I seldom waste time watching television. After the first round of incessant, vacuous commercials I'm ready to do something more interesting - like watching paint dry.
But I confess to having succumbed to a couple of NFL playoff games. And there was even a commercial that appealed to my ethnic sensibilities on money management. There was this guy squeezing a tube of toothpaste in a vise to get the last smidgeon out of it. Heck, the guy wasn't even Swiss.
What a great idea! Every bathroom should come equipped with a vise for that purpose. After all, I learned my practical economics growing up on that dairy farm just north of Monroe. And I learned my academic economics at UW-Madison and University of California-Berkeley from professors for whom the Great Depression was the defining economic event.
I thought we had learned something from the Great Depression. Well, actually we did. But those lessons dimmed, were forgotten, or deemed irrelevant with the passage of time.
We once learned that banks and financial markets had to be regulated, both to protect the public, and themselves from their own profligacy. We once learned that Wall Street cannot be trusted on "Scouts honor" alone. And we learned that regulation was rewarded by inflow of funds from around the world - because American financial markets were viewed as sound and worthy of trust.
Somehow, this all got away from us. Under the guise of "freedom and innovation" we gave Wall Street a pass. The Savings and Loan Scandal should have reminded us of going down the wrong path. The more recent Enron scandal was another wakeup call - ignored, as were other chinks in the armor visible to anyone who cared to look. But nobody wanted to spoil the party.
It doesn't take a financial wizard to know that profits are increased through leverage - as long as underlying asset values keep rising. But when leveraged asset values fall, you are squeezed like toothpaste in that guy's vise.
So, knowing this, why would a lender make a bad loan? Because he can collect the underwriting fees, sell the loan to someone else, and use the money to write more loans and collect more fees.
But why would anyone buy these bad loans? Under the Pollyannaish assumption that asset - read housing - values would keep rising, they weren't necessarily seen as "bad." And besides, they ostensibly were "insured" by the world's largest insurer, AIG. So how could you go wrong? But they really weren't insured in the true sense of the word. Hence, when housing values started to fall, the imperative to rescue AIG, lest the entire house of cards collapse, and with it the American economy.
To complicate matters, these questionable and marginal loans were often bundled with sound loans, and given AAA ratings by rating agencies paid by the outfits for which they were doing the rating.
Add to this new and complex financial instruments such as derivatives, hawked by peddlers who didn't themselves understand them. Investor par excellence Warren Buffet once quipped, "If I can't understand these instruments, it's because somebody doesn't want me to." We should have listened to him.
So there is plenty of blame to go around. We can nail the regulatory agencies for being asleep at the switch. But then we had a culture of deregulation. You can be sure that if the regulatory agencies would have gotten tough, self-serving "free market oriented" politicians and their Wall Street minions would have screamed foul. Nobody, including Fed Chair Alan Greenspan, wanted to spoil the party.
I still recall an introductory economics lecture when a sophomore at University of Wisconsin-Madison. The prof drew a line on the board. On one end was pure laissez-faire capitalism - all goods and services provided, and decisions made, by the private sector, no laws, rules or regs on labor relations, financial markets, public health or anything else. He reminded us that we don't have this and wouldn't want it if we did.
On the other end of the spectrum is socialism - all resources owned, and decisions made, by central government. That doesn't work either.
So what is the solution? It is the awkward, complex, but pragmatic task to "make capitalism work." We need the innovation and creativity of the private sector, and we need government to prevent excesses, take the rough edges off, and make sure that the fruits of production flow to the public at large. We need the resource allocation signals provided by prices and markets, while at the same time the system needs to serve society in such a way that we have a strong middle class.
To achieve this pragmatic balance is easier said than done. And it is the stuff of political debate to come up with the pragmatic mix of private sector and public sector that serves society's broader goals. And as the economy changes and evolves, new challenges emerge. The problem is never totally solved.
Competition plays a vital role in a capitalistic society. But just as we wouldn't send the UW and Ohio State football teams on the field to compete without sensible rules, reasonably enforced, we can't expect institutions that handle our nation's wealth to compete without some adult supervision. This means, apologies to Rush Limbaugh and his apostles, government, and reasonable and enforceable rules and regulations. We can argue over what is "reasonable," but it is clear that we have gone way to far in letting financial institutions run wild.
To make sure that regulatory agencies such as the Securities and Exchange Commission (SEC) do their jobs, we need appointees who believe in the role of government, and want it to work. And we need politicians who support them and encourage them to function in the broader public interest.
It may seem paradoxical, but rules that apparently "restrict freedom," can actually increase options. Example: Strictly regulated financial markets attract funds because of increased trust. It's not a matter of ideology; it's a matter of pragmatism. Let's do what works.
By the way, I was just kidding that every bathroom should be equipped with a vise. But you get the idea.
To be continued:
-John Waelti is former Professor of Applied Economics, University of Minnesota; and Professor Emeritus, New Mexico State University. He is a native of Monroe Township and currently resides in the City of Monroe. He can be reached at jjwaelti@charter.net.
But I confess to having succumbed to a couple of NFL playoff games. And there was even a commercial that appealed to my ethnic sensibilities on money management. There was this guy squeezing a tube of toothpaste in a vise to get the last smidgeon out of it. Heck, the guy wasn't even Swiss.
What a great idea! Every bathroom should come equipped with a vise for that purpose. After all, I learned my practical economics growing up on that dairy farm just north of Monroe. And I learned my academic economics at UW-Madison and University of California-Berkeley from professors for whom the Great Depression was the defining economic event.
I thought we had learned something from the Great Depression. Well, actually we did. But those lessons dimmed, were forgotten, or deemed irrelevant with the passage of time.
We once learned that banks and financial markets had to be regulated, both to protect the public, and themselves from their own profligacy. We once learned that Wall Street cannot be trusted on "Scouts honor" alone. And we learned that regulation was rewarded by inflow of funds from around the world - because American financial markets were viewed as sound and worthy of trust.
Somehow, this all got away from us. Under the guise of "freedom and innovation" we gave Wall Street a pass. The Savings and Loan Scandal should have reminded us of going down the wrong path. The more recent Enron scandal was another wakeup call - ignored, as were other chinks in the armor visible to anyone who cared to look. But nobody wanted to spoil the party.
It doesn't take a financial wizard to know that profits are increased through leverage - as long as underlying asset values keep rising. But when leveraged asset values fall, you are squeezed like toothpaste in that guy's vise.
So, knowing this, why would a lender make a bad loan? Because he can collect the underwriting fees, sell the loan to someone else, and use the money to write more loans and collect more fees.
But why would anyone buy these bad loans? Under the Pollyannaish assumption that asset - read housing - values would keep rising, they weren't necessarily seen as "bad." And besides, they ostensibly were "insured" by the world's largest insurer, AIG. So how could you go wrong? But they really weren't insured in the true sense of the word. Hence, when housing values started to fall, the imperative to rescue AIG, lest the entire house of cards collapse, and with it the American economy.
To complicate matters, these questionable and marginal loans were often bundled with sound loans, and given AAA ratings by rating agencies paid by the outfits for which they were doing the rating.
Add to this new and complex financial instruments such as derivatives, hawked by peddlers who didn't themselves understand them. Investor par excellence Warren Buffet once quipped, "If I can't understand these instruments, it's because somebody doesn't want me to." We should have listened to him.
So there is plenty of blame to go around. We can nail the regulatory agencies for being asleep at the switch. But then we had a culture of deregulation. You can be sure that if the regulatory agencies would have gotten tough, self-serving "free market oriented" politicians and their Wall Street minions would have screamed foul. Nobody, including Fed Chair Alan Greenspan, wanted to spoil the party.
I still recall an introductory economics lecture when a sophomore at University of Wisconsin-Madison. The prof drew a line on the board. On one end was pure laissez-faire capitalism - all goods and services provided, and decisions made, by the private sector, no laws, rules or regs on labor relations, financial markets, public health or anything else. He reminded us that we don't have this and wouldn't want it if we did.
On the other end of the spectrum is socialism - all resources owned, and decisions made, by central government. That doesn't work either.
So what is the solution? It is the awkward, complex, but pragmatic task to "make capitalism work." We need the innovation and creativity of the private sector, and we need government to prevent excesses, take the rough edges off, and make sure that the fruits of production flow to the public at large. We need the resource allocation signals provided by prices and markets, while at the same time the system needs to serve society in such a way that we have a strong middle class.
To achieve this pragmatic balance is easier said than done. And it is the stuff of political debate to come up with the pragmatic mix of private sector and public sector that serves society's broader goals. And as the economy changes and evolves, new challenges emerge. The problem is never totally solved.
Competition plays a vital role in a capitalistic society. But just as we wouldn't send the UW and Ohio State football teams on the field to compete without sensible rules, reasonably enforced, we can't expect institutions that handle our nation's wealth to compete without some adult supervision. This means, apologies to Rush Limbaugh and his apostles, government, and reasonable and enforceable rules and regulations. We can argue over what is "reasonable," but it is clear that we have gone way to far in letting financial institutions run wild.
To make sure that regulatory agencies such as the Securities and Exchange Commission (SEC) do their jobs, we need appointees who believe in the role of government, and want it to work. And we need politicians who support them and encourage them to function in the broader public interest.
It may seem paradoxical, but rules that apparently "restrict freedom," can actually increase options. Example: Strictly regulated financial markets attract funds because of increased trust. It's not a matter of ideology; it's a matter of pragmatism. Let's do what works.
By the way, I was just kidding that every bathroom should be equipped with a vise. But you get the idea.
To be continued:
-John Waelti is former Professor of Applied Economics, University of Minnesota; and Professor Emeritus, New Mexico State University. He is a native of Monroe Township and currently resides in the City of Monroe. He can be reached at jjwaelti@charter.net.
