Bill Kristol wants to criticize the economic stimulus package that the Democrats are putting together, and that New York Senator Charles Schumer discussed on Sunday morning on This Week. But a year of being wrong about basically everything has made Bill into a bet hedgin' man, and so he titles today's op-ed "Admit We Don't Know," fills it with equivocations ("It's not as if [Schumer's] colleagues have a better understanding of what has happened, or of what should be done. And it's not as if the rest of us do."), and tries to build a case that all of the maladies that have beset our economy could not have been predicted, and were not, in fact, foreseen:
In his interview, Schumer appealed to the authority of economists. Economists still do have considerable sway in our public life -- even though it doesn't seem that a large number of them have been particularly prescient in warning about, or strikingly persuasive in explaining, the current economic situation.
You sort of get the feeling that maybe Kristol is carrying water for an administration that royally FUBARed our pocketbooks, huh? Over at NY Mag's Daily Intelligencer, Moe Tkacik took the opposite point of view:
But for years, Wall Street has exhibited only contempt for anyone on the government payroll who did not work for the Fed. This attitude was abetted and enabled by a Republican leadership that did not trust its own party members on the Financial Services Committee. They saw this coming -- when Long Term Capital Management almost exploded the markets as a direct result of the "counterparty risk" that bound us to bail out AIG, when Enron touched off a wave of 30 or so separate multi-billion-dollar accounting restatements that killed Arthur Andersen and made laughingstocks of the entire accounting industry -- but the fact-resistant, and fundamentally provincial, disdain of jerkoffs like George W. Bush and Tom DeLay...kept them from doing anything, in a perverse decade-long pattern of willful neglect that systematically and repeatedly undermined every federal agency charged with regulating the financial system. (The latest and most egregious example of this: the Office of Thrift Supervision, the regulator to whom Countrywide Financial opportunistically "switched" from the merely woefully neglectful SEC in 2007.)
So was it a failure to predict outcomes or a strategy of neglect? Well, I'm siding with Tkacik. But in the spirit of Kristollian equivocation, I'll allow: it's possible that the economists Kristol follows failed to account for the looming market downturn. This just means the Kristol needs to start following better economists. So do we all, maybe. For instance, it would have been useful, as a baseline, to hear someone issue a common sense warning that when companies that rack up huge hidden debts and traders who illicitly amass mountains of risk are exposed, Wall Street's big players rush to cut their losses and collect on their debts. If that kind of rush were ever to result in a shortage of cash, it would paralyze the financial system. Stock markets would tumble and banks would close, putting the savings of households at risk.
Oh, looky! Daniel Altman, in February of 2002:
When companies that rack up huge hidden debts and traders who illicitly amass mountains of risk are exposed, Wall Street's big players rush to cut their losses and collect on their debts. If that kind of rush were ever to result in a shortage of cash, it would paralyze the financial system. Stock markets would tumble and banks would close, putting the savings of households at risk.
I think that qualifies as prescient! Some other recommendations for Kristol:
[Derivatives are] financial weapons of mass destruction.[...]
Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years.[...]
Large amounts of risk have becomes concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systematic problems.
These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.
If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.
How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.
One way or another, the economy will eventually eliminate both imbalances.
Via Boing Boing, here's a video, spanning the years 2006-07, of Peter Schiff straight-up calling the ball, as the sorts of arrogant ignoramuses that Kristol probably pays attention to laugh off his predictions:
Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks - when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ....I shiver at the thought.[...]
The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events 'unlikely'.
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.[...]
Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble.[...]
Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown.[...]
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress.
In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.
We face an economic downturn that's likely to be the worst in more than a quarter-century.
Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there's no great mystery here. The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero.
It's a bleak picture. The total loss from this economic downturn -- measured by the disparity between the economy's actual output and its potential output -- is likely to be the greatest since the Great Depression.
Finally, it may be worth recalling that back in 1999, Senator Byron Dorgan took a long look at the furtive deregulation efforts of Phil "Nation of Whiners" Gramm, and said:
I think we will look back in 10 years' time and say we should not have done this, but we did because we forgot the lessons of the past and that that which is true in the 1930s is true in 2010.
And here we are, ten years on. Bill Kristol must feel like Oedipus at Colonus!
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