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Global Edition | Today Is Sunday, March 21, 2010 |
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Global Edition | Today Is Sunday, March 21, 2010 |
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Harvard Economist Kenneth Rogoff
The essence of the ‘this time is different’ syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.
Kenneth Rogoff
Harvard Economist & Historian
The question is daunting, to say the least. What must a nation do to rid its banking system of criminal executives?
More money has been lost because of the words this time is different than at the point of a gun.
Carmen Reinhart
Economist
The answer, according to what is being said by the Federal Reserve Board and the United States Treasury, both of which are principal causes for last year’s massive collapse in the credit markets, is to tighten up a bit on regulations and hope for the best. When one asks why not take more timely and direct action the answer is things have changed, we’re in a global economy — this time is different.
The belief that this time is different, among financial institutions and those who oversee them, is global. Recent comments by Lord Adair Turner, Chairman of Britain’s Financial Services Authority, make clear the degree to which people who ought to know better behave as if banks haven’t turned criminal before.
Loaning money for productive use is hard work banks have always sought to be relieved of doing. While it may be true that the friendly banker portrayed by Jimmy Stewart in Frank Capra’s classic movie It’s a Wonderful Life could never deal with the complexities of international corporate finance, there is nothing inherent in legitimate banking that warrants massive transfer of wealth from customers and shareholders to foolish and arrogant executives.
Britain's Financial Regulator Lord Adair Turner
Today’s banks are run by men and women short on prudence and long on personal greed. Some have even suggested that today’s big bank executives are little more than bank robbers without guns — so entrenched and powerful they’re all but impossible to get rid of.
But, today, now that The Royal Bank Of Scotland, and others, are so far out of line, Britain’s Financial Regulator, seems to suggest that one ought only to ask them to steal a bit less. Such timidity, history wants us to know, is part of the problem, not part of any rational solution.
“Banks need to be willing, like the regulator, to recognize that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them.”
Lord Adair Turner
Chairman, Britain’s Financial Services Authority
If you think those failing to fully and forcefully deal with the problems are only Timothy Geithner, Benjamin Bernanke, the Obama administration and the congress, you’re wrong. The belief that today is really different is part of the problem in nearly every G20 nation. A reality that greatly complicates today’s problems, for in some ways the banks have made of themselves renegades that threaten world peace and political stability.
Only a month ago, Lord Adair Turner’s public comments, “Banks need to be willing, like the regulator, to recognize that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them,” has the feeling of a plea that the bank robbers not take so much money. Public opinion, especially in Britain, is far more demanding. In the absence of strong governmental action, ordinary citizens are marching in the streets of London, Washington and most recently, Pittsburgh.
How did it comes to this? What must economists, politicians, financiers and bankers do to restore public faith and confidence in either banks or government? “Listen to history,” professors Rogoff and Reinhart want us to know.
“The recurring theme is arrogance and ignorance. Ignorance that this has happened before in other places and other countries. And arrogance thinking that we’re special – this time is different we have financial globalization – we’re running our economy better — their lending us money because they love us and we’re doing a good job.”
Kenneth Rogoff
Economist
It is unclear, but seems unlikely, that anyone at Treasury, or the Federal Reserve, for that matter, sees today’s financial mess as a repeat of what’s gone before. One of those dealing with the U.S. banking failures, FED Chairman, Ben Bernanke, is a student of economic history. So far, it seems his view may be only that the Fed support and stabilize the financial system and the big banks. This is made all the more difficult in view of the reality that the FED, under former chairman Alan Greenspan, was largely responsible for encouraging the big banks to do what did them in.
Neither the FED nor Alan Greenspan were solely responsible for what happened, for they had the help of the banking lobby, and its virtual control over congress, and politicians of both political parties anxious to deregulate banks. But in the aftermath of Greenspan’s complacency some have reason to wonder who then will speak for the common good?
On this point, two well respected economists, Carmen Reinhart and Kenneth Rogoff, economists who predicated last year’s collapse, remain silent. In their view, it’s not a matter of right and wrong, or good or bad intentions — it’s a failure of responsible policy and oversight driven, history teaches us, by ignorance and complacency. Part of being responsible, their research suggests, is not going along with the crowd, thinking for oneself, and looking to history for patterns that might offer insight into ways to avoid making the same mistakes over and over again.
“Whatever rules of the game are they just simply don’t apply to us. And that is the essence of the arrogance that dominates the boom phase and it is the seeds of the crisis are sown during the boom.”
Carmen Reinhart
Economist
In their view, anyone who knows economic history had to be aware that deregulation and failed supervision were the principal causes of the 1929 crash. Their view clearly suggests that responsible adults ought to know that pushing money around for the benefit of bankers is not banking — it’s robbery, pure and simple. Being economists they don’t use prejudicial terms like robbery, but that’s the word most Americans attach to their views on banks and bankers.
Economist-Historian Carmen Reinhart
Carmen Reinhart, a well respected economist and historian, is Director of the Center for International Economics at the University of Maryland. She recently collaborated with Harvard economist Ken Rogoff on a book bearing those four words, claiming “More money has been lost because of the words this time is different than at the point of a gun.”
If you’re not accustomed to economists who, unlike former FED chairman Alan Greenspan, both think and speak clearly, what both professors Rogoff and Reinhart have to say about our present financial problems is timely and useful. Their message, however, is more than a little daunting in the sense that they’re telling us that our banks and regulators are repeating the same mistakes made in 1929 — and every previous financial catastrophe.
What they want us to know is more than a little unsettling: There is a toxic dark side to behavioral economics — one that repeats throughout economic history. Their conclusion is that those who believe “this time is different” are not only wrong, but ignorant.
PBS NewsHour Audio
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Correspondent: Paul Solmon
Professors Reinhart and Rogoff were featured in a PBS MacNeil/Lerher NewsHour segment only last week to promote their new book, This Time is Different: Eight Centuries of Financial Folly. Neither author is an economic lightweight, nor entirely successful at getting their fellow economists to consider their message. But they speak clearly about things that matter if we are to recover from our profligate ways.
In their new book, Rogoff and Reinhart argue,
“If there is one common theme to the vast range of crises … it is that, excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. … Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang — confidence collapses, lenders disappear and a crisis hits. … Highly leveraged economies … seldom survive forever … history does point to warnings signs that policy makers can look to access risk — if only that do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, ‘this time is different’.”
University Of Chicago Economist, Milton Friedman
Reinhart and Rogoff have strong historical foundations and the ability to analyze patterns in behavior that reveal economics in ways that Milton Friedman and all the rest of us who believed that free will in pursuit of self-interest was the only fundamental steering agent of economic activity. What Rogoff and Reinhart bring to the discussion in the important role illusion, arrogance, ignorance, and a seemingly never ending belief that this time is different, repeats over and over again in human ( and economic ) history.
What those of us who favored Friedman’s Chicago School economic model missed was not a clear understadning of the role free will plays in micro economic decision making, but the role stupidity plays in macro economic decision making.
What we don’t know matters. History cannot be ignored in economics. And as Carmen Reinhart says so eloquently – this time is always the same.
Pushing money around for the benefit of incompetent bankers is not banking any more than failing to run the crooks out of our banks is good economic policy.
