists. Those who rationalized the way things were going gained credibility until the day things fell apart.

How Did Economists Get It So Wrong?
“central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago
in his 2003 presidential address to the American Economic Association
Paul Kruman, New York Times Magazine, 2/9 2009

Boom, Bust and Blame
The Inside Story about America's Economic Crisis
CNBC, September 2009

Låga räntor och räddningsaktioner för banker och storföretag
uppmuntrar till samma huvudlösa risktagande som ledde till den värsta finanskrisen sedan 1930-talet
Johan Norberg, DN Debatt 2009-07-25

Most people wonder how the financial crisis will end. For some, the story of how it began is just as important.
Control of that tale will help determine how we respond to the past two years of market mayhem.
At stake is the financial industry’s business model and billions of dollars in annual profits.
Bloomberg July 8 2009

No wonder Wall Street executives are spinning the causes of the crisis, downplaying their roles in inflating the housing and credit bubbles while presenting themselves as integral to any solution.

Forty years ago, the psychiatrist Elizabeth Kübler-Ross identified the five stages of grief following a traumatic event:
denial, anger, bargaining, depression and acceptance.
In my own struggle to come to terms with last year's banking crisis – a personal trauma for every taxpayer – I have so far experienced only anger and depression.
This week, however, I have regressed to anger, and I sense I am not alone.
Tracy Corrigan, 16 July 2009

Nothing can redress the damage wrought by banks' bad behaviour: their greed and poor judgement severely damaged the economy, and among the mostly blameless victims are those who are living on reduced pensions or have lost their jobs, not to mention future taxpayers who will bear the cost of this folly for years to come.

we, the public, need to feel that banks have been kicked into line and that at least for a period they will be chastened and humble. So far, neither of these conditions has been fulfilled.

Despite their still shaky balance sheets and strained capital, things are going rather well for many banks, considering. This is no surprise: they are always good at rebuilding profitability because, unlike most businesses, they have phenomenal pricing power: we need their services.
But they are currently making lots of money not only because the taxpayer bailed them out in the first place but because they are now borrowing at very low rates, subsidised by the government, while lending at relatively high rates.

Riksbanken har inklusive dagens SEK-auktion med fast ränta lånat ut 303 miljarder kronor
och 17,8 miljarder dollar.
Omräknat till dagens valutakurs har Riksbanken totalt lånat ut 500 miljarder kronor
Riksbanken 2009-07-13

The efficient-markets hypothesis
Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself.
Paul Krugman argued that much of the past 30 years of macroeconomics was
“spectacularly useless at best, and positively harmful at worst.”
The Economist print July 16th 2009

The Fed did not see the crisis coming
The list of dogs that did not bark is a long and distinguished one.
Maverecon: Willem Buiter, FT, July 17, 2009

This criticism is clearly correct. The Fed’s failure to foresee the storm, even when it was imminent, represents an indictment of its competence at one of its key tasks: discerning developments likely to lead to systemic financial instability before the instability manifests itself, and taking preventive measures.

The Fed failed utterly in this task, but so did every other regulator, supervisor and government agency or official with even an indirect responsibility for financial stability. Alan Greenspan did not see it coming during the almost 20 years (1987 till 2006) he spent at the Fed; neither did Ben Bernanke, a member of the Board of Governors of the Federal Reserve Systemfrom 2002 to 2005, Chairman of the President’s Council of Economic Advisers from June 2005 to January 2006 and Chairman of the Fed since February 1, 2006. Hank Paulson did not discern any financial crisis clouds on the horizon, either during his many years with Goldman Sachs (1974-2006), or during the first year of his tenure as Treasury Secretary (July 2006 - January 2009). Likewise, Tim Geithner failed to foresee the crisis when he was Under Secretary of the Treasury for International Affairs(1998–2001) under Treasury Secretaries Bob Rubin and Larry Summers or as President of the New York Fed (2003 - 2009). Larry Summers was similarly blinded by the light during his years at the US Treasury (1993 -2001), including his years as Deputy Secretary under Bob Rubin (1995-1999) and his tenure as Treasury Secretary (1999-2001). There was not a Dicky Bird either from Don Kohn or Bill Dudley.

In fairness I should add that no academic scribbler, least of all I, foresaw the full force of what was about to descend upon us. Academics are joined in the ranks of these who failed to foresee the financial cataclysm by gurus, pundits, economic and financial journalists, futurologists, urologists and other practitioners of cleromancy.

Det finns anledning att sammanfatta hur finanskrisen i USA började mera konkret.
Jag grundar den huvudsakligen på boken En perfekt storm (2009) av idéhistorikern Johan Norberg.
I mycket kort framställning berodde finanskrisens upprinnelse på en samverkan mellan följande fem faktorer:

Att huspriserna fördubblades på 10 år sågs också som en trygghet eftersom säkerheten för lånen ökade.
På marginalen blev det däremot en riskökning som till slut utlöste krisen i bostadssektorn.

Genom att nya värderingsregler infördes för företagens tillgångar, som nu skulle värderas till marknadsvärde, tillkom en procyklisk effekt.
även kraven på kapitaltäckning verkade procykliskt eftersom de vid förluster ledde till stopp för nyutlåning och uppsägning av gamla lån.

Socialismen har genom finanskrisen och klimathotet fått två gratischanser att visa att den lever och att dess praktik borde vara adekvat att tillämpa mot båda. Men ingenting hörs.
Inte ens Göran Greider har längre något konstruktivt att säga om socialismen. Den måste vara död.
Danne Nordling 15/6 2009

I Dagens Nyheters kulturdel igår 14/6 skriver poeten Göran Greider, chefredaktör för Dala-Demokraten (S), en Essä-artikel om klimatpolitiken utifrån ett radikalt vänsterperspektiv.
Han recenserar en ny bok av vänstermannen Anthony Giddens med titeln The Politics of Climate Change.

”När musiken tystnar – en rapport om den globala finanskrisen”.
beskriver krisens förlopp och orsaker, men anger också vilka principer som bör gälla för en ny regleringsmodell.
Ola Pettersson, LO-ekonom 2009-06-10

It is only halfway through November but I think we can already declare the winner of the 2007 Quote of the Year competition.
It is Chuck Prince, the former chairman and chief executive of Citigroup.
As Mr Prince departs, however, it should be noted that his statement was not, as history will record it, idiotic.
His offence was not that he misunderstood or misstated how banks have operated over the past few years but that he blurted out the truth rather too openly.
Note that he did not say “if” the music stops but “when”.
He recognised then – as did others – that the period of extraordinarily easy money that had prevailed since 2002 was bound to end.
John Gapper, FT November 14 2007

It seems that hedge funds have been designated for ritual sacrifice, even though they played no more than a cameo role in the genesis of this crisis.
It was not they who took on extreme debt leverage: it was the banks – up to 30 times in the US and nearer 60 times for some in Europe that used off-books "conduits" to increase their bets.
The market process itself is sorting this out in any case – brutally – forcing banks to wind down their leverage.
The problem right now is that this is happening too fast.
Ambrose Evans-Pritchard, Daily Telegraph April 2009

But to the extent that this G20 accord makes it impossible for the "shadow banking" to resurrect itself in the next inevitable cycle of risk appetite, it may prevent another disaster of this kind.

The key phrase is "new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times." This is more or less what the authorities agreed after the Depression. Complacency chipped away at the rules as the decades passed. It is the human condition, and we can't change that.

Samtal med Johan Norberg
Varför blev det finanskris?
Var det girigheten som löpte amok?
Den osunda kulturen före finanskrisen hade aldrig uppstått
om det inte varit för alla politiska misslyckanden.
PJ Anders Linder, SvD 29 mars 2009

Ekonomiläroböckerna och finanskrisen
I min egen lärobok, som har kommit i elva upplagor, finns visserligen en del avsnitt
om bubblor och om irrationaliteten och kasten på t.ex valutamarknaderna.
Men de avsnitten måste byggas ut till nästa upplaga.

Likaså måste Keynes få en grundligare behandling - inte minst begreppet “likviditetsfälla” och
hur den påverkar penningpolitiken.
Klas Eklund blog 2/3 2009

As a shell-shocked world tries to fathom how its economic collapse happened,
commentators are busily outbidding each other with claims about the exceptional nature of this crisis.
But the most astounding fact is how familiar it look compared to past financial crashes.
The story of the modern capitalist economy is a rhythmic repetition of cycles, syncopated by eerily similar crises.
Financial Times March 9 2009

As a shell-shocked world tries to fathom how its economic collapse happened, commentators are busily outbidding each other with claims about the exceptional nature of this crisis. But the most astounding fact is how familiar its physiognomy and physiology look compared to past financial crashes.

No one can read the chronicles of those earlier crashes without sensing – with a chill – that history is repeating itself. The story of the modern capitalist economy is a rhythmic repetition of cycles, syncopated by eerily similar crises. These crises, while their details differ, are but variations on the same theme.

Easy money, geared up by leverage, floods the financial system through innovative products.
This simultaneously pumps up asset prices and obscures their speculative nature, with euphoria usurping the place of analysis.

Until, one day, something triggers a loss of confidence in the continued rise of prices, and the whole leveraged edifice crumbles.

Today’s collapse has followed the same pattern – as outlined on Tuesday in the FT’s series on the future of capitalism.

Easy money came from global macroeconomic imbalances that generated enormous capital inflows into deficit countries.

Those flows helped drive interest rates down and increase access to credit, fuelling a leveraged asset bubble.

Many leaders in the affected countries – in particular the US – knew this:
Alan Greenspan himself spoke of “irrational exuberance”.

And yet they did not understand how they had to act to prevent a replay of the past.

Sweden's status as a small, open economy enabled it to undertake the reflationary, sharp, and sudden currency depreciation that helped to return the country to growth.
Sweden was able aggressively to reflate and stimulate demand for its output by allowing its currency to float.
It is important to understand that that option is not available today to the large economies engulfed in a global crisis.
John H. Makin, American Enterprise Institute (Timbros storasyster) March 2, 2009

It would be misleading to claim that Sweden's program for dealing with its banks constituted, by itself, a solution to Sweden's economic and financial crisis.
As a relatively small, open economy, Sweden was able aggressively to reflate and stimulate demand for its output by allowing its currency to float.
The resulting rapid depreciation of the krona against the deutsche mark by 30 percent,
paired with the establishment of a viable Swedish banking system, formed a policy combination sufficient to reignite Swedish growth and move most of its banks into private hands.

Shares of Swedish banks rose, on average, by a factor of seven during 1993 as the banking system recovered and Swedish growth turned positive by the third quarter that year.

Rather, the current behavior of currencies relative to each other and relative to gold is being determined by an intensifying search for a safe haven store of value.

I internationella media finns nu mer eller mindre beundrande beskrivningar av den svenska modellen.
Carl Bildt noterade häromdagen på sin wordpress-blog att hanteringen av finanskrisen omfattades av denna beundran.
- För oss som var mitt uppe i turbulensen då såg allt inte så enkelt ut - men att det nu internationellt ses som en stor framgång finns ju anledning att notera, noterade Carl Bildt förtjust.

Greenspan: The Fed Didn't Cause the Housing Bubble
Lower rates on long-term, fixed-rate mortgages and
not the Federal Reserve's policies are to blame for the U.S. housing bubble.
CNBC 11 Mar 2009

"Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months.
This correlation between home prices and mortgage rates was highly significant,
and a far better indicator of rising home prices than the fed-funds rate,"
Greenspan wrote in the Wall Street Journal.

US Federal Reserve chief Ben Bernanke says the world is suffering
from the worst financial crisis since the 1930s.
Mr Bernanke argues that the roots of the current global economic downturn stem from
global imbalances in trade and flows of capital in the late 1990s.
BBC 10/3 2009

Implicitly, the UK government is guaranteeing the liabilities of the swollen UK banks.
Explicitly, it seems likely to guarantee at least £600bn of toxic assets of RBS and Lloyds under its “asset protection scheme”.

I am no populist.
Yet when I think of the sums earned by those responsible for dumping this mess on to the UK taxpayer, even my blood boils.
Martin Wolf, Financial Times March 5 2009

"As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership. Unfortunately, we may have no choice.
US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency.
Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.
James Baker, Financial Times March 1 2009

Det är Kontantinsatsen, Stupid!
Det var en gång för länge sedan vanligt med gammalmodiga bankkamrerare som sade åt
hugade fastighetsspekulanter att det nog gick att låna till villaköpet men att man skulle ha en egen kontantinsats på 25 procent.
Rolf Englund blog 18/2 2009

The statement that systemic breakdowns are surprisingly rare
in the free-wheeling Anglo-Saxon model is false.
Martin Wolf February 9, 2009

Anders Borg, du har fel
Staten skall inte reglera bonusen
Det krävs mod för att lita på att styelserna och cheferna
kan ta eget ansvar
Cecilia Aronsson, Veckans Affärer, 5/2 2009

Styrelseordförandena i Davos, inklusive Investors Jacob Wallenberg, inser att de måste bättra sig

Starka incitament och bra bonus är nödvändigt för att anställda ska orka lyfta sina företag ur krisen.

As far as I can see, many bankers still don't get it.
They created, more or less single-handedly, a boom and bust of staggering proportions,
then held out their hats for taxpayers' contributions to bail them out.
Tracy Corrigan, Daily Telegraph, 6 Feb 2009

Yet quite a number of them still aren't saying, as the rest of us are, "Golly, I hope I won't lose my job" – or even "Lucky me, I can always sell my house in the Cotswolds, if things get tough."

Many bankers still don't seem to grasp that they earned multi-million pound packages as a result of a bizarre twist in the way their industry works, rather than because this is an accurate reflection of their economic productivity. It also turns out that bonuses were paid on the basis of artificially inflated returns.

SEB:s vd Annika Falkengren avstår från sin bonus för 2008.
För 2007 fick SEB-chefen 4 miljoner i bonus och därmed
totalt 12,1 miljoner kronor i ersättning.
DI 2009-02-05

Kommentar av Rolf Englund:
Det betyder att hon får försöka hanka sig fram på sin lön på åtta miljoner kronor.

En bonusdriven finansbransch har sålt stora mängder obskyra värdepapper
– samtidigt som man i Washington har sänkt skatter och fattat beslut om nya jätteprojekt utan att våga be folket om pengar.
PJ Anders Linder, SvD 25/1 2009

The crisis triggered by September's bankruptcy of Lehman Brothers appears to have discredited
many of the assumptions on which American prosperity and democracy was founded.
Anatole Kaletsky, The Times, 22/1 2009

It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best.
The great lesson of the past year is how little we understand and can control the economy.
Robert J. Samuelson, December 29, 2008

Secular gods visibly fail: in 1989, communism collapsed;
in 2008, came the turn of financial capitalism.
As panic spread, governments ended up nationalising the financial systems of the west.
This is no longer capitalism as we knew it. But it is not the end of market economies either.
Financial Times editorial, December 26 2008

Good question, Ma'am
"If these things were so large, how come everyone missed them?"
Alan Beattie, Financial Times, November 14 2008

As Daniel Defoe observed after the first British stock market crash of 1696:
Anyone might have foreseen that . . . the raising of stock, of all sorts to a value above the Intrinsick, must have some fatal issue,
and would fall somewhere at last so heavy as to be felt by the whole body of Trade.
Edward Chancellor, author of "Devil Take the Hindmost: A History of Financial Speculation"
Wall Street Journal, August 18, 1999

So angry is Main Street, you could club an investment banker like a seal pup
and stand a reasonable chance of being cheered by judge and jury.
Jeff Randall, Daily Telegraph, 7 Nov 2008

"I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown,"
President George W. Bush, 14 Nov 2008
Full text

“Amazing” that the Irish government has “socialized” the banks
— some $80 billion in senior and subordinated debt — and made it the financial responsibility of Irish taxpayers, who didn’t create it.
Michael Lewis, author of "Liar’s Poker," "The Big Short" and "The Blind Side,"
CNBC 1 Feb 2011

During that period, Lewis said, Merrill Lynch received hefty fees to underwrite bonds by some Irish banks. When a Merrill Lynch employee in London characterized some Irish bankers as “irresponsible,” said Lewis, the firm fired him.

The End of the Financial World as We Know It
Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Michael Lewis and David Einhorn, New York Times January 3, 2009

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street.
David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.”

Incredibly, intelligent people the world over remain willing to lend us /US/ money and even listen to our advice;
they appear not to have realized the full extent of our madness.

We have at least a brief chance to cure ourselves. But first we need to ask: of what?

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

Vad var det då som bröt den goda utvecklingen och ledde till den finansiella krisen?
Något förenklat kan man säga att god tillgång på kapital på de finansiella marknaderna resulterade i en kombination av mycket låga räntor, stigande tillgångspriser och kreditexpansion världen över.
Samtidigt fanns svagheter i regleringarna av de finansiella marknaderna.
Globala obalanser byggdes upp och det som till slut bröt utvecklingen var
nedgången på bostadsmarknaden och bolånemarknaden i USA.
Stefan Ingves, DN Debatt 31/12 2008

Efter Lehman Brothers konkursansökan i mitten av september ströps kreditflödena. Ingen hade väntat sig att en så betydande bank kunde fallera och oron steg för att fler aktörer skulle hamna i en liknande situation. Utlåningen mellan världens banker upphörde nästan helt.

När bankerna inte kunde låna mer än på mycket korta löptider, ofta bara någon vecka, ställde Riksbanken upp och lånade ut på längre löptider. Utlåningen har skett både i kronor och dollar. Riksbanken har även inrättat en tillfällig kreditfacilitet för att förbättra de svenska företagens möjligheter att låna pengar av bankerna. För att säkerställa den finansiella stabiliteten har Riksbanken också gett individuellt likviditetsstöd till Kaupthing Sverige AB och Carnegie Investment Bank AB.

En del av arbetet har också rört utlåning till Island och Lettland.
Det är hjälp till självhjälp i vårt närområde, något som vi alla har nytta av.

En särskild osäkerhetsfaktor för den svenska finansiella marknaden är utvecklingen i Baltikum där svenska banker har betydande verksamhet och en omfattande utlåning.
Vår bedömning är att bankerna är tillräckligt starka för att kunna hantera ökade kreditförluster från det hållet.

Svenska banker står väl rustade med en i utgångsläget god intjäningskapacitet och låga kreditförluster.

How to prevent the Great Depression of 2009
The global financial system is undergoing a meltdown that has not been seen since the 1930s and
nobody seems to know what to do about it.
How did we get to this point and how can we move forward?
Roger E.A Farmer, Financial Times December 30, 2008

Classical economists argue that falling wages will restore equilibrium; but this is based on the belief that the labour market works like an auction in which employment is determined by demand and supply. It ignores the very real frictions involved in searching for a job by both households and firms that can lead to many possible equilibrium employment levels just as Keynes argued in the General Theory.

Although the free market is very good at deciding how many left and right shoes to produce, it cannot prevent systemic risk that arises from the psychology of herd behaviour.

One might not expect much from economists, but one would surely expect them to warn us of a crisis on this scale.
Speech given by Martin Wolf, chief economics commentator, at the FT’s annual economists’ drinks party in London
Financial Times, 27/11 2008

They Knew What They Were Selling
Warning to Mr. Robert Rubin and Management
Testimony from Mr. Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc. This was given to the Financial Crisis Inquiry Commission Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises.
John Mauldin 23/10 2010

"On November 3, 2007, I sent an email to Mr. Robert Rubin and three other members of Corporate Management... In this email I outlined the business practices that I had witnessed and attempted to address. I specifically warned about the extreme risks that existed within the Consumer Lending Group. And I warned that there were 'resulting significant but possibly unrecognized financial losses existing within Citigroup.'" And now taxpayers own 75% of Citi, and our losses to them are huge.

On March 14, 2008, Robert Rubin spoke at a session at the Brookings Institution in Washington, stating that "few, if any people anticipated the sort of meltdown that we are seeing in the credit markets at present”. Rubin is a former US Treasury Secretary, member of the top management team at Citigroup bank and one of the top Democratic Party policy advisers.
“No One Saw This Coming” Understanding Financial Crisis Through Accounting Models
Dirk J Bezemer, University of Groningen, 16 June 2009

This has been a common view from the very beginning of the credit crisis, shared from the upper echelons of the global financial and policy hierarchy and in academia to the general public.
It continues to be publicised, as documented in more detail in the next section. And yet it would be premature to ask “Why did nobody notice?", as Queen Elizabeth did as she inaugurated a new building at the London School of Economics in November 2008

It is not difficult to find predictions of a credit or debt crisis in the months and years leading up to it, and of the grave impact on the economy this would have - not only by pundits and bloggers, but by serious analysts from the world of academia, policy institutes, think tanks and finance.

Watching Chuck Prince and Robert Rubin, the former Citigroup chairmen, giving evidence today on the bank’s losses in “super-senior” sub-prime mortgage securities, was not reassuring for anyone seeking lessons from the 2008 financial crisis.
In summary, they told the Financial Crisis Inquiry Commission in Washington that the risk management and management structures at Citigroup were state-of-the-art, that regulators were keeping a close eye on the business, and that the board was functioning correctly.
John Gapper FT blog April 8, 2010

Apart from this, the most notable aspect of the hearing so far has been how Mr Rubin has stuck to his view (criticised by me in this earlier column) that he wasn’t an executive at Citi and was not directly responsible for what happened.

Robert Rubin, a senior adviser to Citigroup at the time of its deep losses from subprime mortgages,
said he learned belatedly that Citi had $43 billion in high-risk securities on its books.
CNBC 8 Apr 2010

Rubin said: "I do not recall knowing before September 2007" that the bank had held onto the investments composed of repackaged mortgage bonds. In November 2007, Citigroup publicly estimated it would lose $8 billion to $11 billion in the fourth quarter that year from those securities.

Rubin, a former Treasury secretary, made the statements in testimony to a panel investigating the roots of the financial crisis. He and other former Citigroup executives have been sharply criticized for allowing heavy investments in high-risk securities. Citi was a major subprime lender.

Critics have said Rubin, with his vast experience on Wall Street and as Treasury chief in the Clinton administration, should have picked up on the warning signs of the crisis and taken a more active role in preventing Citigroup's debacle.

I told the President that the Mexican government faced an imminent threat of default. Then I asked Larry to explain the situation in more detail... RE: Larry is, of course, Lawrence Summers
Robert Rubin and Mexico's 1994 Financial Crisis

“Why didn’t we see this coming?”
“What do you mean ‘we,’ white man?”
Paul Krugman, årets nobelpristagare, New York Times, 27/11

Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.

Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

The vision thing
Her Majesty’s question ("If these things were so large, how come everyone missed them?")
Chris Giles, FT, November 25 2008

Her Majesty’s question ("If these things were so large, how come everyone missed them?") has sparked a series of ludicrous claims about the prescience of individual forecasters.

Charlie Bean, the Bank of England’s deputy governor, noted that elements of the global economy had troubled lots of economists and policymakers for a long time.
“We knew they were unsustainable and worried that the unwinding might be disorderly, though I don’t think anyone could have guessed the course that events would actually take,” he said.

In his Senate nomination hearing of 2005, Ben Bernanke, the Federal Reserve chairman, said the US financial system had already benefited from a series of crises that had reinforced its ability to cope with difficult times. “The depths, the liquidity, the flexibility of the financial markets has increased greatly,” he said.

Jean-Claude Trichet, European Central Bank president, told four newspapers in mid-July: “Our baseline scenario is that we will have a trough in the profile of growth in the euro area in the second and third quarters of this year and, following this, a progressive return to ongoing moderate growth.” Instead, Europe is staring at the biggest recession since the early 1990s.

Even permanent bears did not see the full bursting of the credit bubble linked with the commodity boom. Nouriel Roubini, the global “Dr Doom” who got much of the crisis right, has also persistently revised his forecasts lower as the credit crunch has bitten harder.

Though there is great entertainment in looking back at the silly things economists have said, more is to be gained by examining the particular failings that contributed to forecasters’ general inability to warn of the current mess.

Stephen King, chief economist of HSBC, says: “Almost all economic models assume that the financial system ‘works’.” Economists in general did not foresee how the looser monetary policy of the early part of the decade could lead to an unprecedented credit expansion.

The natural tendency to seek rationales for events as they unfold, rather than question whether they are sustainable. Kenneth Rogoff, a Harvard professor who is also a former IMF chief economist, thinks the tendency to look on the bright side is particularly prevalent on Wall Street, where “it is difficult to make a living as a mega-bear”, he says.

William White, the former chief economist of the Bank for International Settlements, the central bankers’ bank in Basel, Switzerland, was a persistent critic of lax monetary policy and the failure to stem credit expansion.

Prof Rogoff also spotted the dangers of unsustainable global economic expansion in a 2004 paper with Maurice Obstfeld.
In more recent work with Carmen Reinhart he has highlighted how policymakers fell into the “this time it’s different” trap that dates back to England’s 14th-century default.

Mention must also be given to the notable voices of doom, who got important bits of the puzzle correct even if the timing or other details eluded them.

Prof Roubini, who now runs the consultancy RGE Monitor, wrote a paper with Brad Setser in August 2004 predicting that the world’s trade imbalances were unsustainable and likely to “crack the system in the next three to four years”.

He has been prescient in understanding the links between financial markets and the real economy.

Good question, Ma'am
"If these things were so large, how come everyone missed them?"
Alan Beattie, Financial Times, November 14 2008

House buyers took the view that as long as someone was prepared to lend them money, things would be OK.

The mortgage lenders reckoned that as long as they could package up the mortgages as newfangled financial derivatives (it's a long story, Ma'am) and sell them on, that would be fine.

The financial institutions surmised that as long as the credit ratings agencies were giving the derivatives their seal of approval, everything would be dandy.

The credit ratings agencies thought – actually, it is pretty hard to work out what in God's name the credit ratings agencies were thinking, except that as long as their rivals were giving these assets the thumbs-up, they had better do so as well.

As for the regulators, Ma'am, the point is that they didn't really know and too many didn't want to.

Warren Buffett, a somewhat well-known investor from one of your revolted colonies, called these exotic derivatives "weapons of mass destruction".

The comparison is apter than even Mr Buffett might have thought. The main thing about these derivatives is no one knew how big the stockpiles were, who had them, or what exact form they took.

The smarter economists treated this as a known unknown. They knew that they didn’t know, and they knew that they wanted to know. But the politicians and regulators whose job it was to know, it appears, didn’t want to know, or didn’t want to know badly enough.
They are now pretending it was an unknown unknown.
Don’t believe them.

How did they get away with it? Partly because there were always some tame economists on hand to say that everything was fine.

These are historic times.
Given the origins of the crisis in the collapse of an asset price bubble and consequent disintegration of the credit mechanism, the way the recession will evolve remains obscure.
The authorities must now focus all their attention on reducing its likely scale.
But then they must ask themselves how such a gigantic mess occurred.
Martin Wolf, Financial Times 30/10 2008

Det behövs bättre regleringar av finansmarknaderna,
men absolut inte någon överreglering som kan hindra marknaderna från att fungera effektivt.
DN-ledare 7/11 2008
Kommentar av Rolf Englund
Jaha, jaha

Experterna på kreditvärderingsföretag som Moodys, Standard & Poor's och Fitch bidrog till att förvärra finanskrisen.
Det säger den svenske Harvardforskaren Bo Becker
Dagens Industri 7/11 2008
Kommentar av Rolf Englund
Det behöver man väl inte vara Harvardforskare för att förstå

I debatten sägs det nu vara mer ädelt att söka förklaringar än att peka ut syndabockar, men varför det?
Krisen är inte någon naturkatastrof
Anders Isaksson, kolumn DN 31/10 2008

Greenspan: It's a 'credit tsunami'
but congressmen say he dodged responsibility and didn't foresee crisis.
CNNMoney.com October 23, 2008

I debatten sägs det nu vara mer ädelt att söka förklaringar än att peka ut syndabockar, men varför det?
Inte heller krisen 1992 var någon naturkatastrof
Det hänger naturligtvis ihop. Frågan om vilka felaktiga beslut som ledde till krisen leder ofrånkomligen och med rätta
till frågan om vilka personer som fattade dessa felaktiga beslut.
Rolf Englund, 31/10 2008

Vi menade då /i Ekonomikommissionens rapport (SOU 1993:16)/, liksom nu, att de ekonomiska problemen inte endast, eller ens i första hand, härrör från ekonomisk-politiska missgrepp, som hade kunnat undvikas med skickligare politiker, experter och ämbetsmän.
Problemens rötter sitter i institutioner och regelsystem i den svenska varianten av representativ demokrati och parlamentarism.
Assar Lindbeck m fl Ekonomirådets Rapport 2000, Politisk makt med oklart ansvar, SNS, sid. 15.

The best recipe for avoiding a global recession
Before our political leaders get too fancy remaking capitalism
they should co-ordinate macroeconomic policies to stop a steep global downturn
Jeffrey Sachs, Financial Times, October 27 2008

Alan Greenspan's tragic mistake
negative real interest rates from 2002 into 2005
It was a painful spectacle to watch.
Wall Street Journal, editorial, October 24, 2008

The original bubble was in housing prices and mortgage-related assets,
which the Federal Reserve helped to create with its negative real interest rates from 2002 into 2005.
This was Alan Greenspan's tragic mistake, not that the former Fed chief will acknowledge it.

Testifying before Congress yesterday, Mr. Greenspan pinned the crisis on mortgage securitizers, risk modelers and lending institutions, thus contributing to the Washington narrative that government had little to do with it. The Fed's monetary policy apparently gets a pass.

The media and Members of Congress will use Mr. Greenspan's testimony to impugn /oppose or attack as false or lacking integrity/
the very free market principles that the former Ayn Rand protégé has spent his life promoting.

It was a painful spectacle to watch.

Konjunkturcykeln är en del av marknadsekonomin, ungefär som förkylningar är en del av livet
Skillnaden mellan 2008 och 1914, 1929 eller 1939 är betryggande.
Niklas Ekdal, Signerat DN 19/10 2008

DETTA äR INTE SLUTET. Det är inte ens början på slutet, men möjligen slutet på början.
Winston Churchills finurliga ordvändning från 1942 kan alltid dammas av när det krisar.
Varje sammanbrott har ett förspel, en avslutning på inledningen och en inledning på avslutningen
Ju förr man accepterar sin tråkiga belägenhet, desto snabbare kan man röra sig åt höger på skalan.

PIMCO’s Investment Committee to a man (no women yet) believes that capitalism is the best and most effective economic system ever devised,
but it has a flaw: it is inherently unstable.
Bill Gross, October 2008

Expect a lengthy recession but not depression, accelerating government deficits approaching a trillion dollars as forecast here in this Outlook several months ago, and
the eventual rise of inflation and longer dated bond yields.

For those of us who believe in free markets, these interventions are unpleasant.
These drastic steps might have been avoided had Treasury and the FDIC acted sooner,
yet now they are necessary given the panic that threatens the larger economy.
Wall Street Journal editorial OCTOBER 15, 2008

The government has taken ownership stakes in the largest banks in the land. This extraordinary intervention is perilous -- not least to the banks themselves -- unless it is limited in scope and time. Mr. Paulson called the capital injection "distasteful" but unavoidable, and we can't disagree. The trick is to ensure that neither he nor his successors develop a taste for politically directed credit.
Despite the risks, directly recapitalizing the banks is likely to prove a better tool than buying up "troubled assets," though the Treasury seems on course to do some of that too.

The current crisis reminds us that, in a free economy, the price of the greatly improved long-term performance that only free economies can provide is an ineradicable economic cycle.
As John Maynard Keynes pointed out in the 1930s, the cause of the cycle is alternating moods of optimism and pessimism, and
its motor is credit, which enables optimism to determine economic activity.
Nigel Lawson. Time Magazine, October. 01, 2008

A Capitalist Manifesto
Markets remain our best hope for a better future.
Judy Shelton Wall Street Journal 13/10 2008

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

"Le laisser-faire, c'est fini."
It was French president Nicolas Sarkozy who actually uttered the words, but you could draw the same message from watching the televised debates in the United States at both the vice-presidential and presidential level. You know that America's founding economic philosophy is in deep trouble when candidates for our nation's highest office refer easily to "Wall Street greed" and "predatory lenders" to explain the global financial crisis. And those are the Republicans.

These days, it seems difficult to defend the efficacy, let alone the morality, of an economic approach to human interaction that is now blamed for having put the entire global economy at risk. But that is exactly what we need -- most importantly, from America's next leader.

Deep within the condemning speeches delivered by Mr. Sarkozy, both in New York and Toulon, are the grains of a new approach to capitalism that should give Americans reason to hope, not only for economic salvation but for a sense of redemption on a deeper level. France's president held out the possibility that all is not lost, that we can fix what is broken.

"The financial crisis is not the crisis of capitalism," according to Mr. Sarkozy. "It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism."

Who would have guessed that it would take a Frenchman to remind us that hope is the limitless source of power that drives the human spirit to create, to improve, to achieve its dreams; it is the greatest civilizing influence in our culture.
Yet it was Mr. Sarkozy, speaking before Congress last November, who offered the most profound assessment of our nation's gift to the world. "What made America great was her ability to transform her own dream into hope for all mankind," he said.

Nyliberalerna tysta så det dånar
Det intellektuella civilkuraget hos den stora kader nyliberala ekonomer, som under årtionden hyllat USA:s ansvarslösa marknadsekonomi, imponerar inte.
Bo Rothstein, SvD Brännpunkt, 27 september 2008

Jag kan mycket väl tänka mig att finanskrisen till dels är betingad av bristfällig tillsyn, illa hopkomna regelverk och dåliga belöningssystem i finanssektorn.
Det är inte omöjligt att krisen motiverar förändringar av de lagar och regler som styr finansmarknaden
De fria finansmarknaderna är en viktig delförklaring till världens enastående tilläxt unde de senaste årtiondena
Men, som bloggen Insikt.se konstaterar:
Hur stämmer Rothsteins modell med vad som hände i Sverige 1992. Var inte heller Sverige en välfärdsstat?
PJ Anders Linder SvD blog 2008-09-27 14:21

This is a difficult time to defend free markets. Nevertheless they must be defended,
It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.
Market freedom is not a “fundamentalist religion”. It is a mechanism, not an ideology.
The Financial Times is proud to defend it – even today.
Financial Times editorial September 25 2008 19:02

Bara för att lista några av de mer betydelsefulla regleringarna som snedvridit den amerikanska marknaden så har vi:

Jimmy Carters CRA (1977) som "requires banks and savings and loan associations to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services".
Lagen "förstärktes" 1993 "requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to target to groups to collect a fee from the banks."
Trots ett flertal varningar om de problem som CRA medförde och riskerna för en bostadskrasch av bl a WSJ, Alan Greenspan och lagförsörslag som bl a skulle medföra en kraftigare reglering av Fanny Mae och Freddie Mac (bl a Elizabeth Dole och John McCain) så röstade demokraterna ner de flesta förslagen (även som minoritet hade de goda möjligheter att stoppa lagföslag).
Sedan har vi ENRON-affären som ledde till "mark-to-markets" bokföring; ett annat politiskt beslut som naturligtvis ökar instabiliteten i systemet (och ökar frestelsen för mindre nogräknade affärsmän!).

The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate
http://www.ffiec.gov/cra/

Over the past five years, stock buy-backs have increased at a remarkable rate.
Combined, the 500 companies in the S&P 500 index in January 2008 repurchased $120bn in 2003 and $597bn in 2007;
in 2007 repurchases represented 90 per cent of their net income, while dividends were another 39 per cent.
William Lazonick, Financial Times September 25 2008

New figures coming out of the US economy confirms that in almost every respect it is doing significantly better than expected. It is impressive.
Carl Bildt blog 6/12 2005

Det räcker inte med att ha rätt, man ska helst ha det vid rätt tidpunkt också.
Rätt tidpunkt är den då någon bryr sig om vad som sägs
SvD-ledare 30/9 2004

Felet med Mosesteorin SvD-ledare 2000-03-02, utdragSom SvD:s EU-expert Mats Hallgren kunde rapportera i onsdagens Näringsliv har EU-kommissionen under Romano Prodis ledning förstått att studera vilka lärdomar Europas beslutsfattare bör dra av den amerikanska modellen och dess väldiga framgångar.Det var på tiden. Efter decennier av skleros och Delorium har EU mycket att lära av den ekonomiska förnyelsen i USA, som tog sin början under Reagan-åren.
Klicka här

Bo Lundgren i Torsdagsbrev nr 21/2001, 11 oktober 2001Vad gäller ekonomin lade Reagans marknadsliberala politik grunden för en uppgångsfas utan motsvarighet i amerikansk historia. Fram till idag har USA, med undantag för två kvartal under krisåret 1991, fått uppleva 17 år av oavbruten mycket stark tillväxt.

President Sarkozy rasade i veckan i Toulon mot förställningen om att marknaden alltid har rätt och att det skulle vara rena galenskapen att politikerna lägger sig i: tiden för laissez-faire är förbi. Och här hemma väntar vänsterseminarier på temat: Finanskrisen – Dödskyss för nyliberalismen?
Men hallå: visa mig var det råder laissez-faire? Man kritiserar ett spöke som inte finns.
Finanskrisen är ett marknadsmisslyckande. Det är helt klart att banker och andra finansinstitut inte har hållit koll på sina risker, och att ett antal direktörer har fått bra betalt för att inte sköta jobbet.
Men det är minst lika mycket ett politikmisslyckande.
Claes Arvidsson 2008-09-27 16:35

Skuldfrågan/ Who is responsible?