Powerful words from the Nobel laureate (h/t Thoma):
Securitization epitomized the process of how markets can weaken personal relationships and community. With securitization, trust has no role; the lender and the borrower have no personal relationship. Everything is anonymous, and with those whose lives are being destroyed represented as merely data, the only issues in restructuring are what is legal…and what will maximize the expected return to the owners of the securities. Enmeshed in legal tangles, both lenders and borrowers suffer. Only the lawyers win.
This crisis has exposed fissures between Wall Street and Main Street, between America’s rich and the rest of our society. Over the last two decades, incomes of most Americans have stagnated. We papered over the consequences by telling those at the bottom—and those in the middle—to continue to consume as if there had been an increase; they were encouraged to live beyond their means, by borrowing; and the bubble made it possible.
The country as a whole has been living beyond its means. There will have to be some adjustment. And someone will have to pick up the tab for the bank bailouts. With real median household income already down some 4 percent between 2000 and 2008, the brunt of the adjustment must come from those at the top who have garnered for themselves so much over the past three decades, and from the financial sector, which has imposed such high costs on the rest of society.
But the politics of this will not be easy. The financial sector is reluctant to own up to its failings. Part of moral behavior and individual responsibility is to accept blame when it is due. Yet bankers have repeatedly worked hard to shift blame to others, including to those they victimized. In today’s financial markets, almost everyone claims innocence. They were all just doing their jobs. There was individualism, but no individual responsibility…
The failures in our financial system are emblematic of broader failures in our economic system and our society. That there will be changes as a result of the crisis is certain. The question is, will they be in the right direction? Over the past decade, we have altered not only our institutions—encouraging ever more bigness in finance—but the very rules of capitalism. We have announced that for favored institutions there is to be little or no market discipline. We have created an ersatz capitalism, socializing losses as we privatize gains, a system with unclear rules, but with a predictable outcome: future crises, undue risk-taking at the public expense, and greater inefficiency.