Sunday, August 02, 2015

Taking bows for what?

From Barack Obama to Ben Bernanke to Dodd and Frank, and on down throughout much of Washington DC, politicians and economists are taking deep bows for "saving" the world economy in 2008-09. But bailing out cronies ("Who benefits from bailouts") with taxpayer's money is actually pretty simple.

The morning after is the hard part. The latest GDP growth numbers are still awful. Also here and here.

But it's even worse. We lose the essentials of capital markets. Writing in today's NY Times, Adam Davidson reminds readers that, "Rather than condemn Greece for unwise borrowing, we should worry about why our economic system refuses to punish unwise lending ... We need the market to reward bets that are economically wise, instead of those that are politically savvy."

Capital markets are there to resolve an essential (and huge) coordination problem. How does society provision itself for the future? Not actually "society" but decentralized capital markets that coordinate an uncountable number of savers' and investors' consumption-smoothing plans.  Scarce resources must somehow be channeled to the most worthy projects.  That is how we grow.

To get it done, there is only one option: capital markets without political manipulation.

The investors who bet on Greek sovereign debt were betting on the bailouts they are now getting.  Investors in U.S. mortgage-backed securities were also betting on implicit (soon to become explicit) loan guarantees, first to Fannie Mae and Freddie Mac and then to much of Wall Street. As Davidson suggests, bad GDP numbers are just the parts that are most easily seen.