- ‘Others will write (and in fact have already written) books that point fingers at this policymaker or another, this financial executive or another, who helped steer us into the current crisis. This book has a different aim. Its view is that essentially all the critical policies, such as those related to deregulation, were the consequence of political and economic ‘forces’ – interests, ideas, and ideologies – that go beyond any particular individual.’ (xvii)
- ‘But in the aftermath of the Great Depression, we did succeed in creating a regulatory structure that served us well for a half century, promoting growth and stability. This book is written in the hope that we can do so again.’ (xxv)
- ‘We have to be wary of too facile explanations: too many begin with the excessive greed of the bankers. That may be true, but it doesn’t provide much of a basis for reform. Bankers acted greedily because they had incentives and opportunities to do so, and that is what has to be changed. Besides, the basis of capitalism is the pursuit of profit: should we blame the bankers for doing so (perhaps a little bit better) what everyone in the market economy is supposed to be doing?’ (6)
- ‘They argue, however, that the real cost of regulation is the stifling of innovation. The sad truth is that in America
- ‘Those in the financial sector often blame the Fed for allowing interest rates to remain too low for too long. But this particular attempt to shift blame is peculiar: what other industry would say that the reason why its profits were so low and it performed so poorly was that the costs of its inputs (steel, wages) were too low? The major ‘input’ into banking is the cost of its funds, and yet bankers seem to be complaining that the Fed made money too cheap! Had the low-cost funds been used well, for example, if the funds had gone to support investment in new technology or expansion of enterprises, we would have had a more competitive and dynamic economy.’ (8-9)
- ‘Had it not been for these efforts at lending to the poor, so the argument goes, all would have been well. This litany of defenses is, for the most part, sheer nonsense. AIG’s almost $200 billion bailout (that’s a big amount by any account) was based on derivatives (credit default swaps) – banks gambling with other banks. The banks didn’t need any push for egalitarian housing to engage in excessive risk-taking. Nor did the massive overinvestment in commercial real estate have anything to do with government homeownership policy. Nor did the repeated instances of bad lending around the world from which the banks have had to be repeatedly rescued. Moreover, default rates on the CRA lending were actually comparable to other areas of lending – showing that such lending, if done well, does not pose greater risks.’ (10)
- ‘Today, the problem of moral hazard is greater, by far, than it has ever been.’ (17)
- ‘As the calls for action from economists and the business sector increased, President Bush turned to his usual cure for all economic ills and passed a $168 billion tax cut in February 2008.’ (28)
- ‘It was remarkable how, even in public, some of the financiers who had run to Washington for help argued that it was one thing to bail out banks – they were the lifeblood of the economy – but quite another to start bailing out companies that actually produced things. It would be the end of capitalism as we know it.’ (43)
- ‘President Bush wavered – and postponed the problem to his successor, extending a lifeline that would keep the companies going for a short while. The condition for more assistance was that they develop a viable survival plan. The Obama administration articulated a clear double standard: contracts for AIG executives were sacrosanct, but wage contracts for workers in the firms receiving help had to be renegotiated. Low-income workers who had worked hard all their life and had done nothing wrong would have to take a wage cut, but not the million-dollar-plus financiers who had brought the world to the brink of financial ruin. They were so valuable that they had to be paid retention bonuses, even if there was no profit from which to pay them a bonus.’ (43)
- ‘The flood of liquidity coming from the Fed will find some outlet, hopefully leading to more lending to businesses, but it could also result in a mini-asset price or stock market bubble. Or rising stock market prices may reflect the success of firms in cutting costs – firing workers and lowing wages. If so, it’s a harbinger of problems for the overall economy. If workers’ incomes remain weak, so will consumption, which accounts for 70 percent of GDP.’ (54)
- ‘What worries me is that because of the choices that have already been made, not only will the downturn be far longer and deeper than necessary, but also we will emerge from the crisis with a much larger legacy of debt, with a financial system that is less competitive, less efficient, and more vulnerable to another crisis, and with an economy less prepared to meet the challenges of this century.’ (57)
- ‘What worries me is that because of the choices that have already been made, not only will the downturn be far longer and deeper than necessary, but also we will emerge from the crisis with a much larger legacy of debt, with a financial system that is less competitive, less efficient, and more vulnerable to another crisis, and with an economy less prepared to meet the challenges of this century.’ (57)
- ‘In the end, the Obama administration’s stimulus made a big difference – but it should have been bigger and better designed. It was too small, too much of it (about a third) went to tax cuts, too little went to help states and localities and those that were falling through the holes in the safety nets, and the investment program could have been more effective.’ (62)
- ‘Between the start of the recession, in December 2007, and October 2009, the economy lost 8 million jobs. Including new entrants into the labor force, this means that by the fall of 2009 the jobs deficit, the number of jobs that would need to be created to restore the economy to full employment, had grown to more than 12 million jobs.’ (63)
- ‘Between the start of the recession, in December 2007, and October 2009, the economy lost 8 million jobs. Including new entrants into the labor force, this means that by the fall of 2009 the jobs deficit, the number of jobs that would need to be created to restore the economy to full employment, had grown to more than 12 million jobs.’ (63)
- ‘A broader measure of unemployment that includes these ‘involuntary’ part-time workers and discouraged workers had soared from 10.8 percent before the crisis, in August 2008, to 17.5 percent by October 2009, the highest on record. The fraction of the working-age population that was employed, at 58.5 percent, was the lowest since 1947.’ (64)
- ‘With the downturn stretching on for more than a year and a half, the number of the long-term unemployed (those unemployed more than six months) reached levels not seen since the Great Depression. The average duration of unemployment was close to half a year (24.9 weeks).’ (65)
- ‘With the downturn stretching on for more than a year and a half, the number of the long-term unemployed (those unemployed more than six months) reached levels not seen since the Great Depression. The average duration of unemployment was close to half a year (24.9 weeks).’ (65)
- ‘When property values and profits decrease, tax revenues also drop. The combined budget gaps for the fiscal years 2010 and 2011 are estimated to total at least $350 billion.’ (67)
- ‘It makes little economic sense to hire new workers to build bridges and at the same time lay off teachers and nurses.’ (67)
- ‘A simple formula – making up for the lost revenue on a state-by-state basis – would have been fair and would have deployed the money quickly. This money would have had high multipliers and would have been directed at the people who needed help the most and it would have acted as an automatic stabilizer: if, magically, the economy recovered faster, the spending wouldn’t occur.’ (67)
- ‘Tax cuts that spur investment would accelerate the flow of funds into the economy – and yield long-term benefits. A program to provide tax incentives for homeowners to insulate existing homes would, for instance, have employed some of the construction workers who lost their jobs as the real estate sector sank to a fifty-year low. In a downturn, most firms are not willing to take the risk of investing. A temporary investment tax credit can provide them with the appropriate incentive. In effect, a tax cut makes it cheaper to invest now, when the national benefits are large – rather than later, when the economy has returned to normal. It’s like a sale of capital goods. An incremental temporary investment tax credit is even better. Even in a downturn, some firms are going to invest, and it makes little sense to reward them for doing what they would have done anyways. Giving credit only to investments that exceed, say, 80 percent of a company’s investment dollars over the last couple of years increases the bang for the buck.’ (69)
- ‘President Bush’s February 2008 tax cut didn’t work because so much of it was saved, and there was every reason to believe that matters would be little different with this tax cut, even if it was designed to encourage more spending.’ (69)
- ‘President Bush’s February 2008 tax cut didn’t work because so much of it was saved, and there was every reason to believe that matters would be little different with this tax cut, even if it was designed to encourage more spending.’ (69)
- ‘We need to be prepared for a second round of stimulus spending as the current round of stimulus spending comes to an end – which, by itself, will contribute to ‘negative’ growth. Some of what should have been included in the first round (such as making up for the shortfall in state taxes) should be included in the next round. We need to be ready for more investment spending in 2011.’ (74)
- ‘The wheelings and dealings of the mortgage industry in theUnited States
- ‘Nine lenders that combined had nearly $100 billion in losses received $175 billion in bailout money through TARP and paid out nearly $33 billion in bonuses, including more than $1 million apiece to nearly five thousand employees. Other money was used to pay dividends, which are supposed to be a sharing of profits with shareholders. In this case, though, there were no profits, just government handouts.’ (80)
- ‘The wheelings and dealings of the mortgage industry in the
- ‘Nine lenders that combined had nearly $100 billion in losses received $175 billion in bailout money through TARP and paid out nearly $33 billion in bonuses, including more than $1 million apiece to nearly five thousand employees. Other money was used to pay dividends, which are supposed to be a sharing of profits with shareholders. In this case, though, there were no profits, just government handouts.’ (80)
- ‘Some have expressed surprise at how poorly the rating agencies performed. I was more surprised at the surprise. After all, the rating agencies have a long track record of poor performance – going back well before the Enron and WorldCom scandals in the early 2000s. During the 1997 East Asian crisis, the agencies were blamed for contributing to the bubble that preceded it. They had given the debt of countries like Thailand
- ‘Compounding the problem, the rating agencies had discovered a new way to enhance their income: provide consulting services, such as on how to get better ratings, including the coveted AAA rating. They raked in fees as they told the investment houses how to get good ratings and then made still more money when they assigned the grades.’ (92-93)
- ‘To stem the flood of defaults we have to increase the ability and willingness of families to meet their mortgage payments. The key to doing that is reducing their payments, and there are four ways of doing this: stretching out the period over which payments are made – making the families more indebted in the future; giving them assistance to help make the payments; lowering their interest rates; or lowering the amounts they owe.’ (100)
- ‘Compounding the problem, the rating agencies had discovered a new way to enhance their income: provide consulting services, such as on how to get better ratings, including the coveted AAA rating. They raked in fees as they told the investment houses how to get good ratings and then made still more money when they assigned the grades.’ (92-93)
- ‘To stem the flood of defaults we have to increase the ability and willingness of families to meet their mortgage payments. The key to doing that is reducing their payments, and there are four ways of doing this: stretching out the period over which payments are made – making the families more indebted in the future; giving them assistance to help make the payments; lowering their interest rates; or lowering the amounts they owe.’ (100)
- ‘Given that banks are reluctant to write down the principal of mortgages, they might have to be induced to do so through a “homeowners’ Chapter 11” – a speedy restructuring of liabilities of poorer homeowners, modeled on the kind of relief that is provided for corporations that cannot meet their debt obligations. Chapter 11 is premised on the idea that keeping a firm going is critical for the firm’s workers and other stakeholders. The firm’s management can propose a corporate reorganization, which the courts review. If the courts find the reorganization to be acceptable, there is a quick discharge of all or part of the debt – the corporation is given a fresh start. Homeowners’ Chapter 11 is premised on the idea that giving a fresh start to an American family is just as important as giving one to a corporation. No one gains from forcing homeowners out of their homes.’ (101-102)
- ‘The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government’s ability to borrow at a lower interest rate to provide less-expensive credit to homeowners under stress?’ (103)
- ‘The failures of the Obama and Bush administrations will rank among the most costly mistakes of any modern democratic government at any time. In the United States
- ‘Many other firms (or individuals) would be grateful for a zero interest rate loan – and could generate profits at least as hefty as those being earned by the ‘successful’ banks. It is a huge gift, but one hidden from the taxpayers.’ (110)
- ‘A small part of the financial system, the venture capital firms – many of which were on the West Coast, not in New York – did play a key role in the country’s economic growth by giving capital (and managerial assistance) to many new entrepreneurial companies. Other parts of the financial system – community banks, credit unions, and local banks that supply consumers and small and medium-sized enterprises with the finance they need – have also done a good job.’ (113-114)
- ‘They were interested in the mega-multibillion-dollar deals putting companies together, and when that failed, stripping them apart. While they may not have played a big role in job and enterprise creation, they excelled at job destruction (for others) in the ‘cost-cutting’ efforts that were their signature.’ (114)
- ‘The notion that if only Lehman Brothers had been rescued all would have been fine is sheer nonsense. Lehman Brothers was a consequence, not a cause: it was the consequence of flawed lending practices and inadequate oversight by regulators.’ (119)
- ‘On the initial vote, on September 29, 2008 , the TARP bill was defeated by twenty-three votes in the House of Representatives. After the defeat, the Bush administration held an auction. It asked, in effect, each of the opposing congressmen how much they needed in gifts to their districts and constituents to change their votes. Thirty-two Democrats and twenty-six Republicans who voted no on the original bill switched sides to support TARP in the revised bill, passed on October 3, 2008 .’ (123)
- ‘If we contrast the terms that the American taxpayers got with what Warren Buffett got, at almost the same time, in a deal with Goldman Sachs, or if we compare it with the terms that the British government got when it provided funds to its banks, it was clear that US taxpayers got shortchanged.’ (125)
- ‘In March 2009, the Congressional Budget Office, the nonpartisan office that is supposed to give independent cost evaluations of government programs, estimated that the net cost of using the TARP’s full $700 billion will total $356 billion. The government would get paid back less than 50 cents on the dollars. There was no hope for being compensated for the risk borne.’ (126)
- ‘In March 2009, the Congressional Budget Office, the nonpartisan office that is supposed to give independent cost evaluations of government programs, estimated that the net cost of using the TARP’s full $700 billion will total $356 billion. The government would get paid back less than 50 cents on the dollars. There was no hope for being compensated for the risk borne.’ (126)
- ‘A toxic asset was just an asset on which the bank had made a loss.’ (131)
- ‘If government has to provide temporarily additional financing because of a reluctance of the private sector to do so, it is not the worth thing in the world, provided it gets adequate claims (bonds or shares) on the banks’ future value.’ (132)
- ‘The AIG bailout was particularly foolish. There was a worry that if one didn’t bail out AIG, there would be problems with some of the firms to which it had sold credit default swaps, which were like insurance policies written on the demise of particular corporations. But throwing money at AIG was a poor way of getting money to where it made a difference. Both administrations were using a variant of trickle-down economics: throw enough money at AIG, and some of it will trickle down to where it’s needed Perhaps, but it’s a very costly way of doing business. When the data on where the AIG money went finally became available, it was clear that little of it went to systemically significant institutions – though that was the argument put forward in its defense.’ (134)
- ‘The AIG bailout was particularly foolish. There was a worry that if one didn’t bail out AIG, there would be problems with some of the firms to which it had sold credit default swaps, which were like insurance policies written on the demise of particular corporations. But throwing money at AIG was a poor way of getting money to where it made a difference. Both administrations were using a variant of trickle-down economics: throw enough money at AIG, and some of it will trickle down to where it’s needed Perhaps, but it’s a very costly way of doing business. When the data on where the AIG money went finally became available, it was clear that little of it went to systemically significant institutions – though that was the argument put forward in its defense.’ (134)
- ‘Similarly, there was worry, for instance, that if the government does not bail out all creditors, some insurance and pension funds would experience significant losses. They were being put forward as ‘socially worthy’ claimants. The funds that might trickle down to these private claimants are funds that would be better used to strengthen the Social Security system, avoiding deeper cutbacks there. To which should we give greater weight, those with whom we have made a social contract, or those who have made bad investment decisions? If we need to rescue pension funds and insurance companies, then we should do so directly, where every dollar of government money goes directly to the group that needs it. There is no justification for spending twenty dollars to bail out investors so that one dollar can go to a pension fund that might otherwise be in trouble.’ (134)
- ‘If nothing untoward happens – and there are many problems looming on the horizon, such as in commercial real estate – the banks will recapitalize themselves gradually. With the Fed keeping interest rates near zero, and with competition in banking so limited, the banks can make hefty profits by charging high interest rates even on limited lending. But this will discourage firms from expanding and from hiring new workers. The optimistic scenario is that this recapitalization proceeds faster than troubles mount. We will have muddled through.’ (135-136)
- ‘There is an obvious incentive to let inflation decrease the real value of what is owed, perhaps not in a dramatic episode of very high inflation but more gradually, over ten years, with moderate inflation of, say, 6 percent a year. That would erode two-thirds of the value of the debt.’ (138-139)
- ‘So long as the unemployment rate remains high, the threat is as much deflation as inflation. Deflation is a serious risk, because when wages and prices fall, households and businesses are unable to repay what they owe. Defaults result, and they weaken the banks, triggering a new downward spiral. The Fed is caught in a dilemma. If it takes out liquidity too rapidly, before the recovery is firmly established, the economy could go into a deeper downturn. If it does so too slowly, there is a real risk of inflation – especially given the magnitude of excess liquidity in the system. This balancing act is especially difficult because the full effects of monetary policy take months to be realized, which is why policymarkers normally say they have to act before inflation becomes apparent.’ (139)
- ‘One of the reasons why the Fed was able to get away with what it did was that it was not directly accountable to Congress or the administration. It didn’t have to get congressional permission for putting at risk hundreds of billions of taxpayer dollars. Indeed, this was one of the reasons why both administrations turned to the Fed: they were trying to circumvent democratic processes, knowing that many of the actions had little public support.’ (141-142)
- ‘Believers in the strength of capital markets also believed that they were very fragile – they couldn’t survive even a whisper about a change of the rules.’ (148)
- ‘Believers in the strength of capital markets also believed that they were very fragile – they couldn’t survive even a whisper about a change of the rules.’ (148)
- ‘Cooking the books to hide from investors what is going on – exaggerating income – should be as illegal as doing so from tax authorities (understanding income). None of the ‘off-balance sheet’ magic tricks of the past should be allowed.’ (159-160)
- ‘When asked why they didn’t cancel the deals directly rather than engage in these offsetting transactions – leading to exposures to risk in the trillions of dollars – the answer was, ‘We couldn’t imagine a default.’ Yet they were trading credit default swaps on the big banks, which were premised on the notion that there were risks of default. This is yet another example of the kind of intellectual incoherence that permeated these markets.’ (172)
- ‘The cleverest fees, however, were the ‘interchange’ fees imposed on merchants that accepted their cards. As the cards came into wider use as cardholders were offered various reward enticements to put charges on the cards, store owners felt they had to accept them; they would otherwise lose too many sales to competitors that did. Visa and MasterCard knew this – and knew that that meant that they could exploit the merchant. If the banks charged 2 or 3 percent of the cost of a product, most merchants would still accept the cards rather than lose sales. The fact that modern computers rendered the actual costs negligible was irrelevant. There simply wasn’t any effective competition, and so the banks could get away with it. To make sure that markets didn’t work, they insisted that the merchant neither inform customers of the true cost of using the card nor impose a charge for use of the card.’ (176)
- ‘The financial sector needs regulation, but effective regulation requires regulators who believe in it. They should be chosen from among those who might be hurt by a failure of regulation, not from those who would benefit.’ (179)
- ‘There are large numbers of financial experts in union, nongovernmental organizations, and universities. One doesn’t have to go to Wall Street to get the so-called expertise.’ (179)
- ‘The misguided attempt to reduce the role of the state has resulted in government taking on a larger role than anyone would have anticipated even in the New Deal.’ (185)
- ‘There is no difference, in this respect, among profit-making firms, non-profit organizations, and bureaucratic organizations. All have exactly the same problem of inducing their employees to work toward the organizational goals. There is no reason, a priori, why it should be easier (or harder) to produce this motivation in organizations aimed at maximizing profits than in organizations with different goals. The conclusion that organizations motivated by profits will be more efficient than other organizations does not follow in an organizational economy from the neo-classical assumptions. If it is empirically true, other axioms have to be introduced to account for it.’ Nobel Prize winner Herbert Simon (198)
- ‘There is no difference, in this respect, among profit-making firms, non-profit organizations, and bureaucratic organizations. All have exactly the same problem of inducing their employees to work toward the organizational goals. There is no reason, a priori, why it should be easier (or harder) to produce this motivation in organizations aimed at maximizing profits than in organizations with different goals. The conclusion that organizations motivated by profits will be more efficient than other organizations does not follow in an organizational economy from the neo-classical assumptions. If it is empirically true, other axioms have to be introduced to account for it.’ Nobel Prize winner Herbert Simon (198)
- ‘This has turned out to be one of the largest redistributions of wealth in such a short period of time in history. (Russia
- ‘Economics had moved – more than economists would like to think – from being a scientific discipline into becoming free market capitalism’s biggest cheerleader. If the United States
- ‘In the Great Recession of 2008, many voices argued that Roosevelt’s New Deal had in fact failed and even made matters worse. In this view, it was World War II that finally got America
- ‘Suddenly economists had become political scientists.’ (244-245)
- ‘Economics, as I have noted earlier, is supposed to be a predictive science. If so, the Chicago School
- ‘The focus on inflation was predicated on four propositions, none of which had much empirical or theoretical support. First, central bankers argued that inflation had a significant adverse effect on growth. On the contrary, so long as inflation remained low to moderate, there seemed to be no discernible negative effect – though excessively harsh attempts to suppress inflation did slow growth.’ (263)
- ‘Second, they claimed that inflation is particularly hard on the poor. One should be suspicious when one hears bankers take up the cause of the poor. The fact of the matter is that the people who lose the most are bondholders, who see the real value of their bonds eroded. In the United States
- ‘We know what standard economic theory would say if it were correct that markets were efficient and competitive: in the end, profits would once again be driven down to zero. Removing the restrictions might allow the first firm to seize the new opportunity and make a higher profit, but any such profits would quickly be dissipated. Some firms realize that the only way to make sustained profits is either to be more efficient than one’s competitors or to figure out how to make markets work imperfectly.’ (265)
- ‘While Hayek has become a god among conservatives, he (like Smith) understood that government has an important role to play. As he put it, ‘Probably nothing has done so much harm’ to the market advocates’ cause as the ‘wooden insistence…on certain rules of thumb, above all of the principle of laissez-faire capitalism.’ ’ (273)
- ‘Some 15 million homes, representing about one-third of all mortgages nationwide, carry mortgages that exceed the value of the property.’ (286)
- ‘We know what standard economic theory would say if it were correct that markets were efficient and competitive: in the end, profits would once again be driven down to zero. Removing the restrictions might allow the first firm to seize the new opportunity and make a higher profit, but any such profits would quickly be dissipated. Some firms realize that the only way to make sustained profits is either to be more efficient than one’s competitors or to figure out how to make markets work imperfectly.’ (265)
- ‘While Hayek has become a god among conservatives, he (like Smith) understood that government has an important role to play. As he put it, ‘Probably nothing has done so much harm’ to the market advocates’ cause as the ‘wooden insistence…on certain rules of thumb, above all of the principle of laissez-faire capitalism.’ ’ (273)
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