Video: Understanding the Philippine Economy Through the Eyes Of Milton Friedman

If I were to believe Aquino’s economic team, it will be sunshine all the way but it isn’t. Initial market buoyancy from an Aquino victory has settled in and businesses are dealing with the same issues they faced since the 1935 Constitution – an economic environment that is skewed in favor of Filipinos who can meet the 60/40 equity requirements of the Philippine Constitution.

Milton Friedman and the USA of 1970 Speaks to The Philippines of 2010

When chicken growers lobby to restrict imports, consumers pay higher prices. When rice imports are restricted, consumers pay higher prices for rice. The Philippine government rather than taking a market-driven approach opts to intervene in the market causing a distortion which either ends as a shortage of rice or a surplus of rice depending on whose administration you are referring to – and on what side of the political fence you sit on.

There’s a multitude of issues hitting the Philippine headlines everyday – and the information can be staggering and numbing. And yet, there is a need to make sense out of it – to connect the dots on why the Philippine economy behaves in the manner it currently does – oligarch-centric, boom and bust, low index of global competitiveness – thru the eyes of the 21st Century’s most ardent advocate of the free market – Milton Friedman.

The categories covered are

1) The Economy;and,

2) Poverty and Governance.

A “Food For Thought” section follows each video set and attempts to relate the principles presented in the video to present developmental debacles in the Philippines today. The underlying structure upon which headlines such as-

  • Biggest ever: P24-B tax case filed vs Shell
  • What went before: The Shell game
  • Judge to make ruling despite Aquino’s amnesty decree
  • DND activates panel to process amnesty applications
  • Poverty rate due to GMA highway robbery’
  • Soliman defends P21-B CCT in DSWD budget
  • PCSO flaunts STL new look at Senate hearing
  • Truth body now open vs grafters

are built,  become clearer as you go through the videos.


Why is a resource-rich country so full of poor people? And yet the Philippines has at least three people among the world’s richest individuals. How did this come about? Why is the free market important? Why should we be vigilant against protectionism?



Lesson of the Pencil


Milton Friedman on the Dangers of Protectionism (Obama’s recent tariff on Chinese imports)


Milton Friedman – More Liberty, Less Government


Free Trade and the Steel Industry


Socialism Versus Capitalism


Food for thought:

Have you noticed one of the reasons why the Philippines is not competitive is due to infrastructure? How is infrastructure connected to the following industries?

  • Philippine Steel Industry
  • Philippine Power Industry
  • Philippine Cement Industry
  • Philippine Airline Industry
  • Philippine Telecommunication Industry
  • Philippine Transportation Industry
  • Philippine Water Utilities
  • Philippine Electric Utilities
  • Philippine Retail Industry
  • Philippine Tourism Industry

Food for thought:

What is a better use of the next six years –  Aquino’s proposed anti-trust law versus charter change to liberalize the economy.
Resistance of Filipino companies against economic liberalization.


What would have  Milton said as Aquino and Arroyo perform their pissing contest on how to spend other people’s money – you know. Dinky’s DSWD budget, Noy’s Pork Barrel, Gloria’s Road Board Fund, etc etc – and all the merry men who horrifyingly  call themselves “honorable”.  Not to mention, the men in the hills and their bosses in suburban Europe.

Milton Friedman – Redistribution of Wealth


Milton Friedman – Other People’s Money
Responsibility to the Poor
Milton Friedman – The Free Lunch Myth
Milton Friedman – Socialized Medicine


Milton Friedman – Why Drugs Should Be Legalized


The Most Persistent Economic Fallacy of All Time!


Food for thought:

  • Dinky Soliman’s DSWD Budget
  • Pork Barrel – Aquino, Congress, Senate
  • Arroyo and the Road Board Fund
  • The RHB as Socialized Medicine. The dark side of the RHB’s economics.
  • Legalization of Gambling – not just jueteng.
  • Are government employees being productive and adding value to the Philippine economy?


Should the budget of state universities be reduced? Should investment in education be limited to Filipino corporations only? Isn’t it about time to open up the education sector to foreign owned or foreign majority joint venture private institutions that can provide more appropriate, relevant and cost-effective education content? How do we make certification in MCSE, CCNA, A+ and other courses become more accessible to the Filipino market? How do we get degrees online with a decrepit policy environment in education and investments? Our choices should not be limited to crappy secular schools and lousy state universities.

Milton Friedman On Education (Part One)


Milton Friedman On Education (Part Two)


Milton Friedman On Education (Part Three)


Milton Friedman On Education (Part Four)


Milton Friedman On Education (Part Five)



Until the Philippines learns the lessons of the past, it will be doomed to repeat it, Protectionism and the Philippine oligarchy – new faces, same old scripts. At the end of the day, it’s not about the puppets – it’s about the puppet masters and this theater (corporate boardroom, stock market, chambers of commerce, industry associations, wholesalers, retailers, consumers) of the absurd called the Philippine economy.

MCC Philippine Compact






Las Vegas 😉


I hope you will find the clips as enlightening and entertaining as I have. At the very least, may it give you an idea of where the Philippines is headed (and not headed to) in the next six years, what to expect. Preparedness after all is the better part of valor in these turbulent times.



  1. I wonder what Milton Friedman views of public education.

  2. @Free – I updated the post to include education. Please view clips above.

  3. Thank you, BongV, for these video clips. I am wondering if they teach Milton Friedman’s views in Philippine universities?

    Saddening to know and expect that the Oligarchs will continue to enjoy their billions and the rest will have to live life as it is here in the Philippines.

  4. mel.. based on my college econ class – they teach certain elements but don’t weave it and show its relevance to the local economy. the teachers play it “safe” and sanitize local practices. not to mention a slightly collectivist bent.

  5. Hyden Toro · ·

    I believe that what is ailing the economy is the lack of incentives for people to innovate for solutions to our problems. Take for example our Rice Sufficiency problem. Would a Tenant/Tiller from the Hacienda Luisita, or any of the Haciendas of the Ruling Oligarchs work efficiently? I doubt it; because, he is just a tenant-sharecropper. Czarist Russia had the same problem, with the Russian Serfs, during the reign of Catherine the Great. The Russian Serfs revolted. They were defeated by the Aristocrats. Serfdom continued, until the Bolshevist Revolution of Lenin. Capital is too much distributed to a few (oligarchs). There is no significant middle class. People in the poverty level class is too overwhelming. If people have full stomach; and will not worry, where the next meal come: they can think better. I am not an Economist; just an experienced observer. I’ve lived long enough in the Philippine to know this.

  6. the lack of incentives – is a result of protectionism – no motivation to innovate.

  7. Hyden Toro · ·

    You got it…Dude…

  8. This maybe way beyond the intellectual comprehension of the author of this post.

    Once again my favorite instant internet economist strikes a blow for ignorance and idiocy.

    When one proposes that the state should remove itself with interfering with free markets whether domestic or otherwise one reveals a basic ignorance about micro and macroeconomics and the economic history of the world.

    The world of Friedman or for that matter Adam Smith has never existed…There is no invisible hand that guides markets.

    The two foremost theoreticians of financial economics or monetary economics are John Maynard Keynes and Milton Friedman. JMK is also known as the father of macroeconomics.

    In point of fact it was Milton Friedman who correctly pointed out the root cause of the great depression in 1929. The drying up of credit and the deep contraction of the money supply. The Federal Reserve then failed to realize that the velocity of money creation could also reverse itself in the opposite direction and created deflation and a general collapse of demand in the economy.

    His theoretical basis for monetary policy lasted less than a generation.

    Firstly one cannot use macroeconomic theory in the Philippines. It cannot be applied. This can only be applied to industrial economies that are affected by the economic business cycle.

    Predominantly agricultural economies cannot suffer recessions/depressions as the root cause of this economic business cycle is due to overcapacity or over production. We import our monetary economic crisis.

    In point of fact in the Philippines inflation is not a strictly monetary phenomenon. It is a supply side based structural problem.

    Financial economics came about as a result of the industrialization/mechanization of the division of labor and the resulting creative destructive process of capitalism. It led to the massive intervention of the state in economics and finally put an end to laissez faire economics. In the past few years it is being repeated to prevent another great depression. Friedman’s theories were put into play for a generation and it was proved to be disastrous.

    Waiting for the process of market equilibrium to correct excesses proved to be the eventual undoing of Friedman’s fundamentalist views. The financial markets froze in the fall of 2008 and a bank run at the level of wholesale financial markets almost destroyed the economies of the world in only a few weeks.

    The evolution of feudal societies to industrial societies came about with a lot of blood, sweat and tears literally for the global community.

    Semi feudal societies are in a pre-monetary and pre-capitalist stage of economic development.

    Hence today you have the terms of emerging markets and mature markets being talked about the problems associated with both.

    I strongly suggest to one who pretends to be an internet economist maven to read up and study economics by reading Marx, Smith and Keynes and even Friedman.

    The General Theory of Employment, Interest and Money by Keynes was meant to be a road map for economies to exit the great depression and to tame the economic business cycle.

  9. labor-based agricultural economies are in a perpetual state of misery due to the low value added by the huge number of the labor force to the extractive resource. thus while a case can be made for its “exemption” – it also means it is exempted from the results of the risks and rewards that come with a global free market. the market is unforgiving – inefficiency is punished and innovation is rewarded. while some segments of the market die, other segments of the market take up the slack. in contrast, the agricultural philippine economy retains eternally an infantile state – a failure to launch.

    in contrast, the philippines neighbors who took the risk reaped the rewards that came with the risk. the philippines played the infant industry card – and remained an infant.

    marx, keynes, friedman, smith.. been there done that.


    the process of market equilibrium was precisely to let the non-performing banks crash and be taken over by the more solvent banks – instead of keynesian stimulus spending. the economy is stalling because the market was not allowed to correct itself and the fundamental flaws in policy remain – no stimulus spending, no new taxes – instead reallocate the pork barrel towards the operational budget of the line agencies, implement a strong FOIA and the NBN to monitor fraud and manipulation – and keep the market free from vested interests intervening in the name of the “common good”.


    The banks were on the way to freezing after the forced/coerced extension of credit to people who had low mortgage scores. It was a natural progression – you allow the sub-prime to get the loans, they default, and boom the – sub-prime mess. Was that a failure of the free market OR an intervention in the market that lead to catastrophic results?

    the initial government intervention – was a misguided albeit well intentioned Keynesian housing spending. the policy – built the bubble. vested interests in the financial market were being rewarded for fundamentally unsound practices. the stimulus and the TARP practically rewarded failure.

    to say that the principles do not apply to the philippines misses the fact – or perhaps proves the fact of how left behind the Philippines is in the flow of economic growth because it did not pursue the laissez-faire principles adopted by Singapore, Hong Kong, Taiwan, South Korea, and Japan.

  10. LOL… Like I mentioned in my post your intellectual comprehension of the issues are sorely lacking. You do no know what you know and what is worse you do not understand what it is you seem to know.

    For those who may read this post a good book written recently by James K. Galbraith, “The Predator State: How Conservatives Abandoned the Free Market and Liberals Should Too” would put in the proper perspective the economic problems facing post industrial societies.

    Your post shows a deep ignorance of economics and how the mechanism of markets work most especially the dominance of financial markets over the main economy that counts for humanity.

    The monetary policies employed by the Greespan Fed and subsequently Bernanke Fed led to monstrous bubbles in the equity markets and then subsequently in the real estate markets.

    The subprime mess was the effect of the lax monetary and regulatory policies that was in play ruled by the doctrinaire ideology of the free markets.

    Your statements on it are idiotic. How does one force or coerce one to borrow. Keynesian housing spending… What the hell is that. Idiotic…

  11. Hyden Toro · ·

    Discussing economic theories that most of us cannot understand is useless. It will never solve our economic problems. We are deep in debt. Our country’s income is mostly used to pay up our debts. The country is like a listing ship, being floated by OFW earnings. Many farmers-sharecroppers do not own the lands they till, because the Hacienderos/Politicians own them. The Oligarchs who are the Politicians themselves; or are allied to the ruling Politicians control most of the capital. Our population is growing like ants. We are importing rice, sugar and some of the basic food commodities. We have too much economic theorists; talking about economic terms, we cannot understand. What we can understand is: our pay is not enough for having us live dignified lives.


    For those interested the above link is monetary policy in action straight out of the Keynesian playbook, “Bernankes War on Deflation.” You create inflation to fight deflation to save your economy. The rest of the world can go hang as the Fed is exporting inflation to the world because the dollar is the premier reserve currency of the world.

    Not for the weak of heart.

  13. LOL… am amused you mouth Keynes – but you haven;t seen its application as public policy…


    speaking of recycled electrons –

    For nearly three years now, the world’s economic policy has been dominated by a revival of the once popular idea that massive amounts of public spending could cure a recession and create a new era of government led prosperity. Unfortunately, this Keynesian economic theory has, once again, proved incapable of doing so.

    Now the political and fiscal IOU’s are coming due and, unfortunately, U.S. and European economies are moving forward well below expectations. Many European nations have implemented austerity programs while our present administration has maxed-out our credit cards and appear to be willing to obtain more cards from other willing lenders in order to keep their spending capability intact.

    The current Keynesian revival began under George W. Bush with a spending program of about $168 billion which was “urgently needed to boost consumer demand”. This first round of stimulus produced a statistical blip in GDP growth in mid-2008 but it didn’t stop a more severe downturn in the economy accompanied by the failure of Lehman Brothers and many other significant U.S. institutions.

    “Stimulus Two” occurred under the present administration which was originally to be a $500 billion package. As the pork-laden bill became law, the amount blew up to $862 billion. The White House told us that with the passage of this bill, unemployment would not rise above 8 percent. Clearly, this was not the case. And, of course, we know proponents of the stimulus will say that unemployment would be significantly higher without the stimulus and millions of jobs have been “saved”, a position which is nearly impossible to prove.

    Today, a third phase of stimulus is being considered. This is causing a heated debate between the spenders and the cutters. The recent revival of Keynesian economic strategy, and the results observed thus far, seems to prove that the failures of this theory (which became evident in the 1970’s) had been lost on present policy makers. Forgotten is the much longer than usual period of prosperity experienced in the U.S. from 1982-2007. During this period Reagan and Clinton implemented strategies of lower taxes and spending restraint. Under G.W. Bush, GDP grew by 15% in eight years but spending ballooned, increasing by 58%.

    Unfortunately, today the U.S. Federal balance sheet has exploded and all of the “stimulus” has produced underwhelming results thus far. The fantastical multiplier effect of government spending under the Keynesian model is demonstrably not meeting expectations. A theory which says that a large government body can deploy capital more effectively and efficiently than a private individual simply has no merit. Government cannot do things better than the private sector can. For example, in New York, Off Track Betting is the only bookie joint in history that looses money. The amount of waste, fraud and abuse imbedded in government oversight can simply not be denied. Every dollar the government spends is “taken” from a private individual (in one form or another) and how much of that dollar gets put back into the economy after taking into consideration “administrative costs”, waste, fraud and abuse?

    speaking of ignorant – back at ya

  14. The Keynesian prescription for a recession is to increase government spending. Even if the resulting output is not valuable (the proverbial digging ditches and filling them in again), the thinking is that this will stimulate productive output. Again, this is based on the theory that economic activity is spending. Supposedly, spending will encourage more spending, through the “multiplier” effect.

    The trend is for the proportion of people employed in final-stage production to get smaller and smaller.

    From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market’s recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.

    Some Keynesian economists have proposed an even more unlikely solution, which is to revive the New Deal program of government-created jobs, as in the Works Progress Administration. This idea represents a complete denial of the contemporary reality that labor is capital. Real employment in today’s economy represents a long-term investment, not short-term make-work.

    What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

    Government could reduce the cost of investing in labor-capital. If it can be done in a fiscally responsible way, it would help to reduce the marginal tax rates on investment (the corporate profits tax) and employment (the payroll tax). This may require offsetting tax changes, such as eliminating the mortgage interest deduction or the deductibility of employer-provided health insurance.

    On the whole, the best way to help the process of market recalculation and the creation of sustainable patterns of specialization and trade may be for government to get out of the way.

    more at –


    who’s idiotic now? 😆

  15. which is why the world market is diversifying its portfolio to include the EU and if the US isn’t careful – a shift to. the Yuan – but not for a a decade or two.

  16. keep up with the times – so YOU will be less ignorant 😉


    Why Obama’s Liberal Keynesian Spending Spree Failed

    by Tammy on June 28, 2010 · 9 comments

    An enlightening piece from the WSJ on the theory so-called Progressives, like Obama, and liberals like Bush, relied on when implementing the now certifiably insane spending-our-way-out-of-debt tripe.

    Keynes. Wrong.

    Before you read the article in full, here’s some background on Keynesian economics which promotes the notion that the private sector is too inefficient economically so public section action and intervention is required.

    Now as the G8 has closed and it’s clear Obama’s plea for the rest of the world to continue down his path of economic death and destruction was rejected, this may be the final blow to those who believe the private sector and free market aren’t good enough. Deep in one story about the conclusion of the G8 and their closing statement ‘communique’ of accomplishments notes this:

    The statement addresses a range of development and aid issues, along with trade, and environmental issues. It does not contain any broad statement about how countries will pursue economic recovery, saying progress will be made by the G20 toward sustainable recovery of the global economic and financial system.

    That’s because Obama wants one thing and the rest of the world another. Check this story from the Daily Mail about the differences between Obama and the rest of the world’s approach argued by UK PM Cameron. Additionally, the notion of a global bank tax has failed as well.

    We saw the failure of Keynesian folly unleash itself in Carter’s stagflation of the 70s, but liberals don’t like history as it remind them that they are in fact, doomed to failure. So instead they decide to keep trying the thing history has proven not only will not work, but fails miserably and destroys peoples lives.

    Rand. Right.

    So instead of turning to the theories of Ayn Rand while implementing Reagan policy of empowering small business and the free market, both Bush and Obama rushed instead over into the Keynesian Flophouse of Throw-Money-At-It. Again it failed, and again, our entire nation is at risk because a few very rich, very Ivy league and very stupid Political elites thought they knew better than the average American small business owner.

    It’s you–the stakeholders in this nation and her economy who have turned into Tea Party Patriots signaling that not only is the Progressive disaster of Keynesian economics toast, so is the establishment that thought it would be a good thing to bring it back.

    Here’s just a snippet of the article. Please do read the whole thing. It’s a great analysis in a nutshell.

    The Keynesian Dead End
    Spending our way to prosperity is going out of style.

    For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn’t turned out that way…Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along. The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab…

    The difference this time is that the Keynesian political consensus is cracking up. In Europe, the bond vigilantes have pulled the credit cards of Greece, Portugal and Spain, with Britain and Italy in their sights. Policy makers are now making a 180-degree turn from their own stimulus blowouts to cut spending and raise taxes. The austerity budget offered this month by the new British government is typical of Europe’s new consensus.

    Meanwhile, in Congress, even many Democrats are revolting against Stimulus III. The original White House package of jobless benefits and aid to the states had to be watered down several times, and the latest version failed again in the Senate late this week. Mr. Obama is having his credit card pulled too—not by the bond markets, but by a voting public that sees the troubles in Europe and is telling pollsters that it doesn’t want a Grecian bath.

    The larger lesson here is about policy. The original sin—and it was nearly global—was to revive the Keynesian economic model that had last cracked up in the 1970s, while forgetting the lessons of the long prosperity from 1982 through 2007. The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money. The spending restraint began to end in the late 1990s, sound money vanished earlier this decade, and now Democrats are promising a series of enormous tax increases.

    What the world has now reached instead is a Keynesian dead end…Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

  17. Anti-pinoy Idiots · ·

    Obama’s spending spree? Nobel laureate Paul Krugman don’t think so.

    When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus?

  18. Anti-pinoy Idiots · ·

    Meanwhile, you might want to consider this NYT editorial in light of your opening up the economy mantra.


    if someone told you that he planned to buy a lot of fat food because he thinks they taste so good and he wants to experience those positive taste sensations, yet he wasn’t going to actually eat them because he wants to avoid the weight gains associated with it, wouldn’t you believe that he was delusional?
    Skip to next paragraph
    Stefan Karlsson

    Stefan is an economist currently working in Sweden.
    Recent posts

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    Yet an equivalent delusion can be found in Paul Krugman’s writings about monetary policy and asset bubbles. In his latest post, he comments on his old call for bubbles. Let’s start by reiterating what Krugman wrote then.

    “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

    Krugman now claims that he wasn’t advocating a bubble, he was simply neutrally stating the alleged fact that in order to end the recession, a new bubble was needed.

    “If you read it in context, you’ll see that I wasn’t calling for a bubble — I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea. Of course, I know that this explanation won’t keep the haters from pulling up the same quote out of context, over and over.”

    I have read that whole article repeatedly, yet I can’t find anything in the rest of it (you can try to find it yourself here) which provides a different context from what is in the above 2002 paragraph. Still, his explanation might have been plausible if Krugman had been a well-known “liquidationist” Austrian. But of course, we all know he isn’t, and we all know that he instead advocates the use of government actions to close the “output gap” as soon as possible, at basically all costs. Indeed, in the next paragraph in his latest post, he writes this:

    “But did I call for low interest rates? Yes. In my view, that’s not what the Fed did wrong. We needed better regulation to curb the bubble — not a policy that sacrificed output and employment in order to limit irrational exuberance. You can disagree if you like, but that doesn’t make me someone who deliberately sought a bubble.”

    So let’s restate what Krugman argued:

    1) He argued that the only way to end the recession or in other words to “not sacrifice output and employment” was to create a bubble.

    2) He argues that he believed and still believe that it would be wrong to “not sacrifice output and employment”.

    3) Yet he still claims that he didn’t endorse a bubble.

    You simply can’t believe in all of these things at once. You can believe in 1) and 3) at the same time if you at the same time didn’t believe in 2), and you can believe in 1) and 2) at the same time as long as you don’t endorse 3) and you can believe in 2) and 3) at the same time as long as you don’t endorse 1). But you simply can’t believe that in the absence of a bubble we would “sacrifice output and employment”, argue that it is wrong to “sacrifice output and employment” and still argue that you’re not for a bubble.

    But aside from Krugman specifically wrote about bubbles in 2002, his current argument that you can use interest rate policy to revive an economy without creating bubbles reveals a lack of understanding (or perhaps honesty) about how a Keynesian monetary policy temporarily boosts an economy.

    By lowering interest rates, a Keynesian central banker wants people to borrow money and start spending. If they don’t do that for whatever reason, then monetary policy will have no effect on the economy. Thus, a necessary (but not sufficient) condition for Keynesian monetary policy to work is if it causes credit expansion (or possibly lower savings). Yet an expansion based on central bank inflation is an expansion based on an unsustainable factor, meaning in short that it is creating a bubble in the parts of the economy where the newly created money is spent. Thus, in order to work Keynesian monetary policy needs bubbles (not necessarily big ones, but it needs to be some form of bubble(s)).

    Suppose then however, we got Krugman’s current stated wish of “better regulation to curb bubbles”. Assuming they were effective, this means that monetary policy would also become less effective, meaning that the regulations would “sacrifice output and employment”.

    There is really no escape: either you get a bubble type boom with a temporary boost to some forms of output and employment-or you don’t get it. If you get it, it might shorten a recession but create a bubble which will create future problems. If you don’t get it you will avoid bubbles, but you won’t get the temporary boom in some sectors that Keynesian monetary policy is aimed at achieving. The view of Krugman and other Keynesian that we need Keynesian monetary policy to create a temporary boom and regulation to prevent bubbles is as confused like the view of the guy that bought fat food to enjoy the taste sensations they create while refusing to actually eat it because he doesn’t want to gain weight.

  20. you don’t want hot money – you want long term FDI – actual investments on the ground – buildings – not pieces of paper traded on the stock exchange one day and out the other

  21. A Keynesian World——(Financial Economics)

    Quantify then qualify……..

    The U.S. is the world’s largest debtor nation. But as a percentage of GDP its numbers do not look too bad as compared with other advanced economies.

    It is sad that my favorite internet barbershop economist still does not get it. The argument on Keynes has long been over.

    The top three countries that are running the highest external debts as a percentage of GDP are Switzerland (300%+), U.K. (400%+) and Ireland (1000%+)… Have they disappeared from the face of the earth?

    Can China start investing or exporting to Mars? The U.S. would love to see China start moving its reserves to the Euro and that would make Europe’ goods more expensive in the world markets and cause economic turmoil in Europe.

    Why America is Going to Win in the Currency War
    (registration required)
    “To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.”

    A tidal wave of liquidity is propping up the financial markets and making PNoy look like a genius. But it is all hot money as the U.S. is on a printing money spree. Several countries are already taxing inflows.

    The U.S. has turned Keynesian policy into a WMD and is debasing the dollar deliberately since fiscal policy which is controlled by Congress is paralyzed by partisan political wrangling.

    For the world inflation will be a problem. The U.S. is institutionalizing one of the oldest most effective forms of protectionist policies. Competitive devaluation.

    An across the board import levy versus all import goods.

  22. ako ang simula ng pagkabobo · ·
  23. J_ag the Rip Van Winkle self appointed economist stuck in 1912 Soviet Union and 1950 Maoist China – AN ANTIQUATED HALF-WIT.


    As YOU pointed out “The U.S. has turned Keynesian policy into a WMD and is debasing the dollar deliberately since fiscal policy which is controlled by Congress is paralyzed by partisan political wrangling. ” – and then you want to promote Keynesian economics – MAKE UP YOUR MIND!!! BLOODY IDIOT 😆

    The current Keynesian behavior of the US government is precisely the reason why the Tea Party is on a roll to get America back on track to its laissez faire roots.

    Keynesian spending

    Keynesian advocated it presupposes an economy whose members do not see through the changes brought about by monetary or fiscal manipulation — or, as some might say, the swindle. Above all, it presupposes that people are blinded by the idea that the value of money is stable — by the “money illusion,” as Irving Fisher called it. In all this we are not saying anything new; fundamentally, we are merely stating the approach of the classical economists.

    The Classical Economists and the Money Illusion

    It is usual nowadays to characterize classical economists as antiquated halfwits whose “teaching is misleading and disastrous if we apply it to the facts of experience.”[1] This characterization could perhaps be applied more justly to Keynes’s own theory. It is certainly not just when applied to the classical economists, who were familiar with the effects of manipulations that increase the supply of money. They were well aware that booms can be provoked and prolonged by inflation. Their vehement protests were founded on very extensive experience and acquaintance with the monetary depreciation, debasement of coins, and bank-note experiments of the Mercantilist and post-Mercantilist periods. No classical economist denies that, in the first stage of an inflation, prosperity spreads as if by magic. Yet this prosperity is unreal; nowhere is it depicted more brilliantly than in the second part of Goethe’s Faust. Prices rise faster than costs and profit margins are widened, rendering new enterprises profitable. For the following reasons, however, the stimulus soon loses its force: On the one hand, prices break after a certain time unless new doses of the inflation poison are injected (and if they are, the experiment ends with the destruction of the currency). A rise in prices leads entrepreneurs to expect further rises. Consequently, they make new investments and build inventories, which in turn operate to boost prices further. The moment the stimulus of rising prices is exhausted, the cumulative boom spiral reverses its direction. Since there is no new stratum of buyers on whom the bulls can unload, the downward movement gains momentum. The English economist, A.C. Pigou, gives a penetrating description of the process in his Industrial Fluctuations (London, 1927). In an economy dependent largely upon exports, prices collapse even earlier: under the impact of the rising domestic price level, the balance of payments deteriorates, and the outflowing gold causes a deflationary process within the country, as David Ricardo described clearly in his 1810 pamphlet, The High Price of Bullion.

    On the other hand, costs adjust themselves to the higher prices. The new enterprises become undermined from the cost side and the boom collapses for this reason:[2]

    Interest rates cannot be held down in the long run, for interest rates rise because higher prices demand greater amounts of credit.[3]

    If larger amounts of credit are created through the progressive increase of money, i.e., by the printing press, the process ends in a hopeless depreciation of the currency, in terms of both domestic goods and foreign exchange.

    Wages, which have lagged behind prices, ultimately catch up, for workers care more about their real than their nominal wages. As Adam Smith remarked long ago: “Though the wages of the workmen are commonly paid to him in money, his real revenue, like that of all other men, consists, not in money, but in the money’s worth, not in the metal pieces, but in what can be got for them.”[4]

    Unemployment, therefore, cannot be alleviated by monetary measures. It is caused by what today goes under the name of basic maladjustments in the cost structure. These must be corrected by voluntary adjustments of production factors. Production factors cannot be forced into curtailing their demands by a reduction in the real value of the money unit, i.e., by deceit or trickery.

    The Keynesian System, the Economics of Illusion


    MILTON FRIEDMAN: Let me emphasize [that] I think Keynes was a great economist. I think his particular theory in The General Theory of Employment, Interest, and Money is a fascinating theory. It’s a right kind of a theory. It’s one which says a lot by using only a little. So it’s a theory that has great potentiality.

    And you know, in all of science, progress comes through people proposing hypotheses which are subject to test and rejected and replaced by better hypotheses. And Keynes’s theory, in my opinion, was one of those very productive hypotheses — a very ingenious one, a very intelligent one. It just turned out to be incompatible with the facts when it was put to the test. So I’m not criticizing Keynes. I am a great admirer of Keynes as an economist, much more than on the political level. On the political level, that’s a different question, but as an economist, he was brilliant and one of the great economists.

    Now the crucial issue is, which is more important in determining the short-run course of the economy? What happens to investment on the one hand, or what happens to the quantity of money on the other hand? What happens to fiscal policy on the one hand, or what happens to monetary policy on the other hand? And the facts that led me to believe that his hypothesis was not correct was that again and again it turned out that what happened to the quantity of money was far more important than what was happening to investments.

    The essential difference between the Keynesian theory and the pre-Keynesian, or the monetarist theory, as it was developed, is whether what’s important to understanding the short-run movements of the economy is the relation between the flow of investments — the amount of money being spent on new investments, on the one hand, or the flow of money, the quantity of money in the economy and what’s happening to it.

    By the quantity of money I just mean the cash that people count, carry around in their pockets and the deposits that they have in banks on which they can write checks. That’s the quantity of money. And the quantity of money is controlled by monetary policy.

    On the investment side the flow of investment is controlled by private individuals, but is also affected by fiscal policy, by government taxing and government spending.

    The essential Keynesian argument, the basic Keynesian argument, was that the way to affect what happened to the economy as a whole, not to a particular part of it, but to the level of income, of employment and so on, was through fiscal policy, through changing government taxes and spending.

    The argument from the monetarists’ side was that what was more important was what was happening to the quantity of money, monetary policy on that side.

    And so, as I examined the facts about these phenomena, it more and more became clear that what was important was the flow of money as compared to the flow of government spending, and when fiscal policy and monetary policy went in the same direction, you couldn’t tell which was more important.

    But if you looked at those periods when fiscal policy went in one direction and monetary policy went in another direction, invariably it was what happened to monetary policy that determined matters.

    The public event that changed the opinion of the profession and of people at large was the stagflation of the 1970s, because under the Keynesian view, that was a period in which you had a very expansive fiscal policy, in which you should have had a great expansion in the economy.

    And instead you had two things at the same time, which under the Keynesian view would have been impossible: You had stagnation in the economy, a high level of unemployment. You had inflation with prices rising rapidly.

    We had predicted in advance that that would be what happened, and when it happened, it was very effective in leading people to believe that, maybe, there was something to what before had been regarded as utter nonsense.

    INTERVIEWER: Was stagflation the end for Keynesianism?

    MILTON FRIEDMAN: Stagflation was the end of naive Keynesianism. Now obviously the term “Keynesian” can mean anything you want it to mean, and so you have new Keynesianism, but this particular feature was put to an end by the stagflation episode.

    INTERVIEWER: Talking about Keynesian policies, John Kenneth Galbraith, when we talked to him a few days ago, said that World War II “affirmed Keynes and his policies.” Do you agree?

    MILTON FRIEDMAN: No, I don’t agree at all. World War II affirmed what everybody knew for a long time. If you print enough money and spend it you can create an appearance of activity and prosperity. That’s what it confirmed. It did not confirm his theories about how you preserve full employment over a long time.

  24. Anti-pinoy Idiots · ·

    The Real Story
    By PAUL KRUGMANPublished: September 2, 2010
                    Next week, President Obama is scheduled to propose new measures to boost the economy. I hope they’re bold and substantive, since the Republicans will oppose him regardless — if he came out for motherhood, the G.O.P. would declare motherhood un-American. So he should put them on the spot for standing in the way of real action. 
    But let’s put politics aside and talk about what we’ve actually learned about economic policy over the past 20 months. 
    When Mr. Obama first proposed $800 billion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons. 
    One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal’s opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation. 
    The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available. As I pointed out in February 2009, the Congressional Budget Office was predicting a $2.9 trillion hole in the economy over the next two years; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task of filling that hole. 
    Critics in the second camp were particularly worried about what would happen this year, since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010. 
    So what actually happened? The administration’s optimistic forecast was wrong, but which group of pessimists was right about the reasons for that error? 
    Start with interest rates. Those who said the stimulus was too big predicted sharply rising rates. When rates rose in early 2009, The Wall Street Journal published an editorial titled “The Bond Vigilantes: The disciplinarians of U.S. policy makers return.” The editorial declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.” 
    But those who said the stimulus was too small argued that temporary deficits weren’t a problem as long as the economy remained depressed; we were awash in savings with nowhere to go. Interest rates, we said, would fluctuate with optimism or pessimism about future growth, not with government borrowing. 
    When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now. 
    What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different. Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility. 
    Meanwhile, the timing of recent economic growth strongly supports the notion that stimulus does, indeed, boost the economy: growth accelerated last year, as the stimulus reached its predicted peak impact, but has fallen off — just as some of us feared — as the stimulus has faded. 
    Oh, and don’t tell me that Germany proves that austerity, not stimulus, is the way to go. Germany actually did quite a lot of stimulus — the austerity is all in the future. Also, it never had a housing bubble that burst. And with all that, German G.D.P. is still further below its precrisis peak than American G.D.P. True, Germany has done better in terms of employment — but that’s because strong unions and government policy have prevented American-style mass layoffs. 
    The actual lessons of 2009-2010, then, are that scare stories about stimulus are wrong, and that stimulus works when it is applied. But it wasn’t applied on a sufficient scale. And we need another round. 
    I know that getting that round is unlikely: Republicans and conservative Democrats won’t stand for it. And if, as expected, the G.O.P. wins big in November, this will be widely regarded as a vindication of the anti-stimulus position. Mr. Obama, we’ll be told, moved too far to the left, and his Keynesian economic doctrine was proved wrong. 
    But politics determines who has the power, not who has the truth. The economic theory behind the Obama stimulus has passed the test of recent events with flying colors; unfortunately, Mr. Obama, for whatever reason — yes, I’m aware that there were political constraints — initially offered a plan that was much too cautious given the scale of the economy’s problems. 
    So, as I said, here’s hoping that Mr. Obama goes big next week. If he does, he’ll have the facts on his side.

  25. Prof. Krugman Is Wrong, Again

    Posted by Steve H. Hanke

    Prof. Paul Krugman asserts in his New York Times column of May 31st that “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.”

    While Prof. Krugman and most other fiscalists believe this to be self-evident, it is not. Indeed, this fiscalist dogma fails to withstand the indignity of empirical verification. Prof. Paul Krugman’s formulation fails to mention the state of confidence. This is an important oversight. As Keynes himself put it: “The state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention.”

    By ignoring the confidence factor, economic theory can lead to wildly incorrect conclusions and misguided policies. Just consider naive Keynesian fiscal theory — the type presented (as Prof. Krugman notes) in textbooks and embraced by most policymakers and the general public. According to Keynesian theory, an expansionary fiscal policy (an increase in government spending and/or a decrease in taxes) stimulates the economy, at least for a year or two after the fiscal stimulus. To put the brakes on the economy, Keynesians counsel a fiscal contraction.

    A positive fiscal multiplier is the keystone for Keynesian fiscal theory because it is through the multiplier that changes in the budget balance are transmitted to the economy. With a positive multiplier, there is a positive relationship between changes in the fiscal deficit and economic growth: larger deficits stimulate growth and smaller ones slow things down.

    So much for theory. What about the real world? Suppose a country has a very large budget deficit. As a result, market participants might be worried that a further loosening of fiscal conditions would result in more inflation, higher risk premiums and much higher interest rates. In such a situation, the fiscal multipliers may be negative. Fiscal expansion would then dampen economic activity and a fiscal contraction would increase economic activity. These results would be just the opposite of those predicted by naive Keynesian fiscal theory.

    The possibility of a negative fiscal multiplier rests on the central role played by confidence and expectations about the course of future policy. If, for example, a country with a very large budget deficit and high level of debt (estimated U.S. deficit and debt levels as a percentage of GDP for 2010 are 10.3% and 63.2%, respectively) makes a credible commitment to significantly reduce the deficit, a confidence shock will ensue and the economy will boom, as inflation expectations, risk premiums and long-term interest rates decline.

    There have been many cases in which negative fiscal multipliers have been observed. The Danish fiscal squeeze of 1983-86 and the Irish stabilization of 1987-89 are notable. The fiscal deficits that preceded the Danish and Irish fiscal squeezes were clearly unsustainable, and risk premiums and interest rates were extremely high. Confidence shocks accompanied the fiscal squeezes, and with negative multipliers in play, the Danish and Irish economies took off. (Evidence from the U.S. is presented in an article by Professors Jason E. Taylor and Richard K. Vedder which appears in the current May/June 2010 issue of the Cato Policy Report.)

    Margaret Thatcher also made a dash for confidence and growth via a fiscal squeeze. To restart the economy in 1981, Thatcher instituted a fierce attack on the British deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to the Times of London, they wrote a knee-jerk Keynesian (Prof. Krugman-type) response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.” Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures than the economy boomed. People had confidence in Britain again, and Thatcher was able to introduce a long series of deep free-market reforms.

    While Prof. Krugman’s authority is weighty, his arguments and evidence are slender.

  26. Anti-pinoy Idiots · ·

    These are not normal economic times in the US. It’s not completely out of the slump and Bernanke cautions for a Japanese style deflationary effect. Laissez-faire economics is not a fail-safe work-horse animal. Would the US be better off if it just allowed the collapse of G. Sachs, BoA, Citicorp. et al? The debate on Keynes is over. The tea party-ers still don’t get it.

  27. Bernanke Is Wrong! The Economy Is Getting Worse, Not Better, Schiff Says

    The Fed upgraded its view of the economy Wednesday, declaring: “Economic activity has picked up following its severe downturn.”

    But forget all the talk about recovery, V-shaped or otherwise. The economy is actually worse today vs. during the depths of the recession, according to Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0.

    “Ben Bernanke is keeping his record of perfection intact of never getting anything right. Once again he’s gotten it wrong,” Schiff says. “If the Fed really thought the economy was sound, why does he have it on life support? If he pulls the plug, our sick economy is going to die.”

    Although the Fed never said the economy is “sound”, Schiff is referring to the FOMC’s renewed pledge that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

    Nothing that’s occurred in the past six months has changed Schiff’s view that America’s economy is headed for disaster. In fact, he’s even more convinced a true “currency crisis” awaits, and that China will soon stop enabling our reckless borrowing, the basis our “phony” economy. The coming collapse of the dollar and bursting of the Treasury bubble will have devastating consequences for ordinary Americans, and any investors based in dollars, he says.

    The economy today is “worse [because] we are much more deeply indebted than in March,” Schiff declares. “We’ve dug ourselves a deeper hole.”

    – No thanks to FAILED Keynesian policies.

  28. These are not normal economic times – NO THANKS TO KEYNESIAN policies initiated by Barney Frank and Fannie Mae.

    Keynesian economists screw up then blame the laissez-faire. Would the US be better off if it just allowed the collapse of G. Sachs, BoA, Citicorp. et al? – YES!!!

    That’s the ultimate in market correction – Inefficient companies are shipped out.
    Will people suffer? Sure they will. They kept silent when they should have blown the whistle – face the consequences. I don’t want my taxes subsidizing these loss leaders -that’s throwing good money after bad.

  29. When to Let a Bank Fail


    The bigger mistake has been the bailing out of too many firms rather than too few. Capitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence. For decades, government policy and action have discouraged prudence by bailing out or taking over virtually every significant financial institution that has acted recklessly.

    Five years ago, well before the crisis, Gary Stern and Ron Feldman of the Minneapolis Fed, wrote “Too Big to Fail,” arguing that the continual rescue of debt holders and creditors was creating systemic risk in the financial system.

    They pointed out the crucial role that debt holders and creditors play in monitoring and restraining risky investments on the part of financial institutions. By consistently bailing out creditors, the power of that restraint was being destroyed. They argued that we were encouraging excessive risk-taking and destroying the natural feedback loops of prudence that would otherwise restrain bad behavior.

    They were right, but no one listened. The same mistakes continue. The ongoing rescue of virtually all creditors and counterparties of insolvent firms, rewards recklessness, creates an impression if not the reality of crony capitalism, and sows the seeds for the next financial crisis.


    We do not need to draw a line between the treatment of large, medium and small banks. We need to erase the existing political boundary that favors some while leaving others to fail. All institutions have to be open to failure — it is the reason why markets work.



  30. If we’re not careful—and less spendthrift—the U.S. economy will be heading for a state of permanent recession, argues Stanford economist John B. Taylor. Plus, read the complete list of historians and economists who back The Daily Beast manifesto for a new stimulus.

    The current slowdown in the U.S. economy is a serious concern. After growing at 5.6 percent in the fourth quarter of last year, the economy slowed to 2.7 percent in the first quarter of this year and likely to only 2 percent in the second quarter. It’s not the V-shaped recovery it should have been, and as a result the economy is not generating enough jobs to bring down unemployment from tragically high levels.

    Some argue that we need more deficit spending—another stimulus package—to boost the economy. I agree that the economy needs a boost, but not in the form of increased deficit spending. In my view, the economy is being held back by high deficit spending and related policy uncertainties. The large deficits are causing the federal debt to explode, raising concerns about how it will be financed.

    The Congressional Budget Office projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.

    Data recently released by the Congressional Budget Office give plenty of cause for concern. The CBO focuses on debt in proportion to gross domestic product, a measure of the resources available to service the debt. According to the CBO, the debt will reach 62 percent of GDP this year, a level not seen since 1951 when America was still working off the debt from World War II. But rather than decline as it did in the 1950s and 1960s (to less than 30 percent of GDP), the debt is now expected to rise sharply in the next 20 years—to 146 percent of GDP. In fact, CBO projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.

    Experience shows that such high debt levels reduce economic growth. Historical studies conducted by the International Monetary Fund reveal that an increase in debt by 10 percent of GDP is associated with a decline in economic growth of 0.25 percent. Thus, the increase in the debt from 44 percent in 2008 of GDP to 62 percent this year is already reducing growth by about one-half a percent and the 84 percentage point increase in the next two decades by another 2 percentage points. That would bring the U.S. economy to less than zero growth—yes, a permanent recession.

    Other studies support these findings. Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland find that economic growth is 2.6 percentage points higher for countries with debt below 30 percent of GDP than for countries with debt above 90 percent of GDP. They also find that ballooning debt makes the economy more susceptible to financial crises, as Greece just demonstrated. Paying interest on the debt is a growing demand on tax revenue, crowding out government programs: The CBO forecasts that interest on the debt will eventually exceed spending on all government programs combined if we stay on the current path. Such high interest payments will eventually lead to high inflation as people realize that inflating the debt away is the only recourse.

    In years past, some argued that we should not worry about the debt because it is paid to ourselves, but half of U.S. government debt is owed to foreigners, which is obviously a burden on future generations. In the meantime, our foreign policy suffers: A country’s bargaining position is weaker when a creditor country is on the other side of the negotiating table.

    Not all the increase in the deficit is due to the stimulus packages and the recession; unsustainable growth of entitlement programs is a big part of the problem. But a focus on deficit spending distracts from efforts to address the long-brewing entitlement problem. Adding to the budget uncertainty is that many tax provisions are scheduled to expire in just six months, and without legislative action, there will be a substantial tax increase on all Americans.

    The reason why a deficit-reduction plan is not being articulated and carried out now is apparently a concern that it would remove needed stimulus from the economy. But for all the reasons listed above, the best economic stimulus would be for the government to set a clear path now to reduce the deficit and to bring down the debt in the future.

    John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at Stanford’s Hoover Institution.

  31. William Cohan wrote “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street”, detailing the collapse of Bear Stearns. He’s speaking tomorrow at 92YTribeca from 12-1pm, at 200 Hudson Street- tickets are $16. We asked him some questions about Bear Stearns and the financial crisis.

    Bear Stearns was founded in 1923. Over 86 years, it managed to survive the Depression, many recessions, and grew to more than 15,000 employees, with offices in two dozen cities. What made it unique among the big Wall Street firms? Its culture was focused on making money and allowing anyone to work there who felt the same way. There was not a whole lot of polished people at the firm. Just hard working, very smart people focused on making a lot of money. Bear was scrappy, just like the people who worked there.

    In November of 2006, the company had more than $66 billion in capital. Yet in late 2008, Bear nearly imploded and was sold to JP Morgan Chase for just $236MM (though that amount was later increased.) What went wrong? The answer to that is what House of Cards, my book, is all about. I would be happy to go into this during my talk but it is too difficult to summarize here, other than to say that Wall Street has always been a confidence game and the market lost total confidence in a short period of time in Bear’s ability to stay in business. The same thing also happened to Lehman Brothers and Merrill Lynch, and was about to happen to Morgan Stanley and Goldman Sachs as well.

    Why wasn’t Bear Stearns allowed to go bankrupt, as its competitor Lehman Brothers was allowed to do just six months later? That’s a good question. Bear Stearns was bankrupt, no question about that. But the government decided to rescue it, rather than allow it to fail, on the theory that maybe things would improve if Bear were saved. Interesting idea, and an understandable one, but in retrospect, Bear should have been allowed to fail. Had that happened, Dick Fuld at Lehman would have gotten the message big time.

    Who deserves the blame for what happened to Bear and Lehman? It seems like there are a lot of suspects: the irresponsible executives who ran the companies, the traders who ran up enormously leveraged bets, the regulators who failed to police the companies, and even the American home owners who took on far more debt than they could ever afford to pay back. All of the above had a serious role to play but without the managements of these firms making the greedy decisions they made, without them abdicating their responsibility for their actions, and without them having accountability for their actions, this could not have happened.

    The collapse of Bear and Lehman began a financial panic that marked the beginning of this recent Great Recession. Were they and their fellow banks responsible for what happened to the American economy the last two years, or were there larger forces at work? To a large degree, Wall Street was directly responsible for what happened by encouraging the issuing of mortgages to people who could not afford to pay them back, and then buying up all those mortgages and packaging them into securities and selling them off as investments around the globe. The crisis could never have happened if Wall Street had not come up with that beauty. Now, Wall Street had plenty of help in making it happen too: borrowers should never have taken out loans they could not pay back, the ratings agencies should never have rated all of those securities as AAA, investors should have been more wary, and Congress should never have encouraged Fannie Mae and Freddie Mac to buy all those mortgages too. Then there was the failure of the various regulators, especially the SEC. But without Wall Street as an accelerator, this would not have happened.

    It’s 2010, and we still don’t have a financial reform bill that would do anything to stop the practices that led to these bank blowups. What do you think the Government needs to put in this legislation to keep this stuff from happening again? Is there any chance an effective bill can be passed? You need to get to the root of the problem to expect people’s behavior to change on Wall Street. That gets to incentives. Until the bankers and traders who construct, sell and trade these risky securities have real skin in the game, there is no hope for preventing another crisis in my opinion. This means having their entire net worth on the line for their decisions, just like Wall Street used to run when all the firms were private partnerships. We need to get back to that kind of ethic to prevent a recurrence. But yes, a bill will get passed and there will be a new law, but don’t expect it to prevent another crisis.

    You spent 17 years on Wall Street yourself, at Lazard Freres and JP Morgan Chase. How do you feel about the current American outrage directed at bankers? I think it is fair. Sometimes I even wonder why there is not more of it. This crisis was largely Wall Street’s creation and then we have to bail them out. Then, in short order, they are making billions in profits and compensation again. Main Street, meanwhile, is hurting. No wonder people are upset.

    This week the bankers at Goldman Sachs were in the news. They’re accused of selling securities they knew to be bad for their clients, and then betting against those same securities. What do you think of that kind of behavior, and the case made against them? I think the SEC’s case is a weak one, and the more we learn about it, the weaker it gets. This whole idea that Goldman sold securities it knew would “fail” and then bet against them is pretty ridiculous. They were doing what their counterparts wanted them to do. One wanted to take one risk, one wanted to take another risk, and Goldman just put them together. A more legitimate question is why they would want to do this kind of business in the first place, but I would be very surprised if there was anything illegal about it.

  32. It’s the opposite: the country let go of protectionist measures from ’62 onwards, which is why it has become a failure. In contrast, various Asian countries did the opposite of what Friendman advocates, which involves protectionism way into the late ’80s, and opening up markets only after that.

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