Herziening van de jaarrekeningen USA t/m 2008 nodig?

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Vraag me af of het niet tijd wordt voor de USA om de 'jaarrekeningen t/m
2008' te herzien, analoog aan het bedrijfsleven.
Daar is het immers gebruikelijk dat, zodra blijkt dat de cijfers in de
jaarrekening niet kloppen, er een herziening moet komen.
Het Bruto Binnenlands Product b.v. is dus al jaren veel te hoog
aangegeven, het was immers drijfzand, en berustte op valse gegevens.

Groet / Cees

http://www.vanityfair.com/magazine/2009/01/stiglitz200901
The Economic Crisis
Capitalist Fools
Behind the debate over remaking U.S. financial policy will be a debate
over who’s to blame. It’s crucial to get the history right, writes a
Nobel-laureate economist, identifying five key mistakes—under Reagan,
Clinton, and Bush II—and one national delusion.
by Joseph E. Stiglitz January 2009

There will come a moment when the most urgent threats posed by the credit
crisis have eased and the larger task before us will be to chart a
direction for the economic steps ahead. This will be a dangerous moment.
Behind the debates over future policy is a debate over history—a debate
over the causes of our current situation. The battle for the past will
determine the battle for the present. So it’s crucial to get the history
straight.

What were the critical decisions that led to the crisis? Mistakes were
made at every fork in the road—we had what engineers call a “system
failure,” when not a single decision but a cascade of decisions produce a
tragic result. Let’s look at five key moments.

No. 1: Firing the Chairman

In 1987 the Reagan administration decided to remove Paul Volcker as
chairman of the Federal Reserve Board and appoint Alan Greenspan in his
place. Volcker had done what central bankers are supposed to do. On his
watch, inflation had been brought down from more than 11 percent to under
4 percent. In the world of central banking, that should have earned him a
grade of A+++ and assured his re-appointment. But Volcker also understood
that financial markets need to be regulated. Reagan wanted someone who did
not believe any such thing, and he found him in a devotee of the
objectivist philosopher and free-market zealot Ayn Rand.

Greenspan played a double role. The Fed controls the money spigot, and in
the early years of this decade, he turned it on full force. But the Fed is
also a regulator. If you appoint an anti-regulator as your enforcer, you
know what kind of enforcement you’ll get. A flood of liquidity combined
with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the
high-tech bubble popped, in 2000–2001, he helped inflate the housing
bubble. The first responsibility of a central bank should be to maintain
the stability of the financial system. If banks lend on the basis of
artificially high asset prices, the result can be a meltdown—as we are
seeing now, and as Greenspan should have known. He had many of the tools
he needed to cope with the situation. To deal with the high-tech bubble,
he could have increased margin requirements (the amount of cash people
need to put down to buy stock). To deflate the housing bubble, he could
have curbed predatory lending to low-income households and prohibited
other insidious practices (the no-documentation—or “liar”—loans, the
interest-only loans, and so on). This would have gone a long way toward
protecting us. If he didn’t have the tools, he could have gone to Congress
and asked for them.

Of course, the current problems with our financial system are not solely
the result of bad lending. The banks have made mega-bets with one another
through complicated instruments such as derivatives, credit-default swaps,
and so forth. With these, one party pays another if certain events
happen—for instance, if Bear Stearns goes bankrupt, or if the dollar
soars. These instruments were originally created to help manage risk—but
they can also be used to gamble. Thus, if you felt confident that the
dollar was going to fall, you could make a big bet accordingly, and if the
dollar indeed fell, your profits would soar. The problem is that, with
this complicated intertwining of bets of great magnitude, no one could be
sure of the financial position of anyone else—or even of one’s own
position. Not surprisingly, the credit markets froze.

Here too Greenspan played a role. When I was chairman of the Council of
Economic Advisers, during the Clinton administration, I served on a
committee of all the major federal financial regulators, a group that
included Greenspan and Treasury Secretary Robert Rubin. Even then, it was
clear that derivatives posed a danger. We didn’t put it as memorably as
Warren Buffett—who saw derivatives as “financial weapons of mass
destruction”—but we took his point. And yet, for all the risk, the
deregulators in charge of the financial system—at the Fed, at the
Securities and Exchange Commission, and elsewhere—decided to do nothing,
worried that any action might interfere with “innovation” in the financial
system. But innovation, like “change,” has no inherent value. It can be
bad (the “liar” loans are a good example) as well as good.

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to
come. In November 1999, Congress repealed the Glass-Steagall Act—the
culmination of a $300 million lobbying effort by the banking and
financial-services industries, and spearheaded in Congress by Senator Phil
Gramm. Glass-Steagall had long separated commercial banks (which lend
money) and investment banks (which organize the sale of bonds and
equities); it had been enacted in the aftermath of the Great Depression
and was meant to curb the excesses of that era, including grave conflicts
of interest. For instance, without separation, if a company whose shares
had been issued by an investment bank, with its strong endorsement, got
into trouble, wouldn’t its commercial arm, if it had one, feel pressure to
lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not
hard to foresee. I had opposed repeal of Glass-Steagall. The proponents
said, in effect, Trust us: we will create Chinese walls to make sure that
the problems of the past do not recur. As an economist, I certainly
possessed a healthy degree of trust, trust in the power of economic
incentives to bend human behavior toward self-interest—toward short-term
self-interest, at any rate, rather than Tocqueville’s “self interest
rightly understood.”

The most important consequence of the repeal of Glass-Steagall was
indirect—it lay in the way repeal changed an entire culture. Commercial
banks are not supposed to be high-risk ventures; they are supposed to
manage other people’s money very conservatively. It is with this
understanding that the government agrees to pick up the tab should they
fail. Investment banks, on the other hand, have traditionally managed rich
people’s money—people who can take bigger risks in order to get bigger
returns. When repeal of Glass-Steagall brought investment and commercial
banks together, the investment-bank culture came out on top. There was a
demand for the kind of high returns that could be obtained only through
high leverage and big risktaking.

There were other important steps down the deregulatory path. One was the
decision in April 2004 by the Securities and Exchange Commission, at a
meeting attended by virtually no one and largely overlooked at the time,
to allow big investment banks to increase their debt-to-capital ratio
(from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed
securities, inflating the housing bubble in the process. In agreeing to
this measure, the S.E.C. argued for the virtues of self-regulation: the
peculiar notion that banks can effectively police themselves.
Self-regulation is preposterous, as even Alan Greenspan now concedes, and
as a practical matter it can’t, in any case, identify systemic risks—the
kinds of risks that arise when, for instance, the models used by each of
the banks to manage their portfolios tell all the banks to sell some
security all at once.

As we stripped back the old regulations, we did nothing to address the new
challenges posed by 21st-century markets. The most important challenge was
that posed by derivatives. In 1998 the head of the Commodity Futures
Trading Commission, Brooksley Born, had called for such regulation—a
concern that took on urgency after the Fed, in that same year, engineered
the bailout of Long-Term Capital Management, a hedge fund whose
trillion-dollar-plus failure threatened global financial markets. But
Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and
Greenspan were adamant—and successful—in their opposition. Nothing was
done.

No. 3: Applying the Leeches

Then along came the Bush tax cuts, enacted first on June 7, 2001, with a
follow-on installment two years later. The president and his advisers
seemed to believe that tax cuts, especially for upper-income Americans and
corporations, were a cure-all for any economic disease—the modern-day
equivalent of leeches. The tax cuts played a pivotal role in shaping the
background conditions of the current crisis. Because they did very little
to stimulate the economy, real stimulation was left to the Fed, which took
up the task with unprecedented low-interest rates and liquidity. The war
in Iraq made matters worse, because it led to soaring oil prices. With
America so dependent on oil imports, we had to spend several hundred
billion more to purchase oil—money that otherwise would have been spent on
American goods. Normally this would have led to an economic slowdown, as
it had in the 1970s. But the Fed met the challenge in the most myopic way
imaginable. The flood of liquidity made money readily available in
mortgage markets, even to those who would normally not be able to borrow.
And, yes, this succeeded in forestalling an economic downturn; America’s
household saving rate plummeted to zero. But it should have been clear
that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in
another way. It was a decision that turned on values: those who speculated
(read: gambled) and won were taxed more lightly than wage earners who
simply worked hard. But more than that, the decision encouraged
leveraging, because interest was tax-deductible. If, for instance, you
borrowed a million to buy a home or took a $100,000 home-equity loan to
buy stock, the interest would be fully deductible every year. Any capital
gains you made were taxed lightly—and at some possibly remote day in the
future. The Bush administration was providing an open invitation to
excessive borrowing and lending—not that American consumers needed any
more encouragement.

No. 4: Faking the Numbers

Meanwhile, on July 30, 2002, in the wake of a series of major
scandals—notably the collapse of WorldCom and Enron—Congress passed the
Sarbanes-Oxley Act. The scandals had involved every major American
accounting firm, most of our banks, and some of our premier companies, and
made it clear that we had serious problems with our accounting system.
Accounting is a sleep-inducing topic for most people, but if you can’t
have faith in a company’s numbers, then you can’t have faith in anything
about a company at all. Unfortunately, in the negotiations over what
became Sarbanes-Oxley a decision was made not to deal with what many,
including the respected former head of the S.E.C. Arthur Levitt, believed
to be a fundamental underlying problem: stock options. Stock options have
been defended as providing healthy incentives toward good management, but
in fact they are “incentive pay” in name only. If a company does well, the
C.E.O. gets great rewards in the form of stock options; if a company does
poorly, the compensation is almost as substantial but is bestowed in other
ways. This is bad enough. But a collateral problem with stock options is
that they provide incentives for bad accounting: top management has every
incentive to provide distorted information in order to pump up share
prices.

The incentive structure of the rating agencies also proved perverse.
Agencies such as Moody’s and Standard & Poor’s are paid by the very people
they are supposed to grade. As a result, they’ve had every reason to give
companies high ratings, in a financial version of what college professors
know as grade inflation. The rating agencies, like the investment banks
that were paying them, believed in financial alchemy—that F-rated toxic
mortgages could be converted into products that were safe enough to be
held by commercial banks and pension funds. We had seen this same failure
of the rating agencies during the East Asia crisis of the 1990s: high
ratings facilitated a rush of money into the region, and then a sudden
reversal in the ratings brought devastation. But the financial overseers
paid no attention.

No. 5: Letting It Bleed

The final turning point came with the passage of a bailout package on
October 3, 2008—that is, with the administration’s response to the crisis
itself. We will be feeling the consequences for years to come. Both the
administration and the Fed had long been driven by wishful thinking,
hoping that the bad news was just a blip, and that a return to growth was
just around the corner. As America’s banks faced collapse, the
administration veered from one course of action to another. Some
institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed
out. Lehman Brothers was not. Some shareholders got something back. Others
did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page
document that would have provided $700 billion for the secretary to spend
at his sole discretion, without oversight or judicial review, was an act
of extraordinary arrogance. He sold the program as necessary to restore
confidence. But it didn’t address the underlying reasons for the loss of
confidence. The banks had made too many bad loans. There were big holes in
their balance sheets. No one knew what was truth and what was fiction. The
bailout package was like a massive transfusion to a patient suffering from
internal bleeding—and nothing was being done about the source of the
problem, namely all those foreclosures. Valuable time was wasted as
Paulson pushed his own plan, “cash for trash,” buying up the bad assets
and putting the risk onto American taxpayers. When he finally abandoned
it, providing banks with money they needed, he did it in a way that not
only cheated America’s taxpayers but failed to ensure that the banks would
use the money to re-start lending. He even allowed the banks to pour out
money to their shareholders as taxpayers were pouring money into the
banks.

The other problem not addressed involved the looming weaknesses in the
economy. The economy had been sustained by excessive borrowing. That game
was up. As consumption contracted, exports kept the economy going, but
with the dollar strengthening and Europe and the rest of the world
declining, it was hard to see how that could continue. Meanwhile, states
faced massive drop-offs in revenues—they would have to cut back on
expenditures. Without quick action by government, the economy faced a
downturn. And even if banks had lent wisely—which they hadn’t—the downturn
was sure to mean an increase in bad debts, further weakening the
struggling financial sector.

The administration talked about confidence building, but what it delivered
was actually a confidence trick. If the administration had really wanted
to restore confidence in the financial system, it would have begun by
addressing the underlying problems—the flawed incentive structures and the
inadequate regulatory system.

Was there any single decision which, had it been reversed, would have
changed the course of history? Every decision—including decisions not to
do something, as many of our bad economic decisions have been—is a
consequence of prior decisions, an interlinked web stretching from the
distant past into the future. You’ll hear some on the right point to
certain actions by the government itself—such as the Community
Reinvestment Act, which requires banks to make mortgage money available in
low-income neighborhoods. (Defaults on C.R.A. lending were actually much
lower than on other lending.) There has been much finger-pointing at
Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were
originally government-owned. But in fact they came late to the subprime
game, and their problem was similar to that of the private sector: their
C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a
belief that markets are self-adjusting and that the role of government
should be minimal. Looking back at that belief during hearings this fall
on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.”
Congressman Henry Waxman pushed him, responding, “In other words, you
found that your view of the world, your ideology, was not right; it was
not working.” “Absolutely, precisely,” Greenspan said. The embrace by
America—and much of the rest of the world—of this flawed economic
philosophy made it inevitable that we would eventually arrive at the place
we are today.

Joseph E. Stiglitz, a Nobel Prize winning economist, is a professor at
Columbia University.

How did we land in a recession? Visit our archive, “Charting the Road to
Ruin.” http://www.vanityfair.com/magazine/archive/recession

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