Gerald Epstein at UML ICC

Let me start by saying the oldest cliche from Economics 101 is that "there's no such thing as a free lunch," but the UML Monday noontime lecture series does come complete with a nicely-catered sandwich, salad, and beverage lunch buffet, complimentary for all who attend. The next lecture to be held at the ICC will be from Bob Forrant on 30 NOV (Global Economy -- Local Woes: Lowell and the Great Recession of 2008-2009), but there are going to be presentations on 02 NOV, 09 NOV, 16 NOV, 23 NOV, and 7 DEC at the RESD Seminar Room 500 O'Leary 5th Floor (61 Wilder).

Next, let me say the best quip of the event today came from Prof. Epstein, who said, "If there are no atheists in foxholes, then there are no Milton Friedmanites in global financial crises." I loved it. It summed up a lot of what he was saying about the moral hazard created by government bailouts. The cycle, of course, starts with deregulation, spins increasingly out of hand, there's a very loud THUD that affects some rich and powerful people (with rich and powerful friends who write laws!) and then there's a bailout. Having lived through the S & L fiasco in the late 1980s, and then the latest round of government bailouts, I'd have to say this makes a lot of sense; as Prof. Epstein also said, the current reform efforts have been more of the band-aid variety than honest attempts to completely overhaul the system.

Epstein was quick to dismiss the idea that the Fed created the problem with low interest rates and fast and free liquidity during the 1990s and 2000s. He pointed to interest rates and inflation rates that were just as low in the 1950s and 1960s, but contrasted those times -- when productivity was increasing due to new sectors of the economy producing tangible assets, and when credit flow was more strictly regulated -- to the recent crisis, the run-up to which was fueled by supposedly safe securitization of shaky investments, a 'don't-ask-don't-tell' attitude towards loan and debt issuance, and homeowners using HELOCs like drunken sailors on a port call (actually, Epstein did not talk about HELOCs but did talk about questionable uses of credit, so I included it by implication).

Epstein pointed to the "SOLD OUT" report, which can be found at the Wall Street Watch website. He pointed to several proposals that would help address the systemic causes of the crisis, such as re-instating the Glass-Steagall Act, which separated commercial and investment banking (this call has also been made by our nation's tallest Fed Chairman, Paul Volcker). He also called for the creation of publicly-chartered credit rating agencies, explaining how the blatant conflict of interest whereby investment banks essentially buttered their raters' bread helped fuel the crisis (and that explains how otherwise conservative investment funds invested in supposedly AAA-rated subprime loan-based packages). In addition, Prof. Epstein challenged the way that financial firms create the incentive for excessive risk-taking on the part of traders -- if the traders can rack up large short-term gains, even in a way that's deleterious for the long-term -- they can still collect massive bonuses that do not need to be repaid when those once-lucrative deals go tapioca. He called for laws that would change this (perhaps by creating escrow accounts whose eventual pay-out would depend on long-term trader performance), the restriction or elimination of off-balance-sheet vehicles, and the implementation of financial precautionary testing for new financial products.

In short, he called for greater government regulation of the financial industry, for policies that would "save the banks but not necessarily the bankers" in times of crisis (and that would perhaps be funded by Wall Street itself in the form of securities transactions fees), and for a change in the mainstream economic school of thought which says that markets are inherently self-correcting and function best when left unregulated.

Epstein is a co-founder of SAFER, the Economists' Committee for Stable, Accountable, Fair, and Efficient Financial Reform.

HT to Paul Marion of richardhowe.com for posting this event yesterday, which was what got it onto my calendar.