StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Hopes of a Chastened Capitalist

04 Jan 2010
Posted by Edmund L. Andrews

When I was in journalism school many years ago, a professor remarked that business reporters often go through three phases of maturation. At the start, the callous young reporter assumes that all business executives are rich crooks who need to be exposed. As the reporter enters the second phase, he gains access to top executives and discovers that they are much more open, hard-working and smart than they had seemed. In the final phase, the fully-seasoned journalist breaks through to the highest level of awareness: it turns out, there really are a lot of crooks out there.

That’s the feeling I have now. In more than 20 years as a business and economics reporter for The New York Times, I liked nothing more than a good business scandal. But I also considered myself a fan of free markets, opencompetitionand minimal government regulation. I like the dynamism of the marketplace -- the constant turbulence, the risk-taking and the periodic drama of little-known start-ups toppling Goliaths. Microsoft over IBM in personal computers. Google over Microsoft in web-based services. Those things happen, and the public has generally benefitted.

But the wanton recklessness on Wall Street that nearly wrecked the economy has exposed the limits of laissez faire thinking. It’s clear that banks and Wall Street firms played central roles in the catastrophe. There really were a lot of crooks out there. The free market did not self-correct; it essentially self-destructed. Rational self-interest did not save the day. What saved the day, if indeed it’s been saved, was massive government intervention.

In joining Capital Gains and Games, I want to track these issues as Washington tries to overhaul economic policy and financial regulation.

Mainstream economists are still trying to get their heads around how this could have happened. Joseph Stiglitz, the Nobel prize winning economist and former top advisor to President Clinton, posed the challenge in an opening speech on Saturday to the American Economics Association.

Put simply, Stiglitz declared that the long-standing principles of mainstream economics didn’t hold up: participants – homeowners and probably financial executives -- did NOT act in their rational self-interest; markets were NOT efficient and self-correcting; private rewards did NOT correspond to social returns. Stiglitz has criticized mainstream economic thinking for years, and he was on the outs with much of his profession as a result. Now the profession is in the midst of a lot of soul-searching, but there aren’t any quick ways to strike a new balance between competition and innovation versus stability, prudence and consumer protection.

On a less cosmic level, I will be following the grueling battle over reforming the financial regulatory system. Banks and financial institutions have already had considerable success in diluting the bill assembled by Barney Frank, chairman of the House Financial Services Committee. The requirements to trade financial derivatives through regulated clearinghouses are a shadow of what Frank originally proposed. Another industry victory: the new Consumer Financial Protection Agency will be able to override states that want to regulate credit and lending practices more strictly than the federal government. In the run-up to the mortgage meltdown, federal bank regulators and the big banks relentlessly fought states like North Carolina and New York that wanted to clamp down harder on subprime lenders.

There is one encouraging development: analmost adhoc political action group called Americans for Financial Reform,backed by about200 community groups, consumer groups, labor unions, the AARP and even some businesses. Yes, many of the groups are liberal or left-of-center. But some of them – the Center for Responsible Lending, the Center for Economic Policy and Research—provided the best and earliest warnings about the housing bubble and reckless mortgage lending. More importantly, the group’s key people include experts on the nitty-gritty details of issues like reining in systemic risk and supervising financial derivatives. You may or may not agree with their views on all those issues. But it ought to be comforting that there is at least one group pushing and lobbying on financial regulation that does not represent the industry.


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