Joseph Stiglitz: Financial Hypocrisy

Joseph Stiglitz explains why he's not surprised that "the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies":

Financial Hypocrisy, by Joseph E. Stiglitz, Project Syndicate: This year marks the tenth anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to Korea in December. Eventually, it became a global financial crisis, ... unleashing forces that played out over the ensuing years... It was the worst global crisis since the Great Depression. ...

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India - one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. ...

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. ...

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.

Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.

But lack of transparency played a central role in this past summer's credit crunch... And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed.

But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.

Comments

[reason]

Interesting, a big name who agrees with me. But what is to be done?

[James]

Isn't capital market liberalization a perquisite to 'globalization?'

[paine]

stig
tells it mild but straight

the guy gets the big picture

"while the current system
may lead to unnecessary instability,
and impose huge costs
on developing countries,
it serves some interests well "
those interests ??

not just hi fi ers from the city and wall street
but all
south capital exporting
north product importing
trans border profmax
corporate operators

" It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies"

[paine]

james

"Isn't capital market liberalization a perquisite to 'globalization?'"

no
only trans border corporate driven
globalization
a lot of us se the huge permits
of earth wide integration
but not played
out at wall streets tables

the weebles north or south
don't get the best odds
cause
the house rules tilt the board

[paine]

reason

"what is to be done "

are you asking what could be done ??

why lots

make joe global trade czar
and watch

btw
is it wrong to suggest
you often
think thru a problem
till you stymie yourself
into inaction

[paine]

as a veteran radrev once told me

"too much agit not enough prop "

convincing the good hearted
soul
community
practical answers exist ...
but only
on the other side of
a huge political upheaval
the best answer to the WITBD question

build a new party
or
prolly better yet
brake one down
and rebuild it

[calmo]

This
"earth wide integration
but not played
out at wall streets tables"
reminds me that
private equity is
reported to be
shrinking those tables,
Tables that already
serve 1% of the population
2/3 of the dessert.
Agree Stig gets it
and delivers with
abundant civility, here:

"Of course, Wall Street (whose interests the US Treasury represents)[you figure *I* am heavy with the parentheticals?] profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc."

and here:

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic ["ironic"?, how about "mighty sad an disappointing"...or more iron-fisted: "confirmational" about the institutions rather than the office holders?] to see the US Treasury Secretary once again pushing for capital market liberalization in India"

[dissent]

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. ...

Sounds like Naomi Klein's 'The Shock Doctrine' to me.

[paine]

calmo

"Tables that already
serve 1% of the population
2/3 of the dessert."

talk about yer
unjust dessert portions

[reason]

paine

btw
is it wrong to suggest
you often
think thru a problem
till you stymie yourself
into inaction

I was actually addressing the question to Stiglitz, but is your remark meant to be personal or general.

It is true I'm not a person who thinks any action is necessarily better than none. And in this case I really are not certain of what the solution is, just that it definitely needed and soon. But it is difficult, because the problem is of essense an international one, and we don't really have functional international institutions.

But in some issues, I think the what needs to be done is clear, it just takes the will to do it. It is Americans I find rather constipated policy wise. They always want one trick that will solve all their problems (the pill culture?) instead of a package of related policies. I understand this is because of their odd political system, I'm a parliamentary democracy man myself.

[reason]

Boy two grammatical errors in one sentence

.. And in this case I really am not certain of what the solution is, just that it is definitely needed and soon.

[paine]

reason

stig has lots of remedies

forgive me
but
i thought you'd ripped thru stigs many published Rxs
and found em all or too many of em wanting

water buckets with holes in em

thanx for your answer
i agree regular guy america
needs
to shit a lot of crap out
of their systems
but haven't and possibly can't

[Peter Schaeffer]

I don't agree with everything he says...

However, Stiglitz is right about this one...

[gordon]

Not so much constipated policy-wise, reason, just unable to cope with any solution to any problem which involves Govt. action. It's just communism, man!

[Jay]

Don't forget in 1997 East Asia, it was the governments who owned the banks(indirectly through family) and were writing risky loans to their friends in business.
Many foreigners trusted that the banks were operating in their own self interest. Rather than doing their due diligence, investors threw money into the system hoping that something would be returned to them.
Similar to today's crisis, we learn that humans in general are lazy, and will always look for someone to pass the blame onto.

[James Killus]

Almost all the nations which have ever exercised a powerful influence upon the destinies of the world by conceiving, following up, and executing vast designs - from the Romans to the English - have been governed by aristocratic institutions. Nor will this be a subject of wonder when we recollect that nothing in the world has so absolute a fixity of purpose as an aristocracy.--Alexis De Tocqueville

The invention of the modern corporation, to an extent, reduced the power of hereditary privilege, by creating potentially immortal organizations in which were placed most of the privileges of aristocracies: limited liability, ownership of capital, access to power (lobbying), and all the rights of man (excluding, for some reason, the right to be executed, so otherwise revered), conveniently laid upon them by a 19th Century activist Supreme Court.

And indeed, nothing in the world has so absolute a fixity of purpose as a corporation, it's purpose being the acquisition of money and the distribution thereof, to its favored ones, shareholders (perhaps), and upper management (inevitably).

Moreover, the modern coporation is as fully a command and control organization as any army, or fief, lacking perhaps, only the latter's bondage of peasants to the land (wholly appropriate, given that many corporations are not only landless but multi-national).

American foreign policy from the beginning has been in the service of commerce; now it serves the commercial entities, those command and control organizations. Is it any wonder, therefore, that U.S. foreign policy has long been in service to authoritarian regimes? True, much of this has been inherited from the examples of the colonial empires, which were royalist from the beginning. But even in our own back yard, the propensity to overturn democratically elected governments in preference for more "business friendly" authoritarian regimes, is far too common to go without explanation. The simplest explanation is that "like trusts like," and the authoritarian CEO will smile upon the authoritarian dictator. The only question is to what extent each envies the other.

What is to be done? Well, we could try to bell the cat, or failing that, skin the beast. I will suggest, however, that ideology plays a role in what sort of behavior is allowed, and what is beyond the pale. At the moment, very little falls into the latter category, and I think a few more fingers may be pointed, names named, and crimes accused. Oh, and slapping at toadies is, at the very least, worth some entertainment. With props to paine, "Nobody really likes a kiss ass" is a phrase that is not used nearly often enough.

[calmo]

James,

"Nobody really likes a kiss ass" is a phrase that is not used nearly often enough.

Nobody? Not even the ass whose rear is kissed? I think it exceedingly common among politicians to kiss ass and expect the same in return. [But I B moved by the suggestion that this is an expression of self-loathing...somehow dovetailing well with politicians.]
Consider Her Majesty's line

"We are gathered here today...(so that you can kiss my well powdered bottom...and we all love it.)"

No, that wasn't it. Consider the less powdered bottom of Tom Delay and how many kissed that rump...and how few survived.

I suppose "ass kisser" is slightly more sensitive/polite/civil/composed than "brown noser". I'm sure cm can supply an international perspective, but I'm partial to the former and just cannot permit a slur against the nose.

[ken melvin]

Good and journeyman sir JK; now how do we clean up this mess made worse by the symbiotic frat boy who takes us back to the twenties with Cookie, Buffy, Brownie, ...? And, by the bye what was GW's?

[James Killus]

The notion that the objects of ass kissing like the ass kisser confused the performance with the performer. And while it is true that occassionally a john falls in love with a whore, it is rare, and seldom, if ever, reciprocated.

It is a major principle of flattery that the first effort is to convince the object of flattery that they are above such petty motives as needing fulsome praise. When every flatterer is publicly labeled as such, this process becomes more difficult.

Just a little suggestion for the small scale betterment of mankind.

[calmo]

Mulling this over, James:

The notion that the objects of ass kissing like the ass kisser confused the performance with the performer

and wondering if the ass kisser has reduced him/herself to merely the performance --warranting his dismissal and rebuke for being merely a servant of others...a substandard person. [A variation on the theme of self fulfilling prophesies?]
Tis about power and "kissing ass" is the expression (full of Principle) that has the balls to stand up and point out the obeisances of others...lessers...those mice.
I agree about the 3rd person usage disparaging the performance of others (and hence not "Excuse me while I go kiss some ass." nor, in a strong marriage: "I wish you would spend more time with the children and less time kissing the boss's ass.")
Generally, (possibly increasingly) people do things for money (to avoid starving in the tent)...not particularly for the love (no matter how wayward or saintly) of it (Mother Teressa) or the Principles (shortie's pitiful plug)...because they are personally corruptible (saw 'Shame' recently at an Amnesty meeting informing my views here), particularly in highly politicized environments --Delay particularly, but generally, w's term specifies the period.
Another facet of the increasingly disparate distribution of wealth and power.