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Comment by nemo | Hacker News Reader

Larry may be right on some points, but given his past support for and architecting of deregulation of the U.S financial system (including the repeal of the Glass-Steagall Act) while he was in the Clinton admin., along with support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure, as well as gambling with Harvard's endowment and losing the school $1.8 billion, triggering layoffs and budget slashing, I think we'd do well to find advice from those with a less predictable and disastrous track record.

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"support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering"

Lack of privatization in Post-Soviet states lead to massive human suffering. In Poland the government constantly subsidies all companies that weren't privitzed in 90s. What's worse quality of products and services in these industries is terrible. That's why for instance electricity in Poland is one of the most expensive in Europe. And it is impossible to change anything because all these companies are highly unionized and have huge political influences during elections.

Little state ownership may work fine in countries that has different culture in rest of the economy has been capitalistic for last 200 years. In Post-Soviet world it is disastrous. Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.

I haven't got a problem with privatization per se, and recognize that some approach to privatization was called for. I have major problems with the disastrous "shock therapy" approach to privatization that was actually applied where the US economic advice was what created the mafioso oligarchs.

You are grossly overstating the influence of the "us economic advice", which was zero. The mafioso oligarchs needed and used none of it.

You might want to read up on this. It was US economic advice which led to the rapid sell-off of public assets which resulted in the creation of the oligarchs in the first place.

Seriously, I do not need to read up on this, I was there. But one does not really need to have first-hand experience to see the deliberate deception in klein's "shock doctrine" and the like: for example, different countries in the region had markedly different timings, different implementation of reforms, different rhetoric, and different resources; but the outcomes pretty much fall into two groups: places where people demanded and expected accountability on part of government (ie. baltic states, and a few former warsaw pact countries) did relatively fine, and others devolved into oligarchies (ie. the rest of the former soviet union).

Here's Jeffrey Sachs' account of his role: http://jeffsachs.org/2012/03/what-i-did-in-russia/

You can see he did NOT advocate shock therapy and resigned when he realized he could do nothing about growing corruption.

Sachs resigned when the Harvard Institute for International Development he was running was roiled in the scandal of his direct reports buying Russian stocks and working to get the first mutual fund license in Russia while they were dictating economic policy. They were recommending policies that they were directly profiting from. They lost their funding, were in a massive scandal, then Sachs resigned. His article is a sad heap of dishonest excuses and fails to take responsibility for his own involvement in the corruption he happily blames others for.

The corruption in HIIS was also a factor in the dismissal of Summers, since he set up the project.

Many European countries have very large (dominant even) state owned power companies that work pretty well.

But really the argument about Russian privatization is that it ought to have been executed less poorly, for example not donating most state property to a few corrupt oligarchs.

I would not use words "poor execution" to describe a process that achieved its exact intended effect. Nor does it have anything whatsoever to do with any American economic advisors.

It only looks like a failure if we assume that the Soviet (and post-Soviet Russian) state considered its subjects as stakeholders, which has never been the case.

"Gazprom and other state companies were overtaken by the Putin's mafia"

That is called "privatization".

Sort of. The Russian government still owns a majority stake in Gazprom and Putin's conquests have been under the banner of moving corrupt private oil companies back into the public hands of Gazprom. So it's really a landgrab by the state, which happens to own a private company. But it was the US's policy of rapid "shock" privatisation which resulted in the unmanaged sell-off of the original state assets in the 1990s and the creation of those oligarchs. It's like selling USPS for $1m - that's not privatisation, it's madness.

I agree that Russia is a very extreme case, but it would be difficult to find any place in the world where privatization was not done in the benefit of a few friends of the people in power.

Mexico and Carlos Slim comes to mind for instance.

It was a reaction to a power vacuum. A very severe power vacuum. Frontline's "Putin's Way" is highly instructive. Failed states are dangerous.

>Lack of privatization in Post-Soviet states lead to massive human suffering.

No, lack of rule-of-law and stochasticity (allowance of firms to succeed or fail on their own merits) lead to massive human suffering. If you "privatize" everything without solid rule-of-law and with bank bailouts, you get massive human suffering and no growth. If you "nationalize" things without solid rule-of-law and without allowing experiments in new ways of doing things, you get massive human suffering and no growth.

thank you. people take "rule of law" for granted.

> Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.

You must have missed the Boris Yeltsin era...

"disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure"

Communists around the world killed between 60 million and 100 million people (there is debate among scholars as to the exact number).[0] Stalin killed the "wealthy" peasants, enslaved Eastern Europe, and carted millions off to work camps in Siberia (where they would eventually die or become broken people). Pol Pot killed 2 million of his own people as a "social engineering" experiment (after studying Rousseau). Mao killed 45 million in 4 years. Can anyone say "massive human suffering and political failure"?

It's true that the Post-Soviet states have had mixed results, based upon which have privatized industry and enacted pro-freedom policies, and also based upon which people retained trace Enlightenment notions of the government's relationship to its citizenry. Estonia, for example, has flourished: "The foundation was laid in 1992 when Mart Laar, Estonia’s prime minister at the time, defibrillated the flat-lining economy. In less than two years his young government (average age: 35) gave Estonia a flat income-tax, free trade, sound money and privatisation. New businesses could be registered smoothly and without delays, an important spur for geeks lying in wait."[1] In Russia, a heavy-industrial and resource-based country (partly thanks to Stalin's 5-year-plans and massive capital theft from the Eastern Bloc countries), former Communist officials assumed ownership of state assets during the transition, and it predictably has not done as well.

Again, we can argue that liberalization has not occurred to a great extent in countries such as Russia, where a strongman still rules. (It's probably the case that places with massive natural resources have had greater struggles, as there was probably better opportunity for collusion by the political oligopoly. Less resource-rich countries have on-average fared better.) We can have an intelligent discussion comparing each of those countries based on the different policies they have enacted. However, to drop historical context of life (and death) during the Soviet era is completely ludicrous.

[0] https://en.wikipedia.org/wiki/Mass_killings_under_Communist_...

[1] http://www.economist.com/blogs/economist-explains/2013/07/ec...

I'm not saying they shouldn't have privatized at all, I'm saying the way they privatized was disastrous. Summers was deeply involved in supporting terrible policy and putting corrupt US economic advisors in Russia to advise Yelstin. Those US economic advisors then worked to profit off the policies they were pushing.

Repealing Glass-Steagall was not a bad thing. In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not. Even the i-banks that survived, like Goldmann and Merrill, did so by diversifying. Goldmann became a bank holding company and Merrill merged with B of A.

I don't have the background to address the other points, but the focus on Glass-Steagall annoys me because the counterproof is so obvious.

>In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not.

Why is this argument still around? Yes, "diversified financial institutions" (i.e., too-big-to-fail banks) survived, because they had tremendous political power as a result of their consolidation. The idea that there were too-big-to-fail institutions is not a victory, it's a defeat. These are the institutions that caused the problem in the first place! The fact that they live on is a travesty.

Because it's true. The topic has been so politicized now that it's almost impossible to have an even discussion about it, which is part of what I find annoying.

Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie.

Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.

This is the "regulation is ineffective, let's get rid of it" argument. Yes, by the time of its repeal banks had found ways around Glass-Steagall, both legal and illegal. The conclusion should not be that we should get rid of GS, we should extend it to cover those holes. Banks finding new ways to extend their size and reach is a metastatic event.

I think the argument persists because it accelerated the shift towards a new banking paradigm, where regional banking was swallowed up by massive financial institutions.

There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore.

We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.

Goldman became a bank holding company so that they could access a fed emergency lending facility. Without that lending facility, they probably would have collapsed. They didn't hesitate to organize their new bank in a way that was profitable, but they didn't diversify to survive, they begged for a different legal classification so that they could get a big loan.

AIG collapsed because instead of a boring insurance company, it was a boring insurance company with a bunch of people trading crazy financial derivatives. Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.

> Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.

Glass-Steagall was a law that regulated banks, i.e. financial institutions that accepted deposits. AIG would never have been covered by Glass-Steagall.

This is one reason I find the topic annoying: people ascribe all sorts of effects to Glass-Steagall that it did not actually do.

I know little about this topic. Can you please help me understand. Wikipedia says the act applies to banks and securities, https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legis...

I thought AIG provided securities. I'm sure I'm missing something obvious as it's not something I know anything about

Under federal law a bank is a financial institution that accepts deposits from consumers and businesses. If a financial institution is not accepting and holding deposits, it's not a bank. (This is greatly simplified but it's a key differentiator.)

Laws are targeted toward different types of financial institutions. Glass-Steagall was a law that applied to banks, and prevented them from selling securities.

But if a financial institution wasn't a bank, then Glass-Steagall did not apply to them. AIG did not hold deposits so it wasn't a bank. So no G-S.

Edit: to help connect the dots--what I'm referring to above are technically called "commercial banks."

https://en.wikipedia.org/wiki/Commercial_bank

From the G-S page: "The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms."

In general, different kinds of financial institutions are regulated by different regulatory agencies. This is as good a place to start as any:

https://en.wikipedia.org/wiki/Financial_regulation

Citations for either of these claims?

This sources seems to indicate that goldman's use of the discount window was absolutely minimal:

http://www.bloomberg.com/news/articles/2011-03-31/goldman-bo...

re: AIG, insurance companies were never regulated by Glass-Steagall

Back then, you could shop for your regulator. Often companies shopped for the most lax regulator. AIG purchased a tiny credit union and then got themselves to be regulated by the "Office of Thrift Supervision": https://en.wikipedia.org/wiki/Office_of_Thrift_Supervision The wikipedia article has details on the other organizations who did this.

Should AIG have been regulated by a tiny 30-person regulator? You judge, here is AIG's credit presentation: http://www.aig.com/Chartis/internet/US/en/FinalConf_revised_... AIG had a 1/2 Trillion USD one-way unhedged credit default swap exposure, amongst other exposures.

Does this have anything to do with Glass-Steagall?

Goldman converted to a bank holding company for TARP.

https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#...

I'm think I'm wrong about AIG and don't feel like chasing it.

How could you conclude that given that many of the companies on that list are not bank holding companies?

TARP eligibility had nothing to do with being a bank holding company.

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