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Dinner With Nobel Prize Winner Joseph Stiglitz
The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.
The unfortunate thing is that you also don’t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.
Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.
This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz’s own work on “information asymmetry,” which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.
The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created risk.
A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush’s response was to unleash an extreme form of “trickle down economics,” with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.
The financial system is now more distorted than ever, with major institutions wards of the state, and smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The “once in a 100 year tsunami” argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments, meaning there will be more foreclosures in 2010 than in 2009 or 2008. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.
The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate. The 40% of the stimulus that was tax cuts will get saved and create no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. The inadequacy of the first package means a second is almost a certainty. Any major spending cuts will produce “Hoover” outcomes.
The outlook for the economy is bleak, at best.
Well, I don’t get to chat at length with a Nobel Prize winner every day, so I thought I’d give you the full blast, even though I had to leave a lot out. I’ll talk more about markets tomorrow.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
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Uhhh... really? Someone tell that to California...!
Another person on the "save or create" bandwagon. Tell me, how do you know they saved "2%" and not 5%...? Are you just pulling numbers out of your @ss?
Watched Stiglitz on Charlie Rose last night.
Rose again threw only softballs
It was an interesting contrast to the brutal beating the hedge fund
manager gave Stiglitz
After watching the Rose interview, it became evident that Stiglitz
is an honest chap, just naive. Which defines just about every academic I know
Stiglitz identified the players and problems, but his solution is
to throw more cash at this problem, which tells me he doesn't have
a clue as to how to solve this thing.
When will the politiicans let the Volckers , the Art Laffers and the
William Blacks of this nation get a swing at this problem?
It appears that actually having solved a problem in the past disqualifies you from any future problem solving....failure is rewarded with more attempts,
especially in the case where one created the problem in the first
place, otherwise known as Munchausen by proxy at work.
Wow, some real question-begging by Stiglitz (mixed among some good points), but here's a couple that stood out:
"The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate."
Sorry, but it should be obvious to anyone who's actually been following the economy that the size of the stimulus at this point was irrelevant. It was a $787 billion hedge bet that the economy was in a normal business cycle and not the debt-based downturn that it really was--Romer wouldn't have made that stupid 8% U3 prediction otherwise.
"The 40% of the stimulus that was tax cuts will get saved and create no immediate beneficial effects on the economy."
When you actually look at the money designated as "tax cuts," what it reveals is that the money was divided across several programs as rebates, tax credits, and bond purchase allocations for various entities. These are not the same thing as "tax cuts" by any stretch of the imagination, but especially not the "Making Work Pay" credit. Most of these so-called tax cuts are not cuts in tax rates, but are simply programs being funded with bonds, i.e. additional government debt.
"More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy."
Actually, most of the money HAS gone to the states--to prop up their underwater budgets. Any cursory investigation of the stimulus allocations confirms this. The fact that many spending programs had to be set at 2005 levels (the height of the housing bubble) in order to get the stimulus funding just made the problem that much worse, because states are trying to pay for 2005 budgets with 2010 sales and income tax revenue, which has plummeted. This is probably why Obama and the Dems' decision to hold back most of the money until this year will come back to bite them in the butt, because if the stimulus really does end up impacting national employment, it will probably be too late by this fall.
The fact that the Obama administration has displayed a ridiculous case of political ADD over the past year will not really help matters at all, given that they can't seem to focus on the #1 issue for voters--the economy--longer than a week or two.
Thanks, MHFT. That was a very interesting post. Ignore the silliness... please.
i.
Economists are like rates on a ship...
WTF...Stiglitz got a nobel prize for "proving" the fucking OBVIOUS????
Economics is the biggest JOKE in the history of the world. These idiots understand NOTHING and yet they are given the levers of power
Actually psychiatry/psychology is just as bad. Only the drugs have names like risperidone, xanax, etc, whereas in economics they are called bailout, stimulus, Tarp, etc. They are both based on the same kind of scientifish logic, "Let's try this and see what happens even though we don't understand the underlying mechanism."
As for Krugman, he laid out his theory in his little book "Depression Era Economics". Keysianism is basically represented by his highly sophisticated description of the Capital Hill Babysitting Co-op. That's all there is to it--it's a good story taking about two pages to relate. Then the higher ups like Bernanke take these "highly developed theories" and try them out on us to see what happens. They don't understand the underlying mechanisms of the economy. Does anybody? I sure as hell don't.
I read "depression era economics."
It was much more interesting than the crap they make me learn in B school.
The Nobel prize is the real joke these days.
Yasser Arafat got it ... for being a terrorist, then pretending to be a statesman, and in the process rejecting Palestine's only real chance for peace.
Al Gore got it ... for producing a lame, scientifically inaccurate, and hyperbolic documentary that grossly exaggerated the case for anthropogenic global warming.
Barack Obama got it ... for absolutely nothing.
The nobel prize medal is actually made of real gold though, unlike the olympic gold medal which is 92% silver in composition.
I don't know why I brought that up, but, GOLD bitchez!
I wonder how much this assclown economist is being compensated to advice the EU that wailing on the euro shorts is the key to their long-term success?
Information asymetry is matter of speed and access, not content. McLuhan wrote about this fifty years ago. Greenspan did not assume the asymetry existed, as most computer programs have about the same reaction speed, he didn't imagine some trading platforms were faster than others, and they could leverage even a nanosecond advantage. But even the amateur daytrader knows the difference between your generic online broker and a platform. As your time frame shortens seeing order flow, and having computer programs to make the split second decisions is what separates the institutions from the individual. It's not financial leverage which ruined the economy, its the renter class, the vampire squid, the quants, which extract payment for order flow, and reduce liquidity. The government response to the liquidity crisis was to place a bid under the market, to which the renter class said thank you very much, and they went back to their ways. The government said reflate , and they tapped the taxpayers through deficit spending, and the renter class said thank you again. The solution requires different regulation than those who think this is an information content problem.
My favorate villain is the Boob Tube. Shortens attention spans, provides erzatz gratification before young minds have discovered the real world. No chance at a larger life.
+1
Stiglitz is a "more debt!!!" kind of "reformist"
and therefore just another douche bag
MHFT ought to interview Tiger Woods' putter
Holy Crap, Next you'll be dining with Elvis.
Good for you!
I am beginning to think as well that the madhedgefundtrader has a great imagination as he seems to be able to sit down with every significant person in business, politics and the military weekly. Let's see some pictures!
As for the Nobel Peace prize I think that "nobel" institution is now seen as just another body promoting an agenda to influence the masses and has really no meaning. The money that comes with the award is the real prize. If in doubt, remember the "peace prize", still fighting two wars and possibly a third on the way. Yepee. (FYI- I have no opnions on the wars and just see them as a result of the political/economic system).
I guess you need a Noble to not understand that this is simply a monetary/debt crisis. Is it really that hard for economists?
Overleveraged economy = inflationary economy in a debt based monetary system.
Deleveraging = deflation
Overleveraging is unsustainable = deflation must follow
So there was no economic crisis between the end of the Depression and Reagan huh?
I guess Nixon closing the Gold Window and the 70's - which ended with US Treasuries yield 15% doesn't count.
Maybe the US economy did so well because the rest of the world was left in rubble after WWII.
Anonymous 252195:
On target!
After WWiI, Europe was bombed out, Japan was not competitive, the US had a lot of the Allies' gold and lots of pent up demand. To soldiers returning from the Pacific islands and Europe, a 1,600 sq.ft. house was a palace. Productive physical labor was a game after sleeping in muddy foxholes. Our industrial machine with "modern" production procedures, seriously undertaken, was intact. Almost anything that could be made could be sold, domestically or abroad. The library in Birmingham, MI did not subscribe to the Wall Street Journal in 1950; in wasn't significant. Real wealth, through production, was being accumulated. And, if you want a look at what cross country travel was actually like for a large segment of the rural population before WWII, rent a copy of "Grapes of Wrath"(the movie).
Eisenhower, who probably had more real support than any president since, started the federal highway system. Many of the states were supporting other infrastructure programs.
By 1963, WWII was 18 years in the past, and IMO, the mini-bubbles started. The war in Vietnam served to keep the military-industrial establishment intact. Under the Kennedy administration the circulation of the $1 silver certificate was ended. In 65 the production of 90% silver coins ended. The inflationary process successfully prevented a downturn until the mini-recession from 69 (end of Vietnam) to 73, gas was still 25 cents per gallon, the last thing the populace worried about.
Oil exploration and production in the US and undeveloped middle east was producing very cheap oil. But Nixon ended the conversion of dollars into gold in 71. At that time, the Arab countries, who were getting 5 to 10 cents a barrel for their $2/barrel oil, began to decide they wanted half. Gas prices went to $0.75 per gallon and lines formed at the gas pumps.
In 1974 Ford undid the Roosevelt executive order prohibiting private ownership of gold coin; prices eventually soared. Under Carter the inflation rate got up to 12%(cold war). Carter appointed Paul Volker and he stopped inflation cold, bursting that particular mini-bubble.
Then along came Reagan who got credit for the Russian “pacification” but it was really a gradual process starting with the death of Stalin and the Russian monetary exhaustion from competition with US programs in earlier decades. I was never a great fan of Reagan due to his full deregulation of the airline. If an aircraft has the wrong kind of trouble, a lot of people die. The Israelis hardened their cockpits. We had hijackings and an Oklahoma City bombing but didn’t harden our cockpits. The phrase; “He always knew where the camera was.”, seems appropriate.
IMO, as long as we have food distribution things will not be too bad. The govenment will eventually have to focus on that and education. Housing is available if the people who need it can maintain it. Medical care? When things start to get really rough, I am sure the surviving politicians will be well focused on working things out.
Yeah, I mean, the late 70's was a wonderful time of prosperity for all of America. I'm surprised that he didn't bring that up.
Good post.
the two comments prior to mine are just foolish. Nothing worse than fake capitalists. I see things like this posted towards the comment and the only thing I can think of is that the big boys are going out in blogs making a determined effort to smke screen the truth. the same way the tobacco industry did with their products, or the coal industry does with global warming. This helps to allow thosein power to justify the status quo for their own benefit.
I would hope those reading this aren't fooled by those before me. the data is clear. Income disparty if off the charts, wages have effectively stayed the same for 20 years for the middle class, the power of the dollar is gone, ceo and bonus money is at record. This isn't about socialism, capitalism, etc. It's about who does our government work for. does it work for the benefit of the great majority, or does it work for the benefit of the few.
Nobody would say you should be able to sell any toxic product without regulations. Unsafe cars, poisoned food, unsafe medicines, etc. Yet for some reason the folks believe the financial system should be different. Please give me a break. If I was selling toxic baby food I'd be in jail, yet selling toxic crap by banks is OK?
I'm afraid the arguments don't stack up if you think about it. Should any industry be allowed to pollute as much as it wants. the job of government is to allow capitalism to functions, but that doesn't mean giving them free reign to profit and the expense of 95% of the people who live int the country.
The facts speak for themselves. we had the great depression whcih led to good regulations, they were gotten rid of and we had another. fool me once shame on you, foold me twic shame on me. Are we going to let these people fool us a thrid time
anomyous:
"the two comments prior to mine are just foolish."
I might agree if I was sure which "anomymous" you are.
What the heck are you talking about? I am the author of one of the two comments that seem to have set you off. Both of those comments argue that Keynesian-type stimulus in general, and borrow-and spend in particular, don't work. And then you go off on a rant about unsafe cars, poisoned food, etc. that has absolutely no bearing on the issue at hand. We didn't say anything about Glass-Steagall or any other regulatory issue.
Stiglitz is smart and has called it generally right, but his policy prescription for solving this problem is idiotic and stupid. Deficit spend more, print money and voila everything will be solved!! He, Krugman are all stupid Keynesians...the deficit spending and money printing will be channeled to asset bubbles and non-productive areas and will lead to inflation! I don't know why these Nobel prize winning economists don't understand the basics - you CANNOT create wealth, you can create money all you want, but true wealth is not created by deficts and printed money when they are channeled into asset bubbles! This country is doomed to a slow growth punctuated by brief spurts of growth driven by stupid stimulus measures.
"Any major spending cuts will produce “Hoover” outcomes."
Nevermind that Hoover actually increased federal spending by over 50% during his one term in office, largely in response to the economic downturn. And that FDR was essentially just continuing Hoover's approach. Keynesians always conviently forget that.
Hugh Hendry exposed Stiglitz as the fool he is.
And Glass Steagall was a big deal.
Yet the effects of CRA (community reinvestment act) seem to always be ignored, the ugly step child of this discussion, in spite of being the proximate cause of the meltdown.
Economics is a social study, not a science. A nobel prize in Economics is pretty much meaningless.
It's worse.
Look at the QTM...MV=PT.
Does this look like the foundational equation for a serious science? 4 variables that are nonquantifiable.
Compare this with a basic chemistry equation or one from engineering.
Economists DESERVE no respect from anybody.
means a lot when the dude is wrong and the mass of elected clowns act on his musings, and the biz schools teach his flawed ideas as though they were the Word.
i suppose if the market were 100% government, we would live in a Stiglitz paradise.
This shows that the award of a Nobel prize doesn't mean the recipient is any smarter than half the guys at the corner bar. Where is the stimulus $ coming from - is it manna from heaven? Who says the gov has the knowledge to allocate it most productively. He said in Barrons the productivity from the stimulus will pay for the additional debt incurred. He says the politicians will cut back on gov spending when appropriate - What? I say take the prize back.
jc125d:
Agreed! And add Merton's prize to the take back. He is the "genius" who did not understand that standard statistics cannot be used in predicting human behavior. Man is a communicating, herding animal, not a flipped coin.
Am I the only one who wonders if madhedgefundtrader simply concocts these interviews in his head?
I subscribe to Bill Fleckenstein's service, and Bill mentioned that he did an interview with MHFT and really enjoys his writing. Maybe the guy actually does have serious contacts. Who knows?
Did he make a lot of money trading, or has he just made that up? And why do all these movers and shakers talk to him--what has he done that's so special? I get tired of his constant name-dropping. At the very least it's not interesting, and what he takes away from his interviews makes me wonder how he could have been a great trader with such a paucity of ideas.
That's preposterous. Of course he's not making it up. Did you read his interviews with Abe Lincoln, JFK, and Jesus Christ? All of them really brilliant, and they could only have come from the men themselves. The investment tips that he got at the Last Supper were amazing (long GLD, MYRRH, FRNKNCNS).
Missing, you are so ON.
+1000
At least he stays true to the first three letters of his name. As to whether or not he's still a hedge fund trader, that is questionable. Imagining all these high profile dinners and writing about them must take too much time to leave any room for trading.
I too imagined I had a dinner with Stiglitz after I saw his tech ticker interview where he covered the exact same topics mentioned above in pretty much the same words (or any other of his many venues where he goes through the same speach). Thankfully I then snapped out of it before writing it all down. Alas, that was not the case with our mad friend here...
Did Stiglitz happen to mention how it was that he got bamboozled into writing that 2002 paper claiming near zero threat to the Government from the GSEs? Was he compensated for that work?