They got it wrong:
- the regulators who thought the liberalised financial sector would work just fine by itself, and
- stock market pundits and the financial media who were giving the public a false sense of security ahead of the crash.
“I was shocked”: Alan Greenspan, a longtime ideological champion of free competitive markets and deregulation, admits under official questioning that his model was distressingly flawed, not right, and not working.
Jon Stewart clashes with a stock market guru
Related posts:
Alan Greenspan believes in the power of free market but lacks the understabding of human “Greed” a powerful as well as evil part of human nature. It was human Greed that destroyed world communism not the western capitalism.
Now this Greed has come to haunt the western world in the doing of unregulated financial system reducing their citizens’ pension by half and creating unemployment
The world need fair trade, fair competition and regulated human behaviour.
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I just recently realised, the Mat Salleh is not that honest as what we potray them to be.
With all the nonsense going on there and the exhorbitant spending by top management ie private jets etc, I realise, the cronyism in Malaysia is not exclusive after all. It happens all over the world.
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I think some people like Anil mixed up liberalization and deregulation as one thing.
Market liberalization does not mean that you let the market force 100% freedom to adjust itself, is more on let everyone got equal chance to enter the market.
US financial crisis is mainly due to over-selling virtual financial products like derivative products worth three or four times than real economic. This kind of deregulation (no regulation!!) to allow bubble to grow is the culprit, not the liberalization of a protected market.
Liberal the market without regulation is creating another wild west world. Liberal the market with same sets of regulation applied to everyone shall be the answer to Malaysia.
Don’t be hypocritical to condemn bumi-first policy and at the same time you are asking same protection from the foreign competition.
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I respect his guts to admit his mistakes. But… Nasi dah jadi bubur.
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Netto, kindly note that the debate focus or soul searching in the West is about the financial system which is systemic in nature. The free market discussion is not about non financial market.
The financial collapse is a result of inadequate or non performance in the regulators doing their job! The debate is whether the financial system should be allowed to regulate themselves or be held in private sector hands.
So please read with care. Moreover the situation or issue here is different. I will not elaborate more, suffice to say our present issues here in Malaysia are quite different from the current debate in the West. Do not get mixed up. I speak also as a person with financial, corporate and economics background.
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Greenspan smells reptilian.
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Re liberalisation/de-regulation: I think the general literature is pretty clear on this that over the past quarter century or more liberalisation has meant de-regulation. It was said that over-regulation was the problem, hence the need to liberalise, i.e., de-regulate.
This should not be confused with competition and a competition policy. Many comments on this, and the previous, post appear to have confused a liberalisation stance with a competition policy stance. In many areas, liberalisation has, in fact, created monopolies, and allowed monopolies to flourish. One clear example is the media: the Murdoch group controls Fox, Star, the Wall Street Journal, Dow Jones, The Times (UK), the Far Eastern Economic Review, etc. The 5 largest banks in the US — most of them in deep s… — control over 70% of the business, are busy raising credit card fees, cutting credit lines, etc.
Should there be a competition policy? Yes.
As for whether the foreign boys will do better than the local, well, in the first instance, at this time and the medium term, there isn’t going to be much investment. In the second, does it mean that if the foreign boys come in that services will be cheaper? Not necessarily; in some sectors, it will likely become much more costly — the most costly health care services in the world are in the US, where every year some 30% of cases are misdiagnosed. Also, if you are local supplier, be prepared to face pressures to reduce your prices every year if you hope to deal with the big boys. Thirdly, will wages rise? Depends on sector; amongst the most poorly paid jobs in the US are jobs in the retail and hotelling services with the former being amongst the most anti-union. For a further indication, over the last quarter century, the US income distribution has become much more unequal, so much so that from a position where it was much more equal than in Malaysia in the mid-1960s, it is now as unequal as in Malaysia. Between 1993-2006, as the services sector grew, and especially the financial services, and the economy boomed, all the income gains went to the top 1%, a little bit to the next 9%, and virtually nothing to the remaining 90%; the top 1% captured half of the economic growth of the period. Fourth, will there be more jobs? Can’t tell without a full assessment — but as has been noted, the bulk of employment here is from SME’s, many of them in the services sector, e.g., in in-bound tourism, transport, retailing & distributive trades, etc. Sure, they can’t compete with big foreign players if they should come in. Wouldn’t we be better off to look into how we can help them improve, grow, be competitive? Why keep trying to go down the path of foreign investment, export-oriented growth — and make no mistake about it, the recent for the government’s move is to try to grow services export, whether you enjoy better, cheaper services or not is secondary. So, e.g., health tourism, to try and grow both travel services exports as well as health services exports.
Finally, there’s a great book by Korean economist Ha Joon-Chang, based in Cambridge (UK), called “Bad Samaritans” which sets out very clearly how when the countries we now called developed were developing, they were very selective about intellectual property rights, very protectionist, and so on, but now go around telling the developing countries not to do what they did — basically what he calls “kicking away the ladder (after they’ve climbed it)”.
Finally, finally, all in favour of the wholesale liberalisation of services — and it looks like its coming — better get ready to pay your RM100-150 for your DVD’s, no more pirated software, no more photocopying books, etc. because you can be sure that the foreign boys will be demanding such regulatory structures as a condition of their entry. It’s ok, you can subscribe to NetFlix.
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Dear Anil,
Our new government’s decision to liberalise 27 services sub-sectors by removing the 30 per cent Bumiputera quota on equity ownership in health and social services, tourism services, transport, business and computer industry and related services has been widely lauded.
That CAN BE very positive if only to “Challenge” all the Malaysian Businesses to “Walk their Talk” with Globalisation on a “Level
Playing field”….
To better prepare themselves to face “Global Realities”….
The Ocean of “Big Boys” surrounded by “Man eating Sharks”….
Time has come for all our Bolehland’s “Jaguh Kampungs” with their Ketuanan & NEP mindset….
To FACE the “TRUTH”….
I would also like to share this interesting article with you & your readers….
http://futurefastforward.com/component/content/article/1504
The Upside-down World of John Maynard Keynes – By Mark Thornton (25/4/09)
Mark Thornton
Friday, 24 April 2009 16:03
23 April, 2009 Mises daily
John Maynard Keynes often employed flowery language like “animal spirits” and “liquidity trap” to describe things he did not understand. He was, after all, more of a bureaucrat than an economist. In fact, he would best be described as an anti-economist because he eschewed things like supply and demand and held the opinion that government could run the economy.
So, for example, he could not understand why people would invest resources in risky adventures that helped keep the economy growing at full employment. He therefore substituted “animal spirits” for the profit motive. These spirits allow entrepreneurs to proceed with a naïve confidence and to set aside concerns over losses. Similarly, the failure to invest was also a psychological problem that he dubbed the “liquidity trap.” This trap occurs when investors seek liquidity in cash and when monetary policy — in terms of cutting interest rates — no longer produces an increase in investment.
The problem with Keynes is that he thought that if entrepreneurs lose their collective nerve, the government should socialize investment, prop up demand and employment, and provide assurances to drive the economy back to full employment. He did not understand how the economy works so he could not understand how the economy corrects itself once a contraction occurs.
The problem for us is that Bush, Obama, Geithner, and Summers are all following the Keynesian playbook, with Nobel laureate Paul Krugman serving as head cheerleader. If instead we just allowed the free-market process to work, the economy would likely have already bottomed; companies like AIG would be emerging from bankruptcy and the unemployment rate would be dropping instead of continuing to rise.
The market process was curtailed just a few months into this contraction and — over the last 15 months — has been almost wholly replaced with government intervention. Many of the interventions have been rightly described as “unprecedented” in that they are completely untried. This means that neither market participants nor policy makers have experience with them — and it shows.
This slew of interventions has been disorderly. Many interventions, like the takeover of AIG, were total surprises, causing volatility in stock markets. Moreover, these interventions have been extremely large and wide ranging in scope. Measured in dollar terms, the money “allocated” totals over $12 trillion by one account.
Ironically, by adopting the Keynesian position that we have lost our “animal spirits” and are suffering from a psychological problem of fear, the government has undertaken extreme policy changes that greatly undermine the profit motive. Entrepreneurs are no longer looking for new profit opportunities in the economy. Instead, they are more likely either trying to preserve their capital or lining up for a government bailout.
Preservation of capital requires that you place your wealth in low-risk assets like government bonds, cash, CDs, and gold. So people are saving more and paying down debt to protect themselves, but in Keynesian terminology, we have fallen into the very dangerous liquidity trap.
For Keynes, the liquidity trap occurred when frightened consumers attempted to save more and consume less. He reasoned that less consumption would hurt businesses and production and therefore put businesses and labor at risk. These lower incomes would mean, in turn, that the attempt to save more would actually result in a much worse economy.
The liquidity trap is really about hoarding and saving. While hoarding has a bad name among economists, it actually is a very good thing. Typically, people do not hoard resources irrationally or for no reason; they hoard as a way to protect themselves from dangerous situations. Depression, inflation, war, and other calamities are typically what cause people to hoard.
Not only does the increased saving help the economy, but hoarding is actually a good thing because it helps facilitate the process of deflation and deflation helps bring about recovery. If people reduce consumption (demand) then prices fall, particularly in the early stages of production. As all types of resources and goods are becoming cheaper, including labor, the purchasing power of every hoarded dollar increases.
All the prices that were bid up during the boom — particularly land, capital, and various asset classes — are thus reset at lower levels. Debt is liquidated and savings are restored and the prospects for a return to prosperity emerge, first among producers and then by consumers.
Therefore hoarding speeds up deflation and deflation speeds up the correction process.
But Keynesians are afraid of this process because they don’t understand how it leads us back to full employment and economic growth. I have named this fear apoplithorismosphobia.
Joseph Salerno has shown that there is no theoretical basis for this fear and Greg Kaza has shown that there is no empirical basis for this fear. Ironically, it is Keynesian policies, such as bailouts, stimulus packages, and inflation that should be feared, because they can threaten our animal spirits for profit and leave us stuck in the liquidity trap for many years.
Hoarding eventually fixes most balance sheets, but in a Keynesian-dominated economy, it takes an extremely long time. During the interval, people can become permanently jaded about the market and investing. They may become permanent hoarders.
This is what happened to many Americans who lived through the Great Depression. Frugality and thrift, while admirable, became a kind of psychological scar they wore for the rest of their life.
Keynesian-style policies have resulted in disasters such as the Great Depression, the
“stagflation” in the United States from 1970 to 1982, and the aftermath of the Japanese Bubble. Each lasted more than a decade.
It would be far better to allow for an unobstructed free-market correction process. With no government safety net or bailouts, there would be more hoarding, faster deflation, more bankruptcy, and a speedy return to prosperity.
While bankruptcy sounds horrible, it is actually a wonderful and orderly process. First of all, it fixes balance sheets quickly. It also provides an opportunity to remove current owners and administrators who operated businesses in a risky fashion. No need to worry about bonus questions here! Some bankrupt firms will go completely out of business and their resources will be auctioned off to other entrepreneurs at very low prices.
I would imagine that the dozens of startup firms working to bring electric cars to market would love the opportunity to buy an auto plant in Michigan for pennies on the dollar. Other firms will remain in business with most workers keeping their jobs, but bankruptcy reduces debt and cost and provides an opportunity to renegotiate contracts and wage rates.
The resulting environment after bankruptcy is one of new owners and operators with far less debt who have not had their “animal spirits” crushed. Firms would have less debt and therefore lower cost structures. Some consumers would be flush with hoarded cash and have an opportunity to buy at much lower prices. The economy enters recovery mode and can quickly attain full employment and economic growth. Most importantly, by not bailing out the losers, there is no moral hazard that entrepreneurs will believe they can rely on bailouts in the future.
Because they do not understand how the market works, Keynesians think this is a fantasy. But if you follow the Austrian recipe of allowing liquidation of bankrupt firms and debt, allowing prices to fall without monetary inflation, not propping up employment or subsidizing unemployment, and not discouraging hoarding, you will end up with the quickest possible recovery and minimize the magnitude of economic pain.
Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition and co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War.
Cheers.
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Basic tenet of capitalism = greed.
There is no capitalism without greed.
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Dear Anil and other Fellow Progressive Malaysians
It’s the end of the right-wing economics (“free market fundamentalism” as Joseph Stiglitz calls it) that rose to prominence
under Thatcher, Reagan and Kohl in the late 1970s.
All part of the counter-attack by right-wingers against Keynesian economics and the welfare state (beginning with the book “The Road to Serfdom” by Fredrich von Hayek published in 1944). The right-wing economists formed the Mont Pelerin Society to plot the ultimately successful counter-attack. Milton Friedman was one of these.
Please read Naomi Klein’s book “The Shock Doctrine” (chapter two).
Right-wing economics and right-wing economic policy-making went hand-in-hand with political repression in General Augusto Pinochet’s Chile and
Suharto’s New Order Indonesia. Chile’s economic policies followed advice given by the “Chicago Boys” (Chilean economists trained at the right-wing U of Chicago) and Indonesia followed advice given by the “Berkeley Mafia” (Indon economists trained at the less right-wing U of California at Berkeley).
The following progressive economists are worth reading:
Paul Krugman, Joseph Stiglitz, Dean Baker.
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Expecting the market to know what is best is like expecting people to eat wisely at a buffet dinner.
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Don’t confuse extraordinary happenings with a philosophy here. What has happen is NOT a failure of free markets but rather what sound free-market proponents have always said – free markets are not perfect but it is still the best system out there.
The current failure would not have manifest itself if not for fundamentally a political failure that began with George Bush Jr. that deregulated the sub-prime market to revive the economy from a tech-bubble and compounded by over-zealous innovations in the financial markets.
If we talk about these kinds of failure, other systems and other countries have failures a mile longer. Any country or system that encourages innovations and risk-taking is going to encounter such problems – no guts no glory. That is the nature of human enterprise itself.
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Anil is wrong in calling Greenspan a free marketeer. It is already established among serious economists/historians that Alan Greenspan was not a believer in free markets. He was a proponent of market interference (through his own intuitive tinkering of interest rates) which seemed so successful for a decade but proved to be disastrous in the late 1990s and 2001 when fed rates were cut to 1%.
This policy and misguided economic thinking that consumption and debt can create sustainable wealth is the main CAUSE of the US credit crisis. When debt was increased to make more profits, the greedy CEOs and bankers/hedge fund investors came into the picture. Not the other way round.
Read the late economist Dr Richebacher’s quote abt this:
“It is ludicrous, therefore, when American economists claim that rising asset prices, increasing consumption, should by counted as saving. When we read decades ago that Mr. Greenspan, long before he became Fed chairman, had expressed precisely this view, he was once and for all finished for us as a serious economist.”
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Anil,
The US system has been less of a free market in the past 10 years, first, especially when Alan Greenspan bailed out LTCM funds, and others.
Second, government intervened heavily in house lending through Freddic Mac and Fannie Mae. This is the source of the financial bubble.
Third, Alan Greenspan was a czaar of the financial system, determining the price of money. What free market would have price-deciding wise men on the mountain?
With these 3 key interventions in the core of the economy, Alan Greenspan is bound to fail. He had been a free market thinker operating against himself, within the constraint of big government, and he compromised severely.
The US is a relatively free-market economy, hitting the limits of the compromises with non-free market designs.
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flyer,
You are exaggerating by implying Obama and co follow pure Keynesian economics. Krugman may be a strong proponent of Keynesianism but he is also one of the strongest critic of Obama bailouts, albeit from the left. I don’t know what u meant by “unprecedented” and “untried” but I do see Obama is trying something parallel to Rooselvelt’s “New Deal” in today’s parallel environment to the Great Depression. Elizabeth Warren, the head of the US Congressional Oversight Panel stated that “The deregulated free market capitalist system in the US creates a recession in a 10 year cycle. The New Deal temporarily halted that cycle until Reagonomics in the 80s and 90s. Bush’s was just simple incompetence mixed with blatant ideologism in that of excessive tax cuts without any economic planning.
Obama promised change and that’s exactly what he’s doing. He’s going for the the European Socialism model and by the look of Germany and Sweden, it might not be too bad at all. Regulation won’t hinder competition. US automakers operated under deregulated market, German automakers under a more regulated European system. Yet which ones are facing chapter 11 today?
Kah Seng,
The housing bubble was one of many sources of the current crash but I won’t say that it was the main one. The dotcom bubble in the early 2000 didn’t create a market meltdown. Freddie Mac and Fannie Mae has been around since the late 60s and it has been proven that it could be sustained under stellar stewardship, that is under the Clinton administration.
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Geraint,
The dotCom melt down involved equity cash paid up front, burnt away, and paper value evaporated. There was no debt to drag down the economy.
The mortgage bubble was real money owed. The Democrats took over the Congress in 2006 and encouraged a ballooning of Freddie Mac and Fannie Mae.
Property prices were already high by then. Then poorer families who would not have qualified for home loans at that stage in their lives were encouraged to “buy high.” What else would be the outcome?
Remember all the problems and unresolved issue are really home mortgage-related: from toxic debts to collapsing financial institutions (holding those debts), and consumers not able to buy cars.
The government mortgage agency debacle is much greater than the media is acknowledging. In pundit world, it’s the elephant in the room no one wants to dwell into.
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