Greenspan’s “Flaw” Not Just Significant, Also Ginormous

Those who read this blog have probably heard Alan Greenspan’s shockingly self-aware and yet… disconnected testimony in front of the Government Oversight Committee (chaired by Rep. Waxman). In case you missed it, here’s a large chunk of the exchange (via PBS):

Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems | Online NewsHour | October 23, 2008 | PBS:

REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

REP. HENRY WAXMAN: You found a flaw in the reality…

ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

First, I love the almost Althusserian take on ideology: “Everyone has one. You have to — to exist, you need an ideology.” And yet, then Greenspan goes on to add “The question is whether it is accurate or not.” Alas, Greenspan is a late arrival to the sociology party, and has not yet learned that the question is not whether ideology is accurate – for accuracy is, in some sense, a concept only measurable with respect to an ideology – but rather, what does this ideology do?

Second, what was Greenspan’s “flaw”? A small miscalculation in the relationship between inflation, interest rates and home prices? No:

“I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.”

That’s right, his possibly not significant flaw was that self-interested actors are not the best capable of acting in their own self-interest*. That is, the underlying basis of capitalist ideologies all the way back to Adam Smith (before we even called it capitalism), e.g. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.” Everyone pursuing their own self-interest (by some sort of freaky action at a distance called “the invisible hand”) leads to the most optimal outcome. But Greenspan is saying that banks, those paragons of capitalist rationality, could not even best pursue their own self-interest, and that government ought to have stepped in. Greenspan definitely has not forgotten how to undersell a phenomena – his “Fed” speak is clearly still functioning smoothly.

Too bad the *Fed* isn’t still functioning smoothly…

(I’ll add a link to the Daily Show Coverage of the testimony when it’s posted tomorrow.) Here’s TDS.

* Ok, really it’s more of principal-agent problem. But that’s sort of the point – principal-agent problems are rather a big deal with agents as potent as banks and principals as weak as shareholders in most large business (Useem 1996 not withstanding).

Obama the Sociologist?

The NYTimes had an interesting story in last weekend’s magazine about Obama and lower and middle-class, especially rural, men. I’m still winding through it, but this quote from Obama at the beginning about ‘bittergate’ caught my eye:

“I mean, part of what I was trying to say to that group in San Francisco was, ‘You guys need to stop thinking that issues like religion or guns are somehow wrong,’ ” he continued. “Because, in fact, if you’ve grown up and your dad went out and took you hunting, and that is part of your self-identity and provides you a sense of continuity and stability that is unavailable in your economic life, then that’s going to be pretty important, and rightfully so. And if you’re watching your community lose population and collapse but your church is still strong and the life of the community is centered around that, well then, you know, we’d better be paying attention to that.”

So, not only does Obama seem to have a lot of sociological thinking behind his campaign (just look at this website’s social networking features, to start with), but he’s got a Weberian, anti-Marxist stance (well, anti-vulgar Marxist, e.g. voting against your pocket book is not just false consciousness) to boot. I wonder if Obama’s team has been following Gelman’s work (e.g. Red State, Blue State, Rich State, Poor State) and the line of academic inquiry that rejects the premise of “What’s the Matter with Kansas?”. I hope so. It’d be nice to have a president who thought non-economist academics had something useful to say.

Two Brief Histories of the Crisis

This week’s Economist offers an excellent short history of modern finance. Here are the first two graphs:

THE autumn of 2008 marks the end of an era. After a generation of standing ever further back from the business of finance, governments have been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. As well as partial nationalisation, the price will doubtless be stricter regulation of the financial industry. To invert Karl Marx, investment bankers may have nothing to gain but their chains.

The idea that the markets have ever been completely unregulated is a myth: just ask any firm that has to deal with the Securities and Exchange Commission (SEC) in America or its British equivalent, the Financial Services Authority (FSA). And cheap money and Asian savings also played a starring role in the credit boom. But the intellectual tide of the past 30 years has unquestionably been in favour of the primacy of markets and against regulation. Why was that so?

Berkeley Economist Brad DeLong offers a humorous recent history of the various bailout and government intervention attempts in the Guardian, “From Plan A to Plan G”:

I am an economic historian. An occupational disease of being an economic historian is to insist that the answers to all questions lie in the Great Depression that started in 1929. When the financial crisis hit in a sudden squall in August 2007, in the back of the Federal Reserve’s mind was that it should not repeat any of the mistakes that led to the Depression. Hence Ben Bernanke and his Fed loaned extraordinarily freely to banks and near-banks and non-banks in order to avoid what Milton Friedman said was the key mistake that made the Depression Great: that the Fed had triggered or allowed a liquidity squeeze that made cash hard to get. Call this Plan A.

In a couple of months it became clear that Plan A was not working. The economy was weakening. And the Fed remembered the theory – put forward by, among others, Lawrence Summers and myself – that what made the Depression Great was that businesses began to expect deflation. The expectation of falling prices made every business postpone its investment spending – better to wait a year and build your plant and equipment then when prices were cheaper – and so private investment collapsed. So Bernanke and his Fed lowered interest rates to what they thought were levels that might trigger inflation, as a way of making sure that no business anywhere would even begin to suspect that a deflationary spiral was in the making. That was Plan B.

The plot thickens, of course, and eventually winds its way to the current Plan F, and the possible dramatic Plan G:

If Plan F fails, we move to Plan G: we pull the Keynesian fire alarm and begin an enormous government infrastructure building programme in the whole North Atlantic to keep away depression.

Two notes: DeLong is American, so I doubt he actually wrote ‘programme’ and the phrase “Keynesian fire alarm” is too awesome not to re-use. It sounds like some sort of hilarious game. Hm.

Krugman on Krugman

Krugman took a few moments yesterday to tell us what his Nobel-prize winning work was all about. A far better summary than mine (especially as I completely ignored the geography part), available here.
I’m also putting the whole thing below a cut, for future reference.

The Economy Multiple

Caveat Lector: This post is a bit long and rambly, as close to stream-of-consciousness as I get.

In a previous post, I mentioned my confusion at the recent discussion of the financial crisis’ impact on the “real economy” and what the financial economy might be if it was not somehow part of the “real economy”. Today, I was fortunate enough to come across a great language for discussing this problem in a slightly unconventional source – Annemarie Mol’s The Body Multiple. The Body Multiple is a fascinating, interwoven story of medical sociology/anthropology/philosophy and ethnographic work Mol did working with doctors and patients suffering leg pain (artheroscleroses).

The book is unconventional in that the literature review/dialogue with other academics take place in the bottom half of the page, in a two-column format while the top half of the page is devoted to descriptions of her ethnographic work and reflections upon it. I was skeptical at first of the split format, but my love of Borges and Cortázar rapidly overcame my love of linearity. After all, what is linearity but an assumption we impose on the world to make it tractable, an assumption we relax as soon as we are able*? Mol relaxes this assumption of linearity, or, moreover, imposes two lines of thought on a single page and thus forces the reader to decide more consciously than usual how to read her text – much as Cortázar forced the readers of Hopscotch to choose their path.

498 Words on Krugman’s Nobel Prize*

Readers of this blog are undoubtedly aware that Paul Krugman was awarded this week the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Readers of this blog also know that I have a long-standing interest in this particular prize. Krugman won the award “for his analysis of trade patterns and location of economic activity.” Krugman was not a favorite to win the prize, although his early work has long been seen as groundbreaking, and many blogging economists were not surprised with the choice.

Has Economic Sociology Won?

I wonder if one unanticipated outcome of the financial crisis and the rescue programs being implemented in the US, Britain* and elsewhere is the (perhaps temporary) victory of Economic Sociology. Ok, what could I mean by that? If Economic Sociology makes one claim, it’s Granovetter 1985 – economic action is embedded in social structure. But if Econ Soc makes two claims, the second is that the market economy has always been embedded in the social and political world, and only became disembedded ideologically, not practically (Polanyi 1944, 1947).

I think recent events have really made that second argument seem almost obvious. As this excellent op-ed points out, the debate is no longer between efficiency (the market) and equality (redistributive European-style socialism), but rather about the central claim of the neoliberal paradigm: that markets are self-regulating, functioning autonomously from the state. Key paragraphs:

Apologists for neo-liberalism assume not only that states should be run like companies, but also that, as far as possible, they should not intervene in the economy. The market, they insist, regulates itself.

But, more than 50 years ago, the Nobel laureate Paul Samuelson contradicted this idealisation of markets in graphic terms: absolute freedom for the market will lead to Rockefeller’s dog getting the milk that a poor child needs for healthy development, not because of market failure, but because “goods are placed in the hands of those who pay the most for them”.

This distributional quandary lies at the heart of the capitalist system, which is one of never-ending competition fuelled by the drive to maximise profits. In such a world, there is no room for a social conscience.
…
In fact, the market economy can function only if the state does intervene. The US financial crisis demonstrates what happens when markets are given free rein. Rather than regulate themselves, market players destroy themselves, however much they might be marvelled at as golden calves.

Indeed, investment bankers transformed stock markets into a surreal circus. For the most part, they resembled high-wire artists juggling borrowed money without a safety net. They threatened to crash — until the state stepped in. In Fellini’s film La Strada, the circus artists lived on the margins of society; in the “Wall Street Circus”, they lived like gods, making millions.

That’s over for a while. Wall Street has collapsed. The present crisis, the fall of Wall Street, is to neo-liberalism what the fall of the Berlin Wall in 1989 was to communism.

Thoughts? Should we declare victory, and party while the economy goes down in flames? Or at least say I told you so? And what does this mean for the future of economic sociology?

* As John Quiggin at Crooked Timber notes, “The British government has abandoned proposals for non-voting preference shares and is moving towards full-scale nationalisation of the banking sector.” The US, it seems may be soon to follow.

Two Financial Thoughts for the Day

1. What’s with this “real economy/Main St.” vs. “financial markets/Wall St.” business? Does anyone who has been following these kinds of crises for longer than me know if that’s a new way of framing this or an old one? How do we distinguish the “real” and “fake”* economies anyway? Sociologist and Business Prof. Jerry Davis said at a panel on the financial crisis yesterday that Main St. has become Wall St., as everyday people discuss credit default swaps, LIBOR and the TED spread, etc. I wonder if they were ever separable, and/or what people really mean by that. Perhaps what’s new is that Main St. is becoming aware that it has always been Wall St. as well.

2. According to the Fed’s FAQ, the goal of monetary policy is to promote “sustainable economic growth, full employment, and stable prices.” These three targets of monetary policy are measured by national income statistics, unemployment statistics, and inflation statistics, all of which came into being** after the Fed (which was created in 1913). The original purpose of the Fed, it seems, was to create a publicly run system to prevent and manage banking crises (a role played by JP Morgan in two crises at the end of the 19th and beginning of the 20th century). If Timothy Mitchell (1998, 2002) is correct, the Fed is now tasked with solving problems that literally could not have existed when the system was created. Hm.

* While “Main St.” clearly opposed “Wall St.”, it’s less clear to me what opposes “real economy”. “Fake” is the obvious opposite of real, but that seems to lack nuance and I don’t see it used. Is it the “financial markets” or “financial economy”? Is it just “Wall St.” with no real opposed term to “real economy”? I’m not sure.
** More or less anyway. Some of the ideas are much older, of course, but the first measures that were seen as up to date and reliable came in the 20s and 30s. See, for example, Revolution in U.S. Government Statistics 1926-1976 for details.

A Brief Financial Crisis Bibliography (I)

So, for a week now I’ve been meaning to post something about the economic crisis. My google reader is chock-full of juicy tidbits from blogs written by economists, sociologists, political journalists, etc. But everytime I sit down to write up something, 20 new entries flood in and I scramble to keep up. Eventually, by which I mean last night, I abandoned the project of writing up a semi-brief description of the crisis and decided to just create a list of resources that I’ve found useful. I’ve tried to organize them a little bit, we’ll see how it works.