Forgive me for getting political, but it seems like the world is falling apart and for once some of the responsible parties are actually taking responsibility! As angry as I get at those folks, I would like to applaud them for admitting their boo-boos! (also forgive me if I'm writing too fast and not making sense...)
First, Alan Greenspan sort admitted that he doesn't understand capitalism, or at least how and why it might break down saying, "I don't fully understand why [the credit meltdown] happened." The truth is, this bust was exactly like any other bust, but what confused him is that, for so long, he has been able to blame problems on lack of free markets and this one is so clearly a result of free markets gone awry. I'm not saying free markets are necessarily all bad, but, lets face it, maybe the central pillars of our entire economy need a little oversite, no? Just a little. The bad news is that now Alan Greenspan, an intelligent man who's finally said something people really need to hear, has been discredited in most people's eyes in the space of a few sentences. But lets face the facts now, this was a typical boom/bust cycle: everyone went crazy, overvaluing their assets until suddenly they realized their assets weren't worth anything and the bottom fell out. It's more psychology than math and it happens every boom and bust cycle. Every boom there's some justification for why the boom will last forever. In the internet era we were supposedly in some kind of new economy where we didn't actually have to produce anything. Nonsense, but people believed it. This time, Greenspan and other geniuses told us that thanks to his deregulation, the markets were finally free to keep expanding and that people with subprime mortgages could refinance when the values of their houses went up (this was what he called "democratizing credit" as if that had something to do with our voting rights). Nonsense again, to believe that any market, even housing, would always go up, but people believed it. The housing market was already overvalued, when all this started and only became more overvalued because of those subprime mortgages. But since the banking industry was now deregulated thanks to Greenspan, they only had to police themselves, which they weren't interested in doing because they were all living in a fantasy land of ever increasing property values. It's hard to be sensible about this stuff when you're caught up in a culture of people making rationalizations, so a lot of smart people all made the same mistake. That's why there's no such thing as a safe investment, kids: it's all a gamble. Personally, I think an industry that is gambling with other people's money should be regulated, so that risk is minimized. Until recently, Greenspan disagreed, but now he agrees, and I think we should aplaud him.
Now, we find out that Bill Clinton "blew it", too! Mr. free-trade-solves-all-problems now admits maybe if it leads to starvation we should do things a bit differently. "Food is not a commodity like others," Clinton said. "We should go back to a policy of maximum food self-sufficiency. It is crazy for us to think we can develop countries around the world without increasing their ability to feed themselves." Actually, Mr. Clinton, you may not realize this, but the "free trade" rules regarding food are quite different from other free trade rules. Let me explain. Lets start with the basics of free trade. First off, so-called free trade agreements have very little to do with making trade free. If they did, as my friend Mike pointed out to me, they could be just a page or two long. Moreover, many economists talk about how, because of the law of comparative advantage, both countries automatically benefit from free trade. Even if we assume that the agreements have anything to do with free trade, the law of comparative advantage, is about moving goods, and these agreements have a lot to do with moving capitol, which negates the benefits of the law of comparative advantage.
But let's get back to food and why it's different from other things: the US has enormous farm subsidies and then wants other countries to engage in "free trade" with us, which essentially floods their economy with cheap food. Food that sells in their country for less than the price it takes to produce. That's not free trade. But it seems like a good thing because it means people of these other countries can get cheaper food. The problem is it's not good because it means these countries must now depend on foreign sources for food and no longer have the infrastructure to produce their own food. When international food prices fluctuate, this can destroy their economy from the bottom up: it starves their poorest people making them either dead or unable to work (never mind the fact that it immediately puts farmers out of work). Why would poor countries agree to this? Well it's true, they could veto the agreement, as they eventually did with the new round of trade talks but remember it's not the farmers who make these deals, and in the short run, cheap food sounds good. The other thing is, the poor countries want to have access to foreign capital and investment. In many cases, I think it's true that this aspect of globalization can be helpful to many poor countries, and many of them mistakenly think (or thought) that this would bring their economy up so much that they would become industrialized and not need to produce their own food. As far as I know, though, no major economy exists without the ability to produce it's own food, even if it means it has to subsidize its own crops. (Unfortunately, of course, free trade is often nothing more than an opportunity for rich countries to export their environmental and labor issues to poorer countries who are desperate for an influx of capital, which is bad for the poor and working people of all countries, not to mention the environment.) Clinton did not go so far as to back off from his entire free trade stance, of course, but he did acknowledge that at least some aspects of it are causing people around the world to starve, and I think he should be applauded for admitting this mistake.