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Is the Crisis Real?

posted by Elizabeth Warren

At a Harvard panel discussion yesterday, [correction**] Gregory Mankiw--Harvard economist and Chair of the President's Council of Economic Advisers 2003-2005, made an interesting point: The liquidity crisis isn't real.  Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Greg said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines."  Why?  Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity).  As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash? 

Economics professor Ken Rogoff also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can't support it.   

Greg's work with the current administration and Ken's background with the IMF and on the Board of the Federal Reserve add a certain credibility to their assessments of conditions on Wall Street.  If they are right, the $700 bailout is saving some investment bankers' jobs in the short term, but overall it is just making the financial system worse. 

It was a terrific panel:  Nobel winner Robert Merton, Dean of the Harvard Business School Jay Light, Robert Kaplan--Harvard Business School and long-time Goldman Sachs partner, and me. It might be worth listening to some of the webcast (I repaired the link).

If you tune in, don't miss Greg's talk (fourth of the six) and Ken's talk (fifth of the six of us).  They are calm and funny, but they make the whole rush to bailout Wall Street look like a very bad idea.   

[Note:  I corrected this post.  I had not given proper attribution to Greg Mankiw, formerly of the Bush Administration.  I've corrected the post to sort out Greg's comments and Bob's comments.  Thanks for the careful help from others who read the post.]

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Comments

Isn't this just what happened with Fannie/Freddie? Congress' authorization for Paulson's financial bazooka killed the GSEs because no one wanted to lend to them, much less invest in them given the very real risk of nationalization.

The 'Harvard panel discussion' link seems to be broken.

I think it works now. The screen is black for about 15 seconds, then the stage shows up, then we walk on, etc. It is possible to skip all that by dragging the button over a bit.

Elizabeth Warren was an interesting speaker at this conference but even her reporting of what happened is wrong. It was Greg Mankiw who said "there is plenty of money to invest in financial services....the financial services industry does not want to pay the terms required." The "Ken also said" was said by Ken as reported by Elizabeth. It's quite different in the context of the rest of what the two different speakers said than it seems presented this way. This is perhaps pedantic but this has been quoted by Alex Tabarrok at http://www.marginalrevolution.com/marginalrevolution/2008/09/is-a-potential.html revealing first off that he never went back to the source but more importantly that blog is well read and it has sparked a debate around something that was misreported.

I think he's right on the money since rich people have always cried poverty to get even more money in the their pockets since it's always about greed.

Simply put: the Wall Street parasites (who produce no wealth) are consuming the hosts(weatlh producers)

Another reason to suspect that the crisis is not that real is that the stock market has not truly crashed. The stock market is not the whole story, but if people were really expecting the possibility of a truly debilitated market, the future fortunes of most public companies would be harmed substantially as well. It is possible that investors correctly expected a bailout all along, but the more likely explanation is that the sky is not falling to the extent we are being told.

Some one should let Bernanke in on it. He could go on vacation!

Professor Warren has spent her academic career ignoring the role of capital in economic activity and now she has gone one step beyond ignoring reality to denying it.I say this post ranks right up there with Sarah Palin's performance when interviewed by Katie Couric.

I have the same problem as jrmas. By clicking the link I can save the file "FinMktsPanel.rm" on the desktop - but then what...? I know this is not Bloomberg, but the Harvard site should provide the visitors some guidance.

http://www.news.harvard.edu/gazette/2008/09.25/99-economics.html

Matt

It's Mankiw, astonishingly enough, not Rogoff. Yes? That's what I get when I listen. Correction?

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