How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
Financial "insiders" and "players" are spooked, horrified, according to Paul Krugman. How about the rest of us? AP has this piece of news to greet us on a Monday morning.
The national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day - or nearly $1 million a minute.
That leaves each of us -- including that newborn baby over there -- a debt of $30,000 and growing. So people who aren't insiders and players will be paying (yet again) for some war game constructed by an imperial president or for the free market practices created by a group of "expert" financial profiteers who've screwed up multiple times.
Any question why so many have become populists and skeptics? Still don't understand why big business is seen as the enemy of "regular people" and a healthy democracy?
Krugman looks at what banks have been doing to profit from borrowers and concludes that financial institutions' idea of being smart and innovative is what did the trick.
How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.
O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.
But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.
Completely discredited (it's about time!) is the notion that "the market is always right." The people who say that are really saying, "Don't ask awkward questions! Our ideology rules!" And we let them get away with it on the theory that a few stray pennies may roll our way.
At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.
And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?
One answer could be to require that those make big bucks from free market successes also pay for free market failures, not pass the price on to you and me. That way "free market" really works -- for everyone. So ante up, Alan. Write us a big check, Henry. Oh, and you pay for continuing vets' medical care, George.
