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December 14, 2009

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Too Big to File Suit?

Posted: 14 Dec 2009 02:07 AM PST

I've been somewhat encouraged by this administration's attention to anti-trust issues, but so far there's been more talk than action. I don't think this issue received enough attention in the previous administration -- if anything the Bush administration promoted the interests of large, powerful firms -- and the movement away from strict enforcement of anti-trust rules can be traced to Ronald Reagan's push against government intervention in markets. There have been a few headline cases, e.g. Microsoft, but not the kind of systematic examination of markets and the enforcement of rules to promote competition as I'd like to see. I've been hoping this administration would change that.

Maybe there's a reason for the lack of action. One cost of a severe recession is that anti-trust enforcement is likely to be pursued with less vigor. Suppose, for example, that the government is considering initiating an anti-trust suit against a few large, systemically important firms within the economy (e.g. Google and Wal-Mart? Goldman Sachs?). The government might worry that doing so would create uncertainty in these businesses and cause them to pull back on expansion plans, be less aggressive, etc. That could make already bad conditions even worse, and it could also create uncertainty more broadly within the business community and cause similar, amplifying effects. Thus, the government might prefer to withhold action until things got better (much as though it might be willing to let a car company fail during good times, but not in a recession).

Even if the initiation and pursuit of such action has no effect at all on economic activity, the recovery from the recession could drag on for awhile, and the sluggish recovery could be attributed, in part, to the government's action. Thus, initiating an anti-trust suit against a large, economically important firm would leave the party in power vulnerable to a charge from the other side that their "overly zealous" enforcement of these laws prolonged the recession. As a political calculation, why not wait until things improve before taking such potentially politically volatile action?

There may be other reasons to wait as well. e.g. needing votes to pass a stimulus package that might be lost if anti-trust action is announced. So it seems quite likely that an administration might decide to delay action until the economy is on more solid footing rather than taking action that might upset the economy or leave them politically vulnerable to charges of making conditions worse. It could also be that these types of cases are complicated and take time to build, and with no foundation from the previous administration to build upon, it's too soon to expect results.

But I also worry that, for whatever reason, the administration won't actually take the needed action even when things get better and they've had plenty of time to build their case. One argument used in the past to forestall the regulation of market power is the argument that markets are self-regulating, that they can take care of market power problems by themselves (and it's best to let them do so). We've seen how well the self-regulation argument works when it's applied to financial markets, and it doesn't work any better when it comes to market power. Regulation and effective enforcement of the rules are needed to solve the problem.

It's costly when one or a few firms dominate markets, and it's not just the economic losses that are the problem. Excessive size also gives firms political power and influence and this, too, is costly. We should have done something about this long ago -- perhaps more attention to the costs associated with excessive size and power would have left us less tolerant of too big to fail firms in the financial sector. But in any case, I hope the administration follows up on its increased scrutiny of market power and anti-competitive behavior with meaningful action. We shall see.

Paul Krugman: Disaster and Denial

Posted: 14 Dec 2009 12:54 AM PST

Will centrist Democrats in the Senate support financial reform?:

Disaster and Denial, by Paul Krugman, Commentary, NY Times: When I first began writing for The Times, I ... actually believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs.
And to be fair, it does happen now and then. ...Alan Greenspan ... has admitted that he was wrong about the ability of financial markets to police themselves.
But he's a rare case. Just how rare was demonstrated ... last Friday in the House of Representatives, when — with the meltdown caused by a runaway financial system still fresh in our minds, and the mass unemployment that meltdown caused still very much in evidence — every single Republican and 27 Democrats voted against a quite modest effort to rein in Wall Street excesses.
Let's recall how we got into our current mess.
America emerged from the Great Depression with a tightly regulated banking system. The regulations worked: the nation was spared major financial crises for almost four decades after World War II. But as the memory of the Depression faded, bankers began to chafe at the restrictions they faced. And politicians, increasingly under the influence of free-market ideology, showed a growing willingness to give bankers what they wanted.
The first big wave of deregulation took place under Ronald Reagan — and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s. ...
But the proponents of deregulation were undaunted, and in the decade leading up to the current crisis politicians in both parties bought into the notion that New Deal-era restrictions on bankers were nothing but pointless red tape. ...
And the bankers — liberated both by legislation that removed traditional restrictions and by the hands-off attitude of regulators... — responded by dramatically loosening lending standards. The result was a credit boom and a monstrous real estate bubble, followed by the worst economic slump since the Great Depression. ...
Talk to conservatives about the financial crisis and you enter an alternative, bizarro universe in which government bureaucrats, not greedy bankers, caused the meltdown. It's a universe in which government-sponsored lending agencies triggered the crisis, even though private lenders actually made the vast majority of subprime loans. It's a universe in which regulators coerced bankers into making loans to unqualified borrowers, even though only one of the top 25 subprime lenders was subject to the regulations in question.
Oh, and conservatives simply ignore the catastrophe in commercial real estate: in their universe the only bad loans were those made to poor people and members of minority groups, because bad loans to developers of shopping malls and office towers don't fit the narrative.
In part, the prevalence of this narrative reflects the principle enunciated by Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it." As Democrats have pointed out, three days before the House vote ... Republican leaders met with more than 100 financial-industry lobbyists to coordinate strategies. But it also reflects the extent to which the modern Republican Party is committed to a bankrupt ideology, one that won't let it face up to the reality of what happened to the U.S. economy.
So it's up to the Democrats — and more specifically, since the House has passed its bill, it's up to "centrist" Democrats in the Senate. Are they willing to learn something from the disaster that has overtaken the U.S. economy, and get behind financial reform?
Let's hope so. For one thing is clear: if politicians refuse to learn from the history of the recent financial crisis, they will condemn all of us to repeat it.

links for 2009-12-13

Posted: 13 Dec 2009 11:02 PM PST

Sad News about Paul Samuelson

Posted: 13 Dec 2009 12:01 PM PST

Paul Krugman comments on some sad news:

Paul Samuelson, RIP, by Paul Krugman: Oh, my. Paul Samuelson has died. He had a long, good life; yet he will be sorely missed.
It's hard to convey the full extent of Samuelson's greatness. Most economists would love to have written even one seminal paper — a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars.
And he was a wonderfully down-to-earth human being besides. For a number of years I shared an office suite with him and Bob Solow; he always had time to talk, and was completely without airs.
One of the things Robin Wells and I did when writing our principles of economics textbook was to acquire and study a copy of the original, 1948 edition of Samuelson's textbook. It's an extraordinary work: lucid, accessible without being condescending, and deeply insightful. His discussions of speculation and monetary policy are particularly striking: they run quite contrary to much of what was being taught just a few years ago, but they ring completely true in the current crisis. And he was, of course, the man who truly brought Keynesian economics to America — a contribution that now seems more relevant than ever.
Let us honor the memory of a truly great man.

[For two samples of his writing and thinking from among the many posted here, see Financial Crisis Work of "Fiendish Monsters" and Samuelson on Keynesian Economics.]

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