I just finished Dean Baker’s Plunder and Blunder, The Rise and Fall of the Bubble Economy.
Baker is one of those economists who saw the bubble coming. He was therefore ignored at the time and continues to be ignored, much like those of us who saw the Iraq debacle coming were ignored then, and are ignored now. Nothing gets you more ignored in the halls of power than being right, particularly if what you are saying make rich and powerful people uncomfortable.
The book is short (145 pages) and eminently readable. There is no jargon. You needn’t have taken even Economics 101 to understand it.
What’s done is done, so while it’s important to understand what happened in the past, it’s more important to learn from the past and try to insure that dismal history doesn’t repeat itself. Baker has some prescriptions for avoiding a repetition of the current mess. Some are so obvious that only a Congressman or a banker could disagree. Unfortunately, Congressmen and Bankers make the laws, so most of Baker’s prescriptions have been ignored.
One of the factors leading to the recent crash is the built in conflicts of interest that affect the system. For instance, the appraisers hired by lenders to appraise property are supposed to give honest appraisals, but they quickly got the message that the lenders wanted anything but honest appraisals. Since the lenders were paying for their services, the lenders got what they wanted: dishonest appraisals. LIkewise auditors quickly learned that they would not be re-hired if they produced honest audits, so they didn’t. Baker suggests a neat structural solution. Auditors, appraisers, and other experts that are used to certify financial matters should be assigned by an independent body. The banks would pay the board for the appraisal, but the appraiser would be chosen by the board, not the bank.
Same with auditors, same with the bond rating agencies.
Unfortunately, the recently announced Obama plan does nothing about these built in conflicts. It’s a sad fact that Obama has already allowed the window of opportunity for meaningful financial reform to close. Once again, the folks that didn’t see it coming, or who profited immensely from inflicting this disaster upon us, have an outsized voice in crafting a response. People like Baker are being ignored once again.
If you’re interested in getting an account of what happened and why, from a guy who saw it coming, you can’t do better than this little book.
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