Simon Johnson and James Kwak:

For the past 30 years, financial innovation has increased costs and risks for both individual consumers and the global economy. Today's challenge is to rethink financial innovation and learn how to separate the good from the bad.

The main purpose of financial innovation is to make financial intermediation happen where it would not have happened before. We cannot say that innovation is necessarily good simply because there is a market for it. The fact that there was a market for new houses does not change the fact that building those houses was a spectacularly destructive waste of money. Therefore, when it comes to financial innovation, we must distinguish beneficial financial intermediation from excessive, destructive financial intermediation.

The key to any successful regulatory regime is discerning the difference between good and bad financial innovation. The presumption should be that innovation in financial products is costly and should have to justify itself against those costs.

Instead of a regime where any product is allowed so long as it is sufficiently disclosed, we should consider a regime where only certain types of products are allowed to exist, and they are allowed to vary only along specific dimensions.

The Economist:

Financial progress is about learning to deal with strangers in more complex ways.

Paul Graham:

Don't just not be evil. Be good.

Simon Johnson, in the May 2009 issue of The Atlantic:

The conventional wisdom among the elite is still that the current slump "cannot be as bad as the Great Depression." This view is wrong.

Robert Levine:

The Great Depression brought the New Deal to the United States. It brought the rest of the world Nazism and universal war. This time, though, many nations have nuclear weapons.

"Maybe we could" is the limit of optimism in this paper. The world ahead looks difficult.

An exchange among siblings:

Lisa: "Can't you see the difference between earning something honestly and getting it by fraud?"

Bart: Hmm, I suppose, maybe, if, uh ... no. No, sorry, I thought I had it there for a second."

A final thought from the bankers:

Revolutionize your heart out. We'll still have this country by the balls.

Finance: Before the Next Meltdown

Martin Wolf:

The UK's fiscal position, with a deficit of 14 per cent of gross domestic product forecast by the Organisation for Economic Co-operation and Development for 2010, is radically unsustainable. Big spending cuts and tax increases, relative to GDP, are inevitable.

Paul Krugman:

Lost decade, anyone?

Mike Shedlock:

Today, Riksbank, Sweden's central bank cut the deposit rate to -0.25%, effectively charging savers interest on deposited money.

Ruins of the Second Gilded Age:

Martins, who creates his images with long exposures but without digital maniupulation, traveled from rural Georgia to suburban California, visiting large construction projects that began during the speculative boom years and then came to a sudden halt, often half-finished, when the housing and securities markets collapsed.

The abandoned or stalled developments -- and Martins's photos of them -- can be seen as signs of the hubris (and occasional criminality) that typified the boom and the economic and human damage that remained in its wake.

Tom Vanderbilt:

Sure, people were gullible, living beyond their means as Edmund Andrews admits to doing. But as Alyssa Katz reminds us, the real estate bubble was also a crime scene. The only trouble is delineating where crime ended and social policy began.

Richard Florida:

One thing we know about crises is they frequently bring about significant changes in the system of housing tenure. The Great Depression and New Deal innovations in housing finance and housing policy, plus the post-war boom and infrastructure building, brought a massive shift toward single family homeownership. My hunch is it's time for new hybrid forms of housing tenure which mix the benefits of ownership with the flexibility of renting.

Michael Spence:

What can we expect as the world’s economy emerges from its most serious downturn in almost a century?

Lower growth is the best guess for the medium term. It seems most likely, but no one really knows.

It is not inconceivable that the baby will be thrown out with the bath water.

Joel Stein:

There is so much you can't know about your spouse when you get married, like that one day she will want to eat her placenta.

As the sharp, stabbing pain, fear, and panic associated with rapid and visible blood loss is superseded by a panoply of chronic ailments and a general sense of unwellness, Robert Skidelsky reviews Martin Wolf's "Fixing Global Finance":

After the collapse of the dot-com boom in 2000, the US became a much less desirable place for direct foreign investment. So East Asian countries, especially China, started to buy US Treasury bonds.

In short, it was via their impact on the financing of the federal deficit that Chinese savings made it possible for the US consumer to go on a spending spree.

The fact is that the present system has suited the United States -- specifically the power holders in the United States -- just as much as it has those in China. The phrase "it has enabled the Americans to live beyond their means" is too vague to be useful. One needs to ask: which Americans? Certainly many middle- and low-income American households have been given opportunities to borrow beyond their means.

Ginia Bellafante:

There used to be a time if you didn't have money to buy something, you just didn't buy it.

Decius:

Sometimes the market drives off a cliff.

John Lanchester:

It's becoming traditional at this point to argue that perhaps the financial crisis will be good for us, because it will cause people to rediscover other sources of value. I suspect this is wishful thinking, or thinking about something which is quite a long way away, because it doesn't consider just how angry people are going to get when they realize the extent of the costs we are going to carry for the next few decades.

I get the strong impression, talking to people, that the penny hasn't fully dropped.

Recently:

I thought I was unlucky graduating into the tech bust. I had no idea.

Louis Kahn:

A good idea that doesn't happen is no idea at all.

The World Finance Crisis & the American Mission

John Lanchester:

It isn't hard to know how to slay the zombies.

Nobody in power wants to do that. Nobody with power in the banking system, and nobody with power in government. Both the British and the American plans to help the banks are very, very, very expensive variations on the theme of sticking their fingers in their ears and loudly singing 'La la la, I'm not listening.'

The average British household owes 160 per cent of its annual income. That makes us, individually and collectively, a lot like the cartoon character who's run off the end of a cliff and hasn't realized it yet.

We in Britain are, to use a technical economic term, screwed.

The German economy is fucked off a cliff.

The consequences for Britain are going to be horrific.

There needs to be a general acceptance that the current model has failed.

It's becoming traditional at this point to argue that perhaps the financial crisis will be good for us, because it will cause people to rediscover other sources of value. I suspect this is wishful thinking, or thinking about something which is quite a long way away, because it doesn't consider just how angry people are going to get when they realize the extent of the costs we are going to carry for the next few decades.

I get the strong impression, talking to people, that the penny hasn't fully dropped.

Taleb on hedge fund managers:

They are just picking up pennies in front of a steamroller. And sometimes the steamroller accelerates.

Louis CK:

When I read things like, "The foundations of capitalism are shattering," I'm like, "Maybe we need that." Maybe we need some time ... because everything is amazing right now, and nobody's happy ...

It's Finished

John Lanchester:

If I had to pick a single fact which summed up the cultural gap between the City of London and the rest of the country, it would be that one. I have yet to meet a single person not employed in financial services who was aware of it; I wasn't aware of it myself. I think if I had been, there are two questions I would have wanted answered: how did that happen? And is it a good thing?

This is one of those points of stock-market logic which seems surreal, nonsensical and wholly counter-intuitive to civilians, but which to market participants is as familiar as beans on toast.

Sometimes, when you eat chili-hot food, the first few mouthfuls tell you nothing other than that the food contains chili. It takes a moment or two to detect the presence of other flavors. Bank bail-outs and collapses are a bit like that.

Most of us have had a few drinks at a party and done something embarrassing, usually along the lines of I've-always-fancied-you-isn't-it-time-we-did-something-about-it, but let's take comfort in the following truth: none of us has ever done anything as embarrassing as buying HBOS.

That feeling you get when you've eaten something, and a few minutes later you think, oh-oh, I think that my dinner just said that was a case not of adieu but au revoir? That would be AIG.

Ginia Bellafante:

There used to be a time if you didn't have money to buy something, you just didn't buy it.

Nouriel Roubini:

Things are going to be awful for everyday people.

It's Finished

The Onion:

After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system.

Paul Graham:

Adults lie constantly to kids. I'm not saying we should stop, but I think we should at least examine which lies we tell and why.

Two kids on a school bus:

Lisa: Can't you see the difference between earning something honestly and getting it by fraud?

Bart: Hmm, I suppose, maybe, if, uh ... no. No, sorry, I thought I had it there for a second.

Saul Hansell, from last year:

How Wall Street Lied to Its Computers

Recently, The Economist:

Darker days lie ahead.

Cormac McCarthy, "Blood Meridian":

At dusk they halted and built a fire and roasted the deer. The night was much enclosed about them and there were no stars. To the north they could see other fires that burned red and sullen along the invisible ridges. They ate and moved on, leaving the fire on the ground behind them, and as they rode up into the mountains this fire seemed to become altered of its location, now here, now there, drawing away, or shifting unaccountably along the flank of their movement. Like some ignis fatuus belated upon the road behind them which all could see and of which none spoke. For this will to deceive that is in things luminous may manifest itself likewise in retrospect and so by sleight of some fixed part of a journey already accomplished may also post men to fraudulent destinies.

Nation Ready To Be Lied To About Economy Again

Barry Eichengreen has some penetrating questions.

We now know that much of what we thought was true was not. As a result we are now in for an economic and financial downturn that will rival the Great Depression before it is over.

The question is how we could have been so misguided. The problem is not so much the poverty of the underlying theory as with selective reading of it -- a selective reading shaped by the social milieu.

Where were the intellectual agenda setters when the crisis was building? Why did they fail to see this train wreck coming? More than that, why did they consort actively with the financial sector in setting the stage for the collapse?

From the archive:

Freelance journalist Karen Abbott's vibrant first book probes the titillating milieu of the posh, world-famous Everleigh Club brothel that operated from 1900 to 1911 on Chicago's Near South Side. While lesser whorehouses specialized in deflowering virgins, beatings and bondage, the Everleighs spoiled their whores with couture gowns, gourmet meals and extraordinary salaries.

Recently, Gretchen Morgenson, on Tim Geithner:

The New York Fed is, by custom and design, clubby and opaque.

Geithner ate lunch with senior executives from Citigroup, Goldman Sachs and Morgan Stanley at the Four Seasons restaurant or in their corporate dining rooms. He attended casual dinners at the homes of executives like Jamie Dimon.

Here's another worthwhile Q&A:

Lisa: Uh, are you sure that's safe?

Kearny: Well it ain't gettin' any safer.

And another Q&A, this one from Jane Smiley's review of "Intercourse":

Jack: Is it erotic?

Jane: Not at all, really. In fact, most of the time it's anti-erotic. It's about the things you were thinking about when you should have been paying attention.

A pair of final thoughts:

We're all losers now. There's no pleasure to it.

Remember: There's no medicine for regret.

The Last Temptation of Risk

Globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years.

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

Robert Levine:

The Great Depression brought the New Deal to the United States. It brought the rest of the world Nazism and universal war. This time, though, many nations have nuclear weapons.

"Maybe we could" is the limit of optimism in this paper. The world ahead looks difficult.

Simon Johnson:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong.

What now?

After jokingly asking "Time to buy gold, huh?", there was a pregnant pause. Then came the response: "Buy ammunition".

World Economy Falling Faster Than in 1929-1930

Laurence Kotlikoff:

When there is free money on the ground, people on Wall Street figure out ways to pick it up.

From the archive:

There used to be a time if you didn't have money to buy something, you just didn't buy it.

Nassim Nicholas Taleb:

Many hedge fund managers ... are just picking up pennies in front of a steamroller. And sometimes the steamroller accelerates.

Recently:

Revolutionize your heart out. We'll still have this country by the balls.

Scrap the Summers-Geithner plan

If you think "Russia" when you hear "oligarchy", think again.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists -- at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.

Only decisive government action -- exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health -- can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces -- the power of the oligarchy -- is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Jules Dupuit:

It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches ... What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich ... And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.

Peter Schiff:

I think things are going to get very bad.

From the recent archive:

After jokingly asking "Time to buy gold, huh?", there was a pregnant pause. Then came the response: "Buy ammunition".

The Quiet Coup