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Monday, April 27, 2009

Government is Always the Scapegoat

The first session at the Milken Institute Global Conference [Update: Session video]:

Financial Recovery: When and How?


Mohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment Management Co. (PIMCO)

Steve Forbes, Chairman and CEO, Forbes Inc.; Editor-in-Chief, Forbes

Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC

John Micklethwait, Editor-in-Chief, The Economist


Michael Klowden, President and CEO, Milken Institute

The Global Conference kicks off by addressing the questions at the top of everyone's mind this year. Just where are we in the financial crisis? Is it the top of the eighth inning, or are we still stuck in the bottom of the third, with many more twists and turns still in store? Our panelists will attempt to quantify how much has been broken and how much has been repaired. What more needs to be done to promote a recovery? Are government efforts to restore normal lending and stabilize the banking system having any effect? What might be the effects of stimulus spending? Have we allocated too much — or too little — to address the problems? What indicators will signal that a recovery is under way?

I was curious to see how the attitudes had changed relative to last year, if they had changed at all, e.g. whether there would be any self-reflection, acceptance that the financial sector would have to change. But, nope, not from this panel anyway. There was a lot of talk and worry about the growing role of government in the economy, that was viewed as the main cause of all the problems in the past, and of problems yet to come. There was very little about the financial sector must change in order to stabilize the system going forward, very little about what needs to be done to clean up their own houses.

So the game so far this year, if one session is any indication, is to blame the government for the problems we have, and to point to the government as the biggest potential impediment to the recovery. I don't know if this is a conscious strategy or not, but it seems clear that blame the government is the defense against more regulation.

Forbes is a good example. He said unionization, the government takeover of banking and insurance, the stimulus program, regulation of the financial sector, and other government intervention will potentially stall the recovery. It was government that created this mess, he blames the Fed's low interest rates for the bubble (though later he blamed mark to market, fear of regulators causing assets to be undervalued, and the Fed allowing the dollar to fall too far, but the theme was always that government is the problem), and he says that if the government doesn't get out of the way, the recovery will be very slow. He had one main recommendation for ending the crisis: The Fed should aggressively buy MBS starting now. The fact that they haven't is the reason we are still having problems (so, it's the government's fault).

Griffin also blames government, even brings up the "how many people did we lift out of poverty defense" of financial innovation. But here's the argument that caught my attention. He says the the typical household does not understand all the ways it benefited from the financial sector over the last few decades. Thus, when we socialize losses, as we must do, we are merely taking some of those gains back - households are still better off overall. How is this the government's fault? Instead of explaining this to households so they'd understand, they have stoked populist anger, and that will lead to government reactions that will make things worse.

I shouldn't say that there was no attention at all to how the financial sector must change. In fact, one of the last questions asked was exactly that, "How must financial sector change?" Griffins answer was representative. He said that existing regulations are fine, but they weren't enforced. Thus, we need regulators to enforce what is there, not new regulation . In fact, he'd like some of the existing regulation to go away, and he cited California state law as an example. California has non-recourse laws, and he said this was a very large part of why we had the bubble. Without those laws, things aren't nearly so bad. He also blames Fannie and Freddie for the crisis, and says it proves regulation doesn't work.

The last question they were asked is "The one thing we should do to end the crisis faster." My notes on their responses:

El-Erian: Innovation got ahead of infrastructure. Don't kill the innovation, instead update the infrastructure. This was the closest anyone came to0 admitting that the financial sector must undergo change.

Forbes: The Fed should get more aggressive on MBS. Don't turn the US into Europe.

Griffin: Foster innovation by removing the government from picking winners and losers. The sooner we do that, the faster we'll recover.

Micklethwait: Sort out the good/bad banks as fast as possible, the fight for liberal, free market capitalism. Agrees with Griffin that government should explain how common person benefited from financial innovation so they'll feel better about helping to clean it up.

So there you have it, you don't know what's good for you. The financial sector is fine, so get out of the way, leave them alone, and let them make your lives better once again.

Needless to say, I see things a bit different. [I should edit this, but it will have to do as is ... off to the next session...]

Update: Here's the video:

    Posted by on Monday, April 27, 2009 at 09:49 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (50)


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