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What would Galbraith do?


 

I keep thinking about what John Kenneth Galbraith (1908-2006) would have had to say about the financial markets meltdown.

In his later years, Galbraith used the term “innocent fraud” to describe the way the economy had fallen under the sway of corporate managers looking for short-term personal windfalls, rather than shareholders interested in sound long-term business strategies, or governments worried about broader societal interests.

Regulators should have reined in the greedy insiders—we can all see that now. But who was really doing the regulating? With hindsight, we should have been listening to Galbraith when he observed back in 1999:

“[All] but the most doctrinaire accept the need for regulation and legal restraint by the state. But few economists take note of the cooptation by private enterprise of what are commonly deemed to be functions of the state.”

And how exactly did private enterprise co-opt what were properly government regulatory functions? Object lesson: in 2004 the big investment banks succeeded in convincing U.S. authorities to allow them to be subjected to what amounted to voluntary regulation.

Last week, Christopher Cox, the U.S. Securities and Exchange Commission’s beleaguered chairman, admited the self-supervision scheme was “fundamentally flawed from the beginning,” and scrapped the whole innocently fraudulent experiment.

Galbraith saw it coming.


 

What would Galbraith do?

  1. Deregulation – if it works with finance, why not with food?

  2. But would Galbraith have agreed to the wholesale theft from the productive economy and the yet-unborn, to reward the stupid and the (potentially) criminal for their misdeeds? ‘Cuz that’s what’s currently under negotiation in Washington, for the sake of avoiding too much well-deserved immediate economic pain. And it sucks, it’s immoral, it’s pure theft, and the victims have no say or power to stop it besides some of them (the ones already born) to yell at their congresscritters.

  3. Galbraith wrote well but he was a poor economist. His major theories have largely been discredited and I am not impressed with quote you have presented. Lots of economists saw this coming, they have been writing about it for years.

    The Americans are in the mess they are because of mortgages to people who couldn’t afford them. I don’t think mortgages can be rightly described as a function of the State, at least in a democracy it wouldn’t be.

  4. “Cuz that’s what’s currently under negotiation in Washington, for the sake of avoiding too much well-deserved immediate economic pain.”

    They’ve got no choice. Someone’s going to own the stuff that goes with all that paper once the smoke clears and it isn’t just the home team that’s going to want in on the fire sale.

    Galbraith would be looking for his favorite tie from his old price controls days just to shake it at Washington. After printing off half the GDP from out of nowhere in a matter of weeks and not a word about slowing money down, they could use the reminder.

  5. “His major theories have largely been discredited and I am not impressed with quote you have presented.”

    oh

    bull

  6. I suggest checking out the Progressive Economics Forum and the associated blog to find out what he might think. Paul Krugman’s blog is also on topic.

  7. Oh, and jwl, mortgage hustlers were/are a problem.
    The real problem is what happened to those mortgages later.

  8. In the UK, anyhow, the boom in the banking sector has been explicitly laid at the door of the Sarbanes-Oxley act, and the fact that regulation here has been easier. Even the FSA essentially said it was their policy not to do too much, lest banks leave.

  9. My thoughts went to Galbraith, too.

    Giving the job of regulating banks to banks, though? That’s not so much coopting as it is abdication.

  10. Sisyphus

    I agree there is plenty of blame to go around. But I don’t believe lack of regulations is the problem here. I would prefer less, but better thought out, regulations. I have no idea how it would work but I would put 20 economists, of varying ideologies, in charge of writing regulations and would remove pols and bankers from the process.

  11. You put 20 economists in a room you’re going to get 22 ideas as to what the right course is.

  12. T Thwim

    Ordinarily I would agree. I was just thinking of book The Wisdom of Crowds and how to create a financial system that would make sense.

    I would put those 20 economists together and tell them they can’t leave the room until they broadly agree on framework.

    Putting pols and bankers in charge is recipe for madness (what we see now). They are all up to their eyeballs in corruption, as far as I am concerned.

    Biden and thoughts on this crisis – “When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed, He said, ‘Look, here’s what happened” – really freaked me out. Not that McCain is doing any better but that Biden quote stuck in my mind.

  13. Sure, markets can and do fail.
    But Galbraith and his ilk think that governments don’t.
    There’s plenty of blame to go around in this current debacle, but anyone who says it’s all due to “deregulation” is either stupid or dihonest.
    Without the Fed’s loose monetary policy and Freddie and Fannie’s reckless lending we wouldn’t even be close to a financial meltdown.

  14. I was going to point out that Galbraith would have recommended buying up stock as he suggested in both The New Industrial State (dated but still well worth reading) and Innocent Fraud, but I’ve always considered that to be more of a quirk than a likelihood.

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