Why Does the Worldwide Financial Crisis Fester So?

In today’s Journal, David Wessel nails it. (If you ask me, Wessel nails it consistently.) First, he asks the question that needs to be asked:

It has been two years since the flames were first spotted in Greece, yet the blaze still hasn’t been put out. Now it has spread to Italy.

It’s been five years since the U.S. housing bubble burst. Housing remains among the biggest reasons the U.S. economy is doing so poorly.

On both continents, there is no longer any doubt about the severity of the threat or the urgent need for better policies. Yet the players seem spectacularly unable to act.

What’s taking so long?

And then he offers a compelling answer:

Deciding who will get stuck with the tab.

“In every crisis, you have to allocate the losses between debtors, creditors and taxpayers,” says Anna Gelpern, an American University law professor and former Treasury official. “It’s a shockingly simple concept, and completely intractable.”

“By definition, it’s a political problem,” she adds. “Even if you came up with an optimal allocation, if it’s not politically salable, it can’t happen.”

Most people agree by now that our political structures are too incapable and/or impotent to a) responsibly address a crisis of this nature; and b) help create a framework that would prevent future crises.

To my mind, much of the trouble lies in how politicians’ incentives are badly misaligned: they are rewarded for short-term, self-interested activities (raising money, getting re-elected, coming down on the right side of short-term public opinion) while the goals the public really wants accomplished are long-term, public-interest works (which have almost nothing to do with raising money, electing politicians, or getting a good headline).

I have some inchoate ideas for how to address this incentive gap — to be framed out and written about here someday, hopefully — but I’m wondering what you all think of this politician-incentive problem and possible solutions to it?


twobeef

"To my mind, much of the trouble lies in how politicians’ incentives are badly misaligned: they are rewarded for short-term, self-interested activities (raising money, getting re-elected, coming down on the right side of short-term public opinion) while the goals the public really wants accomplished are long-term, public-interest works (which have almost nothing to do with raising money, electing politicians, or getting a good headline)."

Rewards for short-term, self-interested activities instead of long-term, public interest? Isn't that the exact same corporate mindset that caused the housing bubble in the first place?

JonE

I feel like the solution is really rather simple, and I apologize if someone else has already commented with this idea (I didn't read all the previous posts). Eliminate "career politicians." this, in my mind was an oversight in the Constitution. We remedied the problem with regard to presidents, but for some reason, we have yet to do so with the rest of them.

By eliminating the continued prospects of reelection (and thus pandering to constituent whims), a politician would be able to make what they perceive to be the "right" decision.

Hugh

futarchy

RZ

I think part of the problem is that "the powers that be" try to solve the problem, not by solving the root cause of it, but by feeding the cause. Take the U.S. housing crisis. A big part of the issue is that housing prices rose too high too quickly. Rather than allow housing prices to correct, government is doing everything it can to prop up the inflated prices in hope that will solve the economic problems. They don't take into account that this may help assuage some of the problem in the short-term but is not going to help in the long-term because it prices out the middle class. In other words, a whole segment of society who would be consumers in this area will not be because the price is too high.

Joe

Well to stay on task it is true it is a political problem. When the European Union started. Socialism has always failed, especially when it's forced on them. All these small countries were bullied in to joining and now can't pay their bills. They didn't have these issues before the EU, but now it effects the whole world.

Carl Franklin

The big simple problem is this. No matter what fix anyone comes up with, it will take the politicians themselves to make it law. Nobody in power has an incentive to take their own power away. That's why history is littered with revolutions.

Owen

It's curious to me that the arc of history suggests that making people more accountable has improved many societies, yet this entire thread is debating better ways to make people less accountable.

The problem is not that politicians give people what they want. The problem is that people want the wrong things. This is why advocacy and education is so important.

mannyvel

In regards to the housing problem here in the US, the obvious question is: why should the government do anything else?

The government is already backstopping the industry with Fannie and Freddie and basically keeping the mortgage market alive. They've ensured the continued functioning of the financial system by providing liquidity and being the buyer of last resort. Should the government really do anything about the soft real estate market?

When the financial system collapses, everybody loses. That's a scenario that the government can deal with, because it's the only time when all the appropriate constituents will put their differences aside. And in the case of the bailouts, it's unclear whether the government cared enough about getting screwed in the deal. Like most government officials not in law enforcement, it's hard to imagine that in a life-or-death situation an actor would play for their own gain.

Anyway, in this situation the ones that lose are the ones who don't have a seat at the table: the public. Look what happened to GM, Chrysler, and the bank bailouts: the unions won, the workers won, the banks won, the shareholders won. The taxpayers got short shrift.

They'll work something like that out in the EU as well.

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mfw13

Reforming political structures and processes is great in theory...but not so easy to do in reality.

Just about every change being suggested would require both a Consitutional Amendment AND politicians to act against their own self-interests (since any Constitutional Amendment requires confirmation by state legislatures).

Not gonna happen, unfortunately...

Joe J

mfw13, Actually, it is easier than most realise, but in an all or nothing kind of way. Instead of going through the long process of Amending the Constitution, you can bypass it by holding a Constitutional Convention, as was done when we threw out the Articles of Confederation and wrote the Constitution. It completely bypasses the Federal government, and is done by brand new delegates from the states.

Joe J

I don't see the guaranteed benifits people here are claiming would result from term limits. I see equally as likely to happen, I just got elected and know no matter how bad I do my job, I have my job for X years and no matter how good I do my job, I can't have it for more than the same X years. My incentive to do good is now nonexistant. While with often elections there is the chance that if I do perform badly, it might get me replaced.

What I believe would be much more benificial wwould be to completely eliminate political parties. And have each candidate run on their own merits.
Why would this be better.
I see candidates have, several semi conflicting loyalties.
1. Loyalty to their own personal greed, and ego.
2. Loyalty to doing a good job for their constituants.
3. Loyalty to the advancement of their political party.

Eliminating the political party loyalty would increase the loyalty to the first two. An increase in #1 would make the bad politicians easier to spot and get rid of. and an increade in #2 would cause them to be a better elected official.

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