标题: LESSONS OF THE FINANCIAL CRISISi [打印本页] 作者: tauringhuang. 时间: 2008-8-21 21:53 标题: LESSONS OF THE FINANCIAL CRISISi Martin Wolf
Thursday, August 21, 2008
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[T]he years since the early 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks, and the frequency and severity of financial crises.” Robert Aliber.ii
“The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war.” Alan Greenspan, Financial Times, March 16th 2008.
"I no longer believe in the market's self-healing power.” Joseph Ackermann, Frankfurt, March 2008.作者: tauringhuang. 时间: 2008-8-21 21:57
“Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.” Paul Volcker, The Economic Club of New York, April 8th 2008.
For three decades now we have been promoting the joys of a liberalised financial system. What has it brought us? “One financial crisis after the other” is a good part of the answer: the Latin American debt crisis; the US savings and loans crisis; the Scandinavian banking crisis; the US real estate crisis; the Japanese real estate bubble and subsequent financial crisis; the Tequila crisis; the Asian and Russian financial crises; the implosion of Long-Term Capital Management; the “dot.com bubble”; and now the “subprime crisis”.
All this, as a brilliant new paper by Carmen Reinhart and Kenneth Rogoff demonstrates, is exactly what we should have expected: banking crises have always followed financial liberalisation.iii This is not to say that liberalised finance brings no benefits. It has certainly made a substantial number of people extraordinarily rich. It may well have brought substantial economic benefits, as well. On that, the evidence is somewhat mixed. But of one point, there can be little doubt: the crises have been frequent and costly.
Gerard Caprio and Daniela Klingebiel provide information on no fewer than 117 systemic banking crises (defined as ones in which much or all of bank capital was exhausted) in 93 countries (that is, half the world) since the late 1970s. In 27 of the crises for which they have been able to obtain the data, the fiscal cost of the bail out was 10 per cent of GDP, or more, sometimes vastly more.iv
This was not a happy story. But an optimist – me, for example – might believe, or at least hope, that regulation was becoming better, management of financial institutions more adept and risk-management more sophisticated. Above all, such an optimist could – indeed, did - believe that the most advanced financial systems of the world, particularly that of the US, represented a promised land of sophisticated new transactions-oriented finance.
I wrote a piece on “the new financial capitalism” just before the crisis broke.v In this I argued that we have today “the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism. Above all, the financial sector, which was placed in chains after the Depression of the 1930s, is once again unbound.” I concluded the piece by noting that: “Our brave new capitalist world has many similarities to that of the early 1900s. But, in many ways, it has gone far beyond it. It brings exciting opportunities. But it is also largely untested.”
The test came, almost at once. This is why the latest crisis – the “subprime cum credit-freeze” of 2007 and 2008 - is, I believe, the most significant of the crises of the last three decades. What makes this crisis so significant? It tests the most sophisticated financial system we have. It emanates from the core of the world's most advanced economy and from transactions entered into by the most knowledgeable financial institutions, which use the cleverest tools of securitisation and rely on the most sophisticated risk management.
Even so, the financial system blew up: both the commercial paper and inter-bank markets froze; the securitised paper turned out to be radioactive and the ratings proffered by ratings agencies to be close to a fantasy; central banks had to pump in vast quantities of liquidity; the panic-stricken Federal Reserve was forced not only to make unprecedented cuts in interest rates but to rescue a broker-dealer, Bear Stearns; and the banks themselves have had to seek emergency capital increases from wherever they could find the money.
Even foreign governments have helped recapitalise damaged institutions. An indirect bail-out by the Federal Reserve is also under way, via the yield curve. Moreover, losses keep bleeding out. Few believe we have reached the end of this painful story. It is hardly surprising that Mr Volcker reached such a damning conclusion.
Meanwhile, as a footnote, though it is hardly just that, one of the UK's most dynamic banks, Northern Rock, imploded, generating the first British bank run for over a century and forcing the government, in effect to guarantee the liabilities – yes, I do, alas, mean the entire liabilities – of the British banking system. The UK prided itself on having as advanced a financial system and as sophisticated a system of regulation as anywhere. It can no longer do so.
So what has gone wrong? That seems to me to be the first question. Why has an era of economic stability – the “great moderation”, no less – globalisation, convergence and low inflation led to such a plethora of bubbles, crises and financial mishaps? And what, if anything, can or should we do about it? That will be my second question.
What has gone wrong?
How do we explain this pattern of repeated failure? The alternative perspectives on crises are particularly well displayed in discussions of the most recent one.
One view is that this crisis, like most others, is the product of an inherently defective financial system. An email I received a few months ago laid out the charge as it would be made by many ordinary citizens: the crisis, the writer asserted, is the product of “greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain”.
The more sophisticated version of this argument is that a liberalised financial system, which offers opportunities for extraordinary profits, has a parallel capacity for generating self-feeding mistakes. The story is familiar: financial innovation and an enthusiasm for risk-taking generate rapid increases in credit, which drive up asset prices, thereby justifying still more credit expansion and yet higher asset prices. Then comes a top to the asset prices, panic selling, a credit freeze, mass insolvency and recession. The credit system, then, is inherently unstable and destabilising.
This is the line of argument associated with the late Hyman Minsky. Economists would offer two contrasting explanations for such fragility. One is in terms of rational responses to incentives. Another is in terms of the short-sightedness of human beings. The contrast then is between cupidity and stupidity.
Those who emphasise cupidity point to the incentives for the financial sector to take undue risk. This is the result of the interaction of limited liability with
“asymmetric information” – the fact that insiders know more than anybody else what is going on – with “moral hazard” – the perception that the government will rescue financial institutions if enough fall into difficulty at the same time.
The alternative view is that it all comes down to age-old stupidity. To err is human. The financial deregulation and securitisation of the most recent cycle merely encouraged an unusually wide circle of people to believe they would be winners, while somebody else would bear the risks and, ultimately, the costs.
Whether the fault lay more in cupidity than stupidity, or the other way round, an obvious conclusion is that the failure was one of regulation. If regulators had done their job, by ensuring prudent mortgage lending, curbing the growth of off-balance-sheet vehicles, overseeing regulatory agencies, and so forth, the crisis would never have happened. Yet it is also evident that everybody involved – borrowers, lenders, politicians and even regulators – were simply swept away. Few remain detached in a period of euphoria, or of panic.
A related view is that the crises are actually caused by government intervention: regulation, in this line of argument, does not merely fail to offset the mistakes, but causes them. Governments foolishly provide explicit and implicit guarantees. Governments distort the market for housing, via -subsidies for long-term lending. Governments subsidise borrowing via the tax code. Regulators allow, or even encourage off-balance sheet finance. So, to get a better system, we need governments to withdraw and leave the financial system alone.
Yet there is a very different perspective. The argument is that all financial bubbles and subsequent collapses are the product of monetary policy mistakes. Thus, it is argued, US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001. This critique is widely shared among economists.vi The view is also popular in financial markets: “It isn't our fault; it's the fault of Alan Greenspan, that ‘serial bubble blower'.”
The argument that the crisis is the product of a gross monetary disorder has three variants: the most common view is that a mistake was made; a slightly less common view is that the mistake was intellectual, namely, the Fed's determination to ignore asset prices in the formation of monetary policy; and a still less common view is that man-made (i.e. fiat) money is inherently unstable. All will then be solved when, as Mr Greenspan himself once believed, the world goes back on to gold. Human beings must, like Odysseus, be chained to the monetary mast if they are to avoid repeated monetary shipwrecks.
(To be continued)作者: tauringhuang. 时间: 2008-8-21 21:57
Even so, the financial system blew up: both the commercial paper and inter-bank markets froze; the securitised paper turned out to be radioactive and the ratings proffered by ratings agencies to be close to a fantasy; central banks had to pump in vast quantities of liquidity; the panic-stricken Federal Reserve was forced not only to make unprecedented cuts in interest rates but to rescue a broker-dealer, Bear Stearns; and the banks themselves have had to seek emergency capital increases from wherever they could find the money.
Even foreign governments have helped recapitalise damaged institutions. An indirect bail-out by the Federal Reserve is also under way, via the yield curve. Moreover, losses keep bleeding out. Few believe we have reached the end of this painful story. It is hardly surprising that Mr Volcker reached such a damning conclusion.
Meanwhile, as a footnote, though it is hardly just that, one of the UK's most dynamic banks, Northern Rock, imploded, generating the first British bank run for over a century and forcing the government, in effect to guarantee the liabilities – yes, I do, alas, mean the entire liabilities – of the British banking system. The UK prided itself on having as advanced a financial system and as sophisticated a system of regulation as anywhere. It can no longer do so.作者: tauringhuang. 时间: 2008-8-21 22:02
So what has gone wrong? That seems to me to be the first question. Why has an era of economic stability – the “great moderation”, no less – globalisation, convergence and low inflation led to such a plethora of bubbles, crises and financial mishaps? And what, if anything, can or should we do about it? That will be my second question.
What has gone wrong?
How do we explain this pattern of repeated failure? The alternative perspectives on crises are particularly well displayed in discussions of the most recent one.
One view is that this crisis, like most others, is the product of an inherently defective financial system. An email I received a few months ago laid out the charge as it would be made by many ordinary citizens: the crisis, the writer asserted, is the product of “greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain”.
The more sophisticated version of this argument is that a liberalised financial system, which offers opportunities for extraordinary profits, has a parallel capacity for generating self-feeding mistakes. The story is familiar: financial innovation and an enthusiasm for risk-taking generate rapid increases in credit, which drive up asset prices, thereby justifying still more credit expansion and yet higher asset prices. Then comes a top to the asset prices, panic selling, a credit freeze, mass insolvency and recession. The credit system, then, is inherently unstable and destabilising.
This is the line of argument associated with the late Hyman Minsky. Economists would offer two contrasting explanations for such fragility. One is in terms of rational responses to incentives. Another is in terms of the short-sightedness of human beings. The contrast then is between cupidity and stupidity.
Those who emphasise cupidity point to the incentives for the financial sector to take undue risk. This is the result of the interaction of limited liability with
“asymmetric information” – the fact that insiders know more than anybody else what is going on – with “moral hazard” – the perception that the government will rescue financial institutions if enough fall into difficulty at the same time.
The alternative view is that it all comes down to age-old stupidity. To err is human. The financial deregulation and securitisation of the most recent cycle merely encouraged an unusually wide circle of people to believe they would be winners, while somebody else would bear the risks and, ultimately, the costs.
Whether the fault lay more in cupidity than stupidity, or the other way round, an obvious conclusion is that the failure was one of regulation. If regulators had done their job, by ensuring prudent mortgage lending, curbing the growth of off-balance-sheet vehicles, overseeing regulatory agencies, and so forth, the crisis would never have happened. Yet it is also evident that everybody involved – borrowers, lenders, politicians and even regulators – were simply swept away. Few remain detached in a period of euphoria, or of panic.
A related view is that the crises are actually caused by government intervention: regulation, in this line of argument, does not merely fail to offset the mistakes, but causes them. Governments foolishly provide explicit and implicit guarantees. Governments distort the market for housing, via -subsidies for long-term lending. Governments subsidise borrowing via the tax code. Regulators allow, or even encourage off-balance sheet finance. So, to get a better system, we need governments to withdraw and leave the financial system alone.
Yet there is a very different perspective. The argument is that all financial bubbles and subsequent collapses are the product of monetary policy mistakes. Thus, it is argued, US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001. This critique is widely shared among economists.vi The view is also popular in financial markets: “It isn't our fault; it's the fault of Alan Greenspan, that ‘serial bubble blower'.”
The argument that the crisis is the product of a gross monetary disorder has three variants: the most common view is that a mistake was made; a slightly less common view is that the mistake was intellectual, namely, the Fed's determination to ignore asset prices in the formation of monetary policy; and a still less common view is that man-made (i.e. fiat) money is inherently unstable. All will then be solved when, as Mr Greenspan himself once believed, the world goes back on to gold. Human beings must, like Odysseus, be chained to the monetary mast if they are to avoid repeated monetary shipwrecks.
(To be continued)作者: tauringhuang. 时间: 2008-8-21 22:03
“asymmetric information” – the fact that insiders know more than anybody else what is going on – with “moral hazard” – the perception that the government will rescue financial institutions if enough fall into difficulty at the same time.
The alternative view is that it all comes down to age-old stupidity. To err is human. The financial deregulation and securitisation of the most recent cycle merely encouraged an unusually wide circle of people to believe they would be winners, while somebody else would bear the risks and, ultimately, the costs.
Whether the fault lay more in cupidity than stupidity, or the other way round, an obvious conclusion is that the failure was one of regulation. If regulators had done their job, by ensuring prudent mortgage lending, curbing the growth of off-balance-sheet vehicles, overseeing regulatory agencies, and so forth, the crisis would never have happened. Yet it is also evident that everybody involved – borrowers, lenders, politicians and even regulators – were simply swept away. Few remain detached in a period of euphoria, or of panic作者: tauringhuang. 时间: 2008-8-21 22:09
A related view is that the crises are actually caused by government intervention: regulation, in this line of argument, does not merely fail to offset the mistakes, but causes them. Governments foolishly provide explicit and implicit guarantees. Governments distort the market for housing, via -subsidies for long-term lending. Governments subsidise borrowing via the tax code. Regulators allow, or even encourage off-balance sheet finance. So, to get a better system, we need governments to withdraw and leave the financial system alone.
Yet there is a very different perspective. The argument is that all financial bubbles and subsequent collapses are the product of monetary policy mistakes. Thus, it is argued, US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001. This critique is widely shared among economists.vi The view is also popular in financial markets: “It isn't our fault; it's the fault of Alan Greenspan, that ‘serial bubble blower'.”
The argument that the crisis is the product of a gross monetary disorder has three variants: the most common view is that a mistake was made; a slightly less common view is that the mistake was intellectual, namely, the Fed's determination to ignore asset prices in the formation of monetary policy; and a still less common view is that man-made (i.e. fiat) money is inherently unstable. All will then be solved when, as Mr Greenspan himself once believed, the world goes back on to gold. Human beings must, like Odysseus, be chained to the monetary mast if they are to avoid repeated monetary shipwrecks.