Tuesday, May 12, 2009

Nothing will change Balcerowicz's neoliberal mind

There is an interesting interview with prof. Leszek Balcerowicz in Gazeta Wyborcza (Monday, May 11, 2009) entitled "Leave my capitalism alone". It seems that nothing will change prof. Balcerowicz's neoliberal mind. In essence, he argues that the global crisis is due to state interventon and loose monetary policy. The private sector is not to blame (maybe only partly) He does not mention laisser faire approach to financial sector regulation, tax cuts, financial innovation going astray or weak financial risk managament as sources of the crisis.

I think that he is wrong. Let me just quickly take up his main two arguments:

1. On state intervention - he is yet another guy who erroneously maintains that the growth in the subprime market was due to government's intervenion. First, the law promoting lending to poor households was introduced in 1979, so it can't be blamed for the crisis in XXI century. Second, Fannie Mae and Freddie Mac financed not more than 20% of the subprime market - the rest was financed by the private sector, with no support from the government whatsoever, expect for lack of regulation...

2. Loose monetary policy - he is wrong here, too, although less. Loose monetary did contribute to the crisis. But even if interest rates were higher (if FED followed Taylor rule, inteest rates would not go down to 1% but perhaps to 2-3%), it would not prevent the crisis: financial sector would continue to give money to ninjas no matter what the interest rate and sell it on to all these gullible global investors. The crisis would probably have been slightly smaller (real estate prices would have slightly less space to fall), but it would happen anyway.

Here is my view on the sources of the crisis, in slides.

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