Monthly Archives: October 2008

Market Failure — a teaching moment

Review in the Chronicle discusses whether the current financial crisis causes one to consider whether economics is taught well.  Here are a couple of interesting quotes:

At some point, and this is as good as any, we have to ask ourselves if we have been teaching theory or ideology.

What about a return to the idea that economic theory does not offer settled answers but instead offers only an engine of analysis? Are we fearful that if we allow for too much ambiguity in the use of our theories, we will no longer be perceived as proper scientists? If anything, this episode should remind us to remind our students that there may not always be a unique right answer.

And —

This crisis is built on the foundations of financial illiteracy.

And —

It is very ironic that the end result of the misplaced application of incentives in the Soviet Union led to the increased role of the market system in that country. In the United States, the misplaced application of incentives is bringing about greater government intervention in the economy.

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Gold(man) Standards — Fannie Mae

Article in NYT concerning the evolution at Fannie Mae.  The pressure to take more risky loans came during the heyday of the Republican Congress. But it wasn’t just Congress, as Gov. Palin said during the debate on Oct 2.  Wall Street, investors and the White House pressured Fannie Mae to underwrite the subprime mortgages being written by Countrywide and others.

Seems Fannie Mae had connections to GS:

But earlier this year, Treasury Secretary Henry M. Paulson Jr. grew concerned about Fannie’s and Freddie’s stability. He sent a deputy, Robert K. Steel, a former colleague from his time at Goldman Sachs, to speak with Mr. Mudd and his counterpart at Freddie.

Mr. Steel’s orders, according to several people, were to get commitments from the companies to raise more money as a cushion against all the new loans. But when he met with the firms, Mr. Steel made few demands and seemed unfamiliar with Fannie’s and Freddie’s operations, according to someone who attended the discussions.

Rather than getting firm commitments, Mr. Steel struck handshake deals without deadlines.

That misstep would become obvious over the coming months. Although Fannie raised $7.4 billion, Freddie never raised any additional money.

Mr. Steel, who left the Treasury Department over the summer to head Wachovia bank, disputed that he had failed in his handling of the companies, and said he was proud of his work .

Mr. Steel now has a court fight over to whom he can sell Wachovia (disaster seems to follow him, no?).  Wonder what color his parachute is?

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Gold(man) Standard – Market Failure

The big 5 investement bankers asked for a rule change at the SEC — that this article said created a situation where the information that might have predicted the current crisis became invisible.

The man representing Goldman Sachs at the table, then became Treasury Secretary Paulson.

Markets do not operate well when information is obscured.

An example of where market failure is precipitated by public value failure

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Market Failure — Wrong Risk Model

An opinion piece hypthosizes how an assumption on the isolation of risks in the Wall Street risk models was wrong…

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Market Failure – Information Capital Deficit

This article in the New York Times recounts Bernanke’s theory of information capital (and the deficit thereof) leading to the great depression.

The failure to provide adequate information to the market  — is that a market failure?  If so, does such a failure require a public intervention?

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