Marketplace Scratch Pad

An economic metamorphosis

Scott Jagow Jan 4, 2010

Some of the country’s top economic thinkers have gathered in Atlanta to start the new year. They’re trying to explain to each other what in the world just happened and get a grip on the new realities facing the dismal science. The key question has to be — how and what do we change?

For his part, Federal Reserve Chairman Ben Bernanke says it wasn’t the Fed’s low interest rates that fueled the housing boom and bust. It was a lack of regulation and a lack of enforcement by the Fed and other agencies. From the New York Times:

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke said in remarks to the American Economic Association…

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” Mr. Bernanke said.

Bernanke says the lesson he’s learned is not that financial regulation is ineffective, but that its execution must be “better and smarter.”

But how do you do that? Seeking Alpha makes this point:

No one ever calls for worse or dumber regulation, but somehow, the regulations still somehow often fail to achieve the regulators’ ideal of a bubble-free, inflation-free, ever-growing, full-employment, full home-ownership economy, no matter how many Ph.D. economists are recruited to draft and administer the rules and no matter how hard they work to administer them.

On the other hand, Blogging Stocks says let the old man have a crack at it:

I agree with Bernanke, mainly because I would rather see the power taken from the banks and groups that caused the problem. I am at the point where one of the reasons I think the Fed should have control is because the central bank can’t screw the economy up any worse than it was during the recent crisis. Let’s give Big Ben a chance, it can’t get much worse, can it?

I don’t know, some of the economic forecasts coming out of this conference are pretty ugly.

But let’s stick with the issue of change. Seemingly, the free market and regulators failed, so what do we do now? Add new regulation? Fix the old regulation? Start over completely with our assumptions about how the economy functions? Joseph Stiglitz told the conference that economists share the blame for coming up with lame theories like the one that says markets work efficiently on their own. From Bloomberg:

Homeowners, investors and “probably” financial executives showed “marked irrationalities” and may have “bought into their own false arguments,” Stiglitz said.

“Economists should be included in the list of those to ‘blame’ for the crisis,” Stiglitz said in the presentation… There’s now a “window of opportunity” to build new theories “based on more plausible accounts of individual and firm behavior,” he said.

Where should these new theories begin? In a book coming out this month, “The Value of Nothing,” former World Bank economist Raj Patel has some answers:

…there is a recognition among the public and some politicians that today’s economic crisis is a failure of free market thinking, and not a warrant for more. In response to popular outcry, politicians around the world seem ready to discuss how to regulate and restrain the market. The question is, can they, and, if they can, in whose interests will this regulation work?

Patel says the solution begins with more political participation by the people. Only the people can make the change work for them. He says modern democracy has created a “transformation into consumers rather than citizens” and that “we need to reclaim responsibility, not just in what we buy but how we govern ourselves.”

Essentially, Patel is saying — stop crying “victim.” He cites Kafka’s novella “Metamorphosis,” in which the main character wakes up one morning as a cockroach:

Gregor Samsa’s response is revealing, telling us a little bit more about ourselves than we’d like. For what does Samsa do when he discovers he’s a bug? He doesn’t scuttle from his room screaming, or ponder how this happened, or what his transformation means, and what he might become tomorrow. His response is essentially this: “Poor me! How am I going to keep my job?”

Which is almost exactly how we’ve reacted to this economic crisis.

Okay, you’ve read a few thoughts here. Where do you think our economic metamorphosis should begin?

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