They Write Books

Of course, the reviews aren't front page Pravda news- but the data are out there, anyway.

But who ever said people are reality-based?

Paul M. Barrett:

The delightful motif that enlivens Peter S. Goodman’s otherwise sobering new book on economic delusion suggests that we’ve been living in Neverland. The fairy dust of easy money — heedless borrowing by homeowners and investment bankers alike — has lost its magic, and now we have returned to harsh reality.

Goodman, a national economics correspondent for The New York Times, doesn’t go so far as to match literary characters with real-life figures, but clearly the former Federal Reserve chairman Alan Greenspan would be his Peter Pan: the fantastical flying boy who wouldn’t grow up to confront the adult world, where his theory of pristine, self-correcting markets simply doesn’t work the way he wishes it would. If Greenspan is Peter, then his band of Lost Boys who live with him in Neverland would include the current Fed chairman, Ben Bernanke, and the chief White House economic adviser, Lawrence Summers. Unless our Lost Boys imitate their literary counterparts and return to the gravity-bound world, we could face further rounds of economic disaster.

Goodman, a fair-minded reporter and a clear writer, demonstrates how both Bernanke and Summers, along with most other major economists and Wall Street plutocrats of the past two decades, became entranced by the Greenspan-­Chicago School notion that financial institutions can be trusted to police one another in the absence of rigorous government oversight. Summers opposed the regulation of credit derivatives during his years in the Clinton administration, helping to open the door to the reckless trading and lending that brought Wall Street to its knees. Bernanke failed to appreciate until way too late that the subprime housing bubble would not necessarily deflate on its own.

Greenspan, in one of history’s most galling now-you-tell-us moments, confessed last October that his magical thinking had turned out to be false. Thankfully, he’s gone from the public stage. Bernanke and Summers remain in positions of tremendous influence, and they have failed, so far, to articulate specifically just how wrong Greenspan was, and how they intend to reshape the worlds of banking and financial regulation. The Obama administration’s initiative to stiffen the spine of the Securities and Exchange Commission and curb derivatives speculation is apparently losing momentum. Goodman’s book reminds us that this situation contains the seeds of future fiascoes.

Drawing on his experience covering the technology industry as well as broader economic trends, Goodman performs a tremendous service by showing how the context of market manias changes but the essential content remains the same. The tech boom of the late 1990s gained dangerous momentum when financial seers reassured investors that traditional rules — companies ought to make profits derived from real demand for their goods and services — no longer applied. Crash! More recently the fallacy was that home prices would rise forever, defying the conventional relationship between supply and demand. That’s why banks gave anyone a mortgage, and Wall Street bought those mortgages and turned them into an endless stream of bonds. But when real estate inevitably collapsed, the mortgages went sour, the bonds turned noxious, and, well, here we are.

Some economic indicators are pointing in hopeful directions these days. But we could still see a painful reversal, especially when all those booby-trapped mortgages punish borrowers with interest-rate jumps over the next year. To date, lenders have deftly resisted pressure from Washington to revise the bulk of shaky home loans, heightening the risk of a worsened foreclosure crisis that could drag the larger economy back into recession before we ever reach a solid recovery. Wall Street, for its part, defiantly insists that derivatives trading should remain beyond the reach of the financial police. We desperately need the Lost Boys to wake up and deal with the truth.

The only thing I might quibble with is the nature of the "Lost Boys" we're dealing with. These aren't simply misguided children who refuse to grow up. Oh no- they are quite wealthy as a result of their delusions. There is a whole political order- or rather, disorder- the Chicago School's delusions have been used to support.

There is a "Lost Boys" analogy that works for the Faithful of Chicago School economics, though...