Joseph Stiglitz:

As America attempts to work its way out of the present crisis, the danger is that we will listen to the same people on Wall Street and in the economic establishment who got us into it. For them, our current predicament is another opportunity: if they can shape the government response appropriately, they stand to gain, or at least stand to lose less, and they may be willing to sacrifice the well-being of the economy for their own benefit—just as they did in the past.

What has happened to the American economy was avoidable. It was not just that those who were entrusted to maintain the economy’s safety and soundness failed to do their job. There were also many who benefited handsomely by ensuring that what needed to be done did not get done. Now we face a choice: whether to let our response to the nation’s woes be shaped by those who got us here, or to seize the opportunity for fundamental reforms, striking a new balance between the market and government.

Reversal of Fortune

This paper explored the determinants of survival in a life and death situation created by an external and unpredictable shock. We are interested to see whether pro-social behaviour matters in such extreme situations. We therefore focus on the sinking of the RMS Titanic as a quasi-natural experiment do provide behavioural evidence which is rare in such a controlled and life threatening event. The empirical results support that social norm such as "women and children first" survive in such an environment. We also observe that women of reproductive age have a higher probability of surviving among women. On the other hand, we observe that crew members used their information advantage and their better access to resources (e.g. lifeboats) to generate a higher probability of surviving. The paper also finds that passenger class, fitness, group size, and cultural background matter.

From the archive:

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.

Determinants of Survival in a Life and Death Situation

A new book.

"Martin Wolf is the world's preeminent financial journalist. This book should be read by anyone who cares about the future of the international system, which, given recent events, is anyone who cares about the global economy or their economic future."

-- Lawrence H. Summers, former U.S. Secretary of the Treasury

Wolf was recently on Charlie Rose.

Consider:

“There are many books I could have written that are better than the ones I actually wrote. My best book would have been 'Managing Ignorance', and I’m very sorry I didn’t write it.”

-- Peter Drucker

Fixing Global Finance

Stripped of their superpowers, Wall Street’s wounded action heroes have been reduced to working for the government—or not at all.

The meritocracy wasn’t supposed to work this way.

See also, Paul Graham:

When times get bad, hackers go to grad school.

From a recent NYT:

"Everyone I know is studying for the LSATs right now."

The Autumn of the I-Banker

Robert Shiller:

I like to think of capitalism as a game.

See also:

The first comic books appeared in 1935. Not having anything connected or literary about them, and being as difficult to decipher as the Book of Kells, they caught on with the young. The elders of the tribe, who had never noticed that the ordinary newspaper was as frantic as a surrealist art exhibition, could hardly be expected to notice that the comic books were as exotic as eighteenth-century illuminations. So, having noticed nothing about the form, they could discern nothing of the contents, either. The mayhem and violence were all they noted. Therefore, with naive literary logic, they waited for violence to flood the world. Or, alternatively, they attributed existing crime to the comics. The dimmest-witted convict learned to moan, "It wuz comic books done this to me."

-- Marshall McLuhan, Understanding Media

Finally:

It seems the perpetual garage sales were annoying some residents.

The Trouble With Homeownership

Joan Didion, writing in The New York Review of Books:

We could argue over whether "intelligent design" should be taught in our schools as an alternative to evolution, and overlook the fact that the rankings of American schools have already dropped to twenty-first in the world in the teaching of science and twenty-fifth in the world in the teaching of math. We could argue over whether or not the McCain campaign had sufficiently vetted its candidate for vice-president, but take at face value the campaign's description of that vetting as "an exhaustive process" including a "seventy-question survey." Most people in those countries where they still teach math and science would not consider seventy questions a particularly taxing assignment, but we could forget this. Amnesia was our preferred state. In what had become our national coma we could forget about Fannie Mae and Freddie Mac and Bear Stearns and Lehman Brothers and Merrill Lynch and AIG and Washington Mutual and the 81,000 jobs a month and the fact that the national debt had been approaching $10.6 trillion even before Henry Paulson and Ben Bernanke mentioned the imperative need to spend, which is to say to borrow, $700 billion for securities backed by bad mortgages, a maneuver likely to raise the debt another trillion dollars. ("We need this to be clean and quick," Paulson told ABC.)

We could forget the 70 percent of American eighth graders who do not now and never will read at eighth-grade levels, meaning they will never qualify to hold one of those jobs we no longer have. We could forget that we ourselves induced the coma, by indulging the government in its fantasy of absolute power, wielded absolutely. So general is this fantasy by now that we approach this election with no clear idea where bottom is: what damage has been done, what alliances have been formed and broken, what concealed reefs lie ahead. Whoever we elect president is about to find some of that out.

See also:

John McCain had met Sarah Palin once, but their conversation—at a reception during a meeting of the National Governors Association, six months earlier—had lasted only fifteen minutes. “It wasn’t a real conversation,” said McCain's longtime friend, who called the choice of Palin “the fucking most ridiculous thing I’ve ever heard.”

To be truly challenging, a voyage, like a life, must rest on a firm foundation of financial unrest.

If Schnabel is a surfer in the sense of knowing how to skim existence for its wonders, he is also a surfer in the more challenging sense of wanting to see where something bigger than himself, or the unknown, will take him, even with the knowledge that he might not come back from the trip.

A Fateful Election

If the financial debacles of the past decade—the enormous bubbles, the credit collapse and its trillion-dollar consequences—have taught us anything about the American economy, it is that capitalists have done a remarkably poor job of safeguarding the future of capitalism. Our system became so dominated by finance, insurance, and real estate, and by the complex derivative securities these industries engendered, that the most eminent financiers (and their unsleeping computers) were unable to protect us from economic shocks. For a number of years, farsighted commentators—including in this magazine—warned of the looming credit collapse, and yet the masters of our economy took no action until the crisis was already upon us. Now we must not only repair our tenuous financial system but shore it up to withstand two great, gathering storms: dwindling energy supplies and accelerating climate change. To this end, Harper’s Magazine asked a group of leading economic thinkers to offer sweeping but concrete proposals for the rescue of capitalism, and capitalists, from doom.

How to Save Capitalism

We show that four widely-held beliefs about the financial crisis of 2008 are false.

...

The financial press and policymakers have made four claims about the nature of the crisis:

1. Bank lending to non-financial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false.

Myths about the Financial Crisis of 2008

Great slide deck untangling the mortgage meltdown from a seminar today at the Milken Institute in Los Angeles.

Consider, as well:

The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles.

While it is too soon to pronounce an about-face in Fed thinking, policy makers' views clearly are evolving.

Recall:

The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitization, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

Making Sense of the Mortgage Meltdown

With Wall Street in a frenzy, we're looking for insights and perspectives on the Credit Crisis. Your presentation should be an original take on the crisis. It can be a primer on subprime loans, or a financial model of credit default swaps or mortgage backed securities. You can be broad or talk about a specific subject such as the automotive industry or the startup ecosystem. Or you can tell the story of an average family in the face of the crisis. You have 30 slides.

See the current entries. The content ends tomorrow.

The Credit Crisis In 30 Slides