Financial crisis quote

Krugman in the NY Times:

Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.

Even the temporary appearance of success offered gigantic rewards. That's the problem with the financial system in a nutshell. You can be running your institution into the ground, but as long as you do whatever it takes to keep your stock price high from one quarter to the next you will get richly rewarded.

Are you a financial manager? Then you just have to play well in the only game everyone scores, and that's about making short-term market gains. If you look to the long-term viability of your institution, behave more cautiously than the herd, you won't risk enough and earnings will slow. And so your job will go to someone who is more aggressive. So you do the sensible, common, and obvious thing: you play a relatively short-term game, knowing that any serious long-term pain will be the taxpayer's burden.

On economists who know nothing of history

Krugman blogs:

. . . economists, who should be helping introduce some clarity, are on the whole making things murkier. I had thought that the lessons of the Depression would help guide us through this crisis; but it turns out that a large part of the profession knows nothing about those lessons, and is peddling fallacies exploded three generations ago as if they were profound new insights.

So yes, we can have another depression — because those who refuse to learn from history may be condemned to repeat it.

Krugman's blog makes for sobering reading these days. If Krugman is correct, Obama's first stimulus plan -- assuming it even passes -- will fall entirely short of what would be required to set the US economy on course to recovery. The prospect of a global depression looms larger every day.

Stupidest question of the debate

I thought Bob Schieffer was the best moderator of presidential debates. Schieffer asked one really good question. Relative to past moderators, his questions elicited interesting responses.

However, Schieffer did ask one silly question. (Anyone who happened to catch the "financial crisis quote of the day" or the "interview with George Soros" posts would have recognized what was so bizarre about the question). The question?

What will you cut back in terms of spending?

You can watch the video of the debate segment related to that question bellow, or read an excerpt of this exchange extracted from my live-blogging post of the debate post. Here is the video clip of the relevant exchange (via CNET):

McCain's continued call for a "spending freeze" suggests just how out of touch he is with modern economics. McCain does not seem to understand that avoiding a deep recession will call for massive spending increases. Obama rightly attacked McCain on his fetish for a "freeeze," but from another angle; that of someone concerned about funding a cure for autism.

And to think that McCain mentioned Obama's "projector" for a third time!

Financial crisis quote of the day

". . . consumer spending is now plunging at serious-recession rates. . . . even if the rescue now in train succeeds in unfreezing credit markets, the real economy has immense downward momentum. In addition to financial rescues, we need major stimulus programs. "

- Paul Krugman, blog post entitled "train headed downhill"

Soros spots commodity bubble

The people who tell you that commodity prices today are driven by “economic fundamentals” are the same ones who said that house prices in Britain were rising because of land shortages.

- Anatole Kaletsky, Times (UK)

I think that there is a bubble in oil prices, and it has two components. There is this foundation in reality, and the interpretation and the bias in the market. Recently, this bias has expressed itself in more of a rise. So there is a froth super-imposed on the fundamental trend. Oil is increasing ... but the recent rise I think has a larger fundamental speculation and really misconception in the way the institutions have piled in on one side of the market buying these commodity indexes.

- George Soros, interview with CBC

Global crisis jot

“The current crisis is not only the bust that follows the housing boom,” Mr. Soros declared. “It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.”

- Investor and philanthropist George Soros at Davos this week.