注册 登录  
 加关注
   显示下一条  |  关闭
温馨提示!由于新浪微博认证机制调整,您的新浪微博帐号绑定已过期,请重新绑定!立即重新绑定新浪微博》  |  关闭

N·格里高利·曼昆的博客

恒甫学社的学术性分支博客

 
 
 

日志

 
 
关于我
曼昆  

曼昆

网易考拉推荐

好文章来不及:solow 大战 posner  

2009-04-22 16:47:52|  分类: 默认分类 |  标签: |举报 |字号 订阅

  下载LOFTER 我的照片书  |

Volume 56, Number 8 · May 14, 2009

How to Understand the Disaster

By Robert M. Solow

A Failure of Capitalism: The Crisis of '08 and the Descent into Depression
by Richard A. Posner

Harvard University Press, 346 pp., $23.95

Noone can possibly know how long the current recession will last or howdeep it will go. That is because the dangerous combination of the"real" recession—the unemployment and idle productive capacity thatcome from lack of demand—and the financial breakdown, each being bothcause and effect of the other, makes the situation more complex, moreunstable, more vulnerable to psychological imponderables, and moredistant from previous experience. Whenever the US economy returns tosome sort of normality, or preferably before then, it will be necessaryto improve and extend the oversight and regulation of the financialsystem. The main goal should be to make another such episode much lesslikely, and to limit the damage if one occurs.

To make progress in that direction requires some understanding ofthe origins of the current mess. I once saw a hospital dischargediagnosis that read "sepsis of unknown etiology"; that sort of thingwill not help in this case. The need is not only for a clear picture ofwhat happened but for an assessment of the motives and actions of themain players, the causes and consequences of what they did, and theideas and institutions that encouraged, inhibited, and shaped theoutcomes. Richard Posner's book is intended to fill that need, in clearand understandable language. I think it is at best a partial success;it gets some things right and some things wrong, and the items on bothsides of the ledger are important.

More striking than what the book says is who says it. Posner is ajudge of the US Court of Appeals for the Seventh Circuit, and sopreeminently a lawyer. In addition, he is an apparently inexhaustiblewriter on...nearly everything. To call him a polymath would be a grossunderstatement. A partial list of his publications in the past tenyears alone includes How Judges Think; Law, Pragmatism and Democracy; Frontiers of Legal Theory; the seventh edition of his Economic Analysis of Law (first published in 1973); the third edition of Law and Literature; three volumes of essays on The Economic Structure of Law;and books on plagiarism, constitutional aspects of nationalemergencies, the election of 2000, the US domestic intelligence system,countering terrorism, public responses to the risk of catastrophe, theClinton impeachment, dealing with the AIDS epidemic, and,significantly, Public Intellectuals: A Study of Decline. There is a prehistory of still more books, and many articles in legal and other periodicals.



Judge Posner evidently writes the way other men breathe. I have tosay that the prose in this book often reads as if it were written, ormaybe dictated, in a great hurry. There is some unnecessary repetition,and many paragraphs spend more time than they should on digressionsthat seem to have occurred to the author in mid-thought. If not exactlychiseled, the prose is nevertheless lively, readable, and plainspoken.The haste may have been justified by the pace of the events he aims todescribe and explain. Posner has an extraordinarily sharp mind, andwhat I take to be a lawyerly skill in argument. But I also have to saythat, in some respects, his grasp of economic ideas is precarious. Inhis book on public intellectuals, Posner blames the decline of thespecies on the universities and their encouragement of specialization.I may be acting out that conflict. Remember that even hairsplitting isnot so bad if what is inside the hair turns out to be important.

The plainspokenness I mentioned is what makes this book an event.There is no doubt that Posner has been an independent thinker, never apassive follower of a party line. Neither is there any doubt that hisindependent thoughts have usually led him to a position well to theright of the political economy spectrum. The Seventh Circuit is basedin Chicago, and Posner has taught at the University of Chicago. Much ofhis thought exhibits an affinity to Chicago school economics:libertarian, monetarist, sensitive to even small matters of economicefficiency, dismissive of large matters of equity, and thereforeprotective of property rights even at the expense of larger and softer"human" rights.

But not this time, at least not at one central point, the main point of this book. Here is one of several statements he makes:

Some conservatives believe that the depression is theresult of unwise government policies. I believe it is a market failure.The government's myopia, passivity, and blunders played a critical rolein allowing the recession to balloon into a depression, and sohave several fortuitous factors. But without any government regulationof the financial industry, the economy would still, in all likelihood,be in a depression; what we have learned from the depression has shownthat we need a more active and intelligent government to keep our modelof a capitalist economy from running off the rails. The movement toderegulate the financial industry went too far by exaggerating theresilience—the self-healing powers—of laissez-faire capitalism.

If I had written that, it would not be news. From Richard Posner, itis. The underlying argument—it is not novel but it is sound—goessomething like this. A modern capitalist economy with a modernfinancial system can probably adapt to minor shocks—positive ornegative—with just a little help from monetary policy and mostlyautomatic fiscal stabilizers: for example, the lower tax revenues andhigher spending on unemployment insurance and social assistance thatoccur in a weakening economy without any need for deliberate action. Itis easy to be lulled into the comfortable belief that the system cantake care of itself if only do-gooders will leave it alone. But thatsame financial system has intrinsic characteristics that can make itself-destructively unstable when it meets a large shock. One suchcharacteristic is asymmetric information: some market participants knowthings that others don't, and can turn that knowledge into profit.Another is the capacity of financial engineering to produce securitiesso complicated and opaque—for example, collateralized debt obligationsand other exotic derivatives—that almost no one in the market canunderstand their implications. (Insiders still have an exploitableadvantage.)

Yet another characteristic is the inevitability of marketimperfections, so that what is essentially the same object can sell fortwo or more different prices; or so that some market prices can bemanipulated by large, informed operators; or so that some markets takea long time to match supply and demand. And yet another is thepossibility that large financial institutions can raise large sums ofcredit, in amounts and ways that can affect the whole system, withoutanyone taking account of, or feeling responsible for, the systemwideeffects.

In that kind of world, imagine a period of low interest rates. Oncea set of profit opportunities is found, big operators will be temptedto borrow so that they can play with much more than their own capital,and thus make very large profits. This has come to be called"leverage." Suppose I have $100,000 of my own, and I see an opportunityto earn a 10 percent return. If it pans out, I make $10,000; if itearns nothing, I have my original stake. If it loses money, that comesout of my initial capital. But I have a shot at something bigger. I canborrow $900,000 at, say, 5 percent interest, and invest the wholemillion. If it earns the expected 10 percent, I have $1,100,000; I canpay off my debt, plus interest of $45,000, and have $155,000 left. Ihave earned 55 percent on my money. Only in America! Of course, if theinvestment earns zero, I must still pay back my borrowing, withinterest, which leaves me with $55,000. I have lost almost half of mycapital; and it could be worse. Risk cuts both ways. What I have justdescribed is 10-to-1 leverage; the size of the total bet is ten timesmy equity.

In the past, 10-to-1 leverage would have been aboutpar for a bank. More recently, during the housing bubble that precededthe current crisis, many large financial institutions, includingnow-defunct investment banks such as Bear Stearns and Lehman Brothers,reached for 30-to-1 leverage, sometimes even more. So suppose I borrow$2.9 million to go with my very own $100,000—leverage of 29 to 1. I canbuy $3 million of whatever asset I fancy. If it earns 10 percent, Irepay the $2.9 million plus $145,000 in interest and go home with$255,000, having earned a mere 155 percent on my own capital. But now,if the investment earns zero, I have an asset worth $3 million andliabilities of $3.045 million. I am, to coin a phrase, bankrupt. Andthis is when I have invested in an asset that is worth, at the end ofthe year, exactly what I paid for it at the beginning. If I had boughta piece of a complicated package of subprime mortgages, as manyinvestors did, it might be worth less than I paid for it a year ago. Infact, there might be no takers at all. There is no way of knowing whatthe package of mortgages might be worth in a couple of years; when itcomes to raising more cash to cover my debt, it is worth essentiallynothing, i.e., it can neither be sold nor used as collateral. Whoeverlent me the $3.045 million, including interest, has lost the wholething.

Why did I do such a risky and, as it turned out, stupid thing? Well,it had worked in the past, and made a lot of money for many people. IfI had backed off, others would probably have continued to make moneyfor a while. I would have looked like a fool, and very likely anunemployed fool.

This sob story is just the beginning. Many highly leveragedfinancial institutions—banks, hedge funds, and insurance companiesamong them—have dug themselves into similar, interconnected holes. Theyhave borrowed from other financial institutions to make complicatedbets on risky assets, and they have lent to other leveraged financialinstitutions so that those institutions could make complicated, riskyasset bets. These are the "toxic assets" that weigh down the balancesheets of banks. No one knows for sure what anyone else is worth:they own assets of uncertain value, including the debts of otherinstitutions that own assets of uncertain value.

All those banks and others are now unwilling to lend to one anotherbecause they fear that the potential borrower is already broke and willbe unable to repay. And so the credit markets freeze up and ordinarybusinesses that need credit for ordinary business purposes find thatthey cannot get it on any reasonable terms. This is what happened inSeptember 2008 when the commercial paper market—the market for dailybusiness borrowing—ceased to work. The breakdown of the financialsystem exacerbates the recession; many who want to buy or build cannotget credit with which to do so. The recession then endangers thesolvency of more financial and nonfinancial borrowers and worsens thestate of the financial system.

I have deliberately kept this story stylized, omitting the juicydetails about complicated derivative securities that seem to bear onlythe most tenuous connection to the everyday economic realities ofproduction, employment, consumption, and so on. I have also ignored theeven juicier details of greed, stupidity, and corruption. Posner doesnot ignore those things. They provide an irresistible target foramusement and contempt. I wanted instead to focus on the central roleof leverage, because it is leverage that turns large banks andfinancial institutions into ninepins that cannot fall without knockingdown others that cannot fall without knocking down still others. Thatseems to be the key to the potential instability of an unregulatedfinancial system. It happens without any of the private actorsviolating the canons of self-interested rationality. Those canons wouldhave been different if the SEC, the Fed, and other institutions chargedwith regulation had insisted both that all transactions be made publicand that there be some limits on leverage.

It is a noteworthy intellectual event that Posner has come to thisunderstanding and expressed it forcefully and fearlessly. This sameunderstanding must then also be the key to designing regulations thatcan reduce the frequency of financial crises like the current one, andlimit the collateral damage to the real economy that they entail.Regulation should require that the uses and amounts of leverage, stilllargely hidden, be made public and that limits be set on the amounts ofleverage that financial institutions can bring into play.

Now let me turn to the recession itself. Posnerprefers to label it a "depression"—see his subtitle—as if there is someunambiguous dividing line that has been crossed. He defines adepression as a "steep reduction in output that causes or threatens tocause deflation and creates widespread public anxiety and, among thepolitical and economic elites, a sense of crisis that evokes extremelycostly efforts at remediation." All sorts of obvious questions arise.How steep? How many prices must fall for how long to qualify asdeflation? "Core" consumer prices—meaning prices for all consumer goodsand services exclusive of energy and food—had not fallen at all at theend of 2008. Even more recently, decreases in the price indexes havebeen few and sporadic. Wage rates have not fallen either, still less sowhen benefits are added in. Anyhow, one should mean by "deflation" acumulative, sustained fall in prices, not a scattered episode.Deflation is certainly a "threat." In a time of roughly stable pricelevel, any recession entails a threat. My guess is that Posneroverstates it. Finally, a "sense of crisis" seems merely to replace onevague word by another.

I am going to stick with "recession." Posner thinks this is aeuphemism in aid of denial. No: we are in a long and serious recession.When it is over we will be able to estimate roughly how much productionwas lost in the course of it. But I want to avoid the suggestion thatsomething qualitative happened at the end of 2007 or sometime in 2008,over and above the combination of recession and the financialbreakdown, or that we are on our way to the 1930s, which is grosslyunlikely. What is important is the interaction of the "real" recessionand the financial crisis. I mentioned at the beginning that they arereciprocally cause and effect, and that is what I want to clarify, atleast broadly.

Posner starts the story, reasonably enough, with the period of easymoney and low interest rates that began in 2001 as the Fed's normalresponse to the recession of that year, and lasted until the middle of2004. There was plenty of liquidity—money, or assets that can bereadily turned into money—and one result was a housing boom. In fact,construction had already increased pretty sharply during the prosperous1990s, in spite of generally unfavorable demographics, such as theaging of the population and the corresponding slowdown in familyformation, both of which diminish the need for living space.

But there was certainly a further spurt. About 1.2 million privatehousing units were started in 1990, 1.6 million in 2000, and 2.1million in 2005. Posner emphasizes the corresponding run-up in houseprices, and he is right to do so. But the housing boom was not just afinancial fact. By 2005 the country had clearly built many more houses,maybe two or three million more, than it could afford to occupy andfinance. There would have been a housing slump in any case. We have hadhousing booms and slumps before, with consequences no worse than aninterval of slow growth or a brief downturn, met with normal monetarypolicy and automatic fiscal stabilizers such as changes in tax rates orin public spending.

What made this housing boom different, of course, was the mix of lowinterest rates and the ability of the original lenders to package manythousands of mortgages into mortgage-backed securities that could besold off to the broad capital markets, where the buyers could have noreal grasp of how risky the underlying mortgages were. (The ratingagencies that were supposed to figure it out for them were waist-deepin conflicts of interest. Moody's and Standard and Poor's were paid bythe same institutions whose securities they were supposed to bejudging.) As a result, trillions of dollars of mortgages were sold,unscrupulously and deceptively, to buyers whose only chance of meetingtheir obligations was a continued rise in prices. (I remember aubiquitous TV commercial for a mortgage finance company whose punchline was: "When others say No, Champion says Yes." I haven't seen itlately.)

So this housing boom was enhanced by riskier and more opaquefinancial products that entangled a wider variety of highly leveragedfinancial institutions. The word "bubble" is often misused; but therewas a housing bubble. Rising house prices induced many people to buyhouses simply because they expected prices to rise; those purchasesdrove prices still higher, and confirmed the expectation. Prices rosebecause they had been rising.

To make matters worse, the fever spread to other assets: stockprices doubled in the five years 2003–2007. When the implosion came in2007, enormous amounts of what had been perceived as wealth—true,eventually spendable wealth—simply disappeared. According to datacompiled by the Federal Reserve, household wealth in the US peaked at$64.4 trillion in mid-2007, and had plummeted to $51.5 trillion at theend of 2008. Something like $13 trillion of perceived wealth vanishedin not much more than a year.

Nothing concrete had changed. Buildings still stood; factories werestill just as capable of functioning; people had not lost their abilityto work or their skills or their knowledge of technology. But apopulation that thought in 2007 that they had $64.4 trillion with whichto plan their lives discovered in 2008 that they had lost 20percent of that. A standard, empirically tested rule of thumb is thatan additional dollar of wealth induces the average consumer to increaseannual spending by an amount between four and six cents. So we arelooking at a potential drop in consumer spending of something like $650billion a year (5 percent of $13 trillion).

To see how big this is, remember that PresidentObama's stimulus package amounted to less than $800 billion, spreadover two or more years. If every dollar of stimulus were translatedinto a dollar of spending, this particular consumer-spending gap wouldstill not be filled. And not every dollar of stimulus will be spent;nor is the consumer-spending gap the only demand failure we have toworry about. But this is one very important route by which thefinancial collapse damages the real economy. Another, of course, is theparalysis of credit markets, limiting the ability of legitimatebusinesses and families to borrow and spend. Much the same thing seemsto be happening in Europe and in Asia, with national differences indetail.

Judge Posner does not quite get the role of the consumer right. Hesays that among the "immediate causes of the depression were theconfluence of risky lending with inadequate personal savings...so thatpeople couldn't reallocate savings to consumption." He is referring tothe fact that American families, who were saving 7 or 8 percent oftheir after-tax income not so long ago, had brought their saving ratedown to less than 2 percent on average in the years between 2001 and2008. If they had saved more they would find it easier to maintaintheir consumption spending in hard times.

But from the rational individual's point of view, the goal of savingis to add to one's wealth, to be used eventually in whatever way seemsbest. If your wealth is increasing anyway—as it was—there is less needto save from current income. The problem was that bubble-generatedwealth is very unreliable, to put it mildly. Judge Posner is much toosmart to expect the average household to see exactly how much of itsapparent wealth was at risk in an unregulated, highly leveraged, deeplyopaque, generally shortsighted financial system. Besides, there isplenty of evidence that many people rarely, if ever, alter their 401(k)allocations and, when they do, are very likely to alter them unwisely.

Most commentary, at large, in Posner's book, and in this review, hasbeen about how the financial collapse damages the real economy. Itmight be thought that somehow fixing the financial mess wouldautomatically fix the real economy. That is not so, for at least tworeasons worth mentioning. In the first place, all that vanished wealthcannot be restored; much of it was fluff, as we now know. Americanfamilies are not worth $64.4 trillion. There is no way to know nowwhether they are worth more than $51.5 trillion or less. When all thatshakes itself out, both the real economy and the financial system willbe different.

Secondly, the restoration of credit flows is not just a matter ofclarifying and strengthening the balance sheets of banks and otherlenders. It takes two to make a loan: a solvent and willing lender anda credible borrower. In a deep recession, there are not enough credibleborrowers, meaning businesses and individuals with excellent prospectsof being able to repay a loan on time, with interest. That is whydirect stimulus has to accompany the necessary work of cleaning up thedebris cluttering the financial system, by removing those toxic assetsfrom the balance sheets of banks and replacing them with clean capital.

There are other weaknesses in Posner's remarks on the real economy.For example, more than once he says that the various antirecessionarymeasures—like fiscal stimulus, bailouts—are very "costly" and "may dolong-term damage to the economy." He does not explain what these costsand damages are. Sometimes he seems to have budgetary costs in mind.But bailouts are mostly transfers from one group in society to another,for example from taxpayers to financial institutions and their owners.They are certainly not ethically satisfying transfers, but it is notclear how they do long-term damage to the economy. The components of afiscal stimulus package are costs to the federal budget; but to theextent that they put otherwise unemployed labor and idle industrialcapacity to work, they do not impoverish the economy; in fact, theyenrich it. (Of course, one would prefer useful projects to wastefulones.) If fiscal stimulus works, even imperfectly, there is no doubtwhich way the benefit–cost ratio goes.

Posner is on much firmer ground in worrying about the very largeincreases in the money supply and in the interest-bearing public debtthat are left behind by antirecessionary policy. Even there, we do notknow how skillful and lucky the Federal Reserve will be at mopping upexcess liquidity when the economy recovers, whether by arrangingrepayment of loans it has made to the private sector, or by selling offthe assets it has acquired along with Treasury debt. And if the economycan be restored to normal growth and sensible fiscal policy, the ratioof debt to GDP, which is what matters, can eventually be brought down.Without some analysis, this sort of talk does not spread light.

There is an even odder chapter called "A Silver Lining?" In itPosner flirts with the idea that a recession, even a depression, has agood side. It weeds out inefficient firms and practices. This is alittle like saying that a plague is not all bad: it cleans up the genepool. No doubt there is some truth to this idea of a purifying effect.But the notion that it could possibly compensate for years of lostoutput and lost jobs seems wholly implausible. There is certainly nocalculation of economic costs and benefits behind the thought of a"silver lining." I think it is another example of overemphasis on minorgains in efficiency and neglect of first-order facts.

Posner's chapter on "The Way Forward" is all ofsixteen pages long, and fairly disorganized pages at that. This meanshe does not seriously try to imagine what an effective regulatoryregime for financial markets would look like or, above all, how itcould be designed to protect the real economy as much as possible fromdamage inflicted by financial breakdown. Nevertheless he says someuseful things; and it is especially significant that they come from aleading conservative (even if never a tamely doctrinaire one). Here isa representative statement:

Other regulatory changes might be desirable, such aslimiting leverage; raising credit-rating standards and changing howcredit-rating agencies are compensated; forbidding proprietary tradingby banks (that is, trading of their equity capital, which puts thatcapital at risk); adjusting reserve requirements to take more realisticaccount of the riskiness of bank's capital structures; requiringgreater disclosure by hedge funds and private equity funds; requiringthat credit-default swaps be traded on exchanges and fullycollateralized; and even resurrecting usury laws.

In addition, he is clear that the enormous collection of federal andstate agencies with various regulatory responsibilities over financialinstitutions has to be somehow consolidated and unified. Also, thoughhe is unnecessarily ambiguous, a new streamlined regulatory apparatushas to apply to most of the financial sector, including hedge funds,not just the proper banks. If this is not done, new but just asdangerously risky and opaque practices will find their way between thecracks; and no agency will have the capacity or the responsibility todetect oncoming trouble.

Obviously that laundry list is not a blueprint for reform. It seemsto me that effective limits on leverage, even if they have to bedifferent for different classes of institutions, are basic tocontrolling the potential instability of the financial system. Evenwith more transparency, extreme leverage is what generates extremeuncertainty and systemic risk. And it also encourages the dangerouscompensation practices that Posner pillories. Leverage allows a cleverplayer to manage enormous sums; it is then irresistible to focus on theshort run and skim off mind-boggling paychecks and bonuses before theopportunity goes away.

The Obama administration has been trying to inject enough clarityand capital into the balance sheets of banks so that they can resumeproviding credit for businesses and consumers. The job of regulatoryreform has had to wait. The hints we have had suggest that theadministration understands the need to include the unregulatedinstitutions, and to set up at least an early warning system to detectmajor risks before they arrive. But there is no way yet to know whatform the new system will take. One would like to establish someprinciples before we forget how bad it can get.

The financial system does have a useful social function to perform,and that is to make the real economy operate more efficiently. Somehuman institution has to collect a nation's savings and put them at thedisposal of those who have productive ways to use them. Risks arise inthe everyday business of economic life, and some human institution hasto transfer them to those who are most willing to bear them. When itgoes much beyond that, the financial system is likely to cause moretrouble than it averts. I find it hard to believe, and I suspect thatJudge Posner shares my disbelief, that our overgrown, largelyunregulated financial sector was actually fully engaged in improvingthe allocation of real economic resources. It was using modernfinancial technology to create fresh risks, to borrow more money, andto gamble it away.

Posner writes:

As far as I know, no one has a clear sense of the socialvalue of our deregulated financial industry, with its free-wheelingbanks and hedge funds and private equity funds and all the rest.

That is already a hint that he thinks its social value is limited.As Posner sees it, talk about greed and foolhardiness is comforting butnot useful. Greed and foolhardiness were not invented just recently.The problem is rather that Panglossian ideas about "free markets"encouraged, on one hand, lax regulation, or no regulation, of apotentially unstable financial apparatus and, on the other, theelaboration of compensation mechanisms that positively encouragedrisk-taking and short-term opportunism. When the environment was right,as it eventually would be, the disaster hit.

April 16, 2009

  评论这张
 
阅读(140)| 评论(0)
推荐 转载

历史上的今天

评论

<#--最新日志,群博日志--> <#--推荐日志--> <#--引用记录--> <#--博主推荐--> <#--随机阅读--> <#--首页推荐--> <#--历史上的今天--> <#--被推荐日志--> <#--上一篇,下一篇--> <#-- 热度 --> <#-- 网易新闻广告 --> <#--右边模块结构--> <#--评论模块结构--> <#--引用模块结构--> <#--博主发起的投票-->
 
 
 
 
 
 
 
 
 
 
 
 
 
 

页脚

网易公司版权所有 ©1997-2017