[...] bubbles create other bubbles, they’re like derivative bubbles, so to the extent that there was a bubble in credit or a bubble in the mortgage market, that created a bubble for people who could trade those products. There was just a misallocation of resources not only into mortgages, let’s say, but also into the trading of mortgages, and it sucked talent into those areas that probably should be deployed other places. And the way talent gets sucked into those places is by a price signal, the compensation going out. The pay scale for finance was just—incredibly out of whack. You had guys who were literally just a couple of years out of college, maybe they’d done a year or two at an investment bank, making several hundred thousand dollars a year doing pretty low-value-added Excel modeling tasks.

[...] In October, it was like a patient having a heart attack: the short-term credit market ceased to function. That’s the heart of our economic system; it ceased to function. The government was like the doctor. The government runs into the heart attack patient’s house, steps over the heart attack patient, goes to his refrigerator, opens it up, and says, “I have to take out all the fatty foods in the refrigerator.” Meanwhile the guy’s dying of a heart attack.

[...] The SEC tends to be focused on stuff that’s a lot more technical. They’re very focused on technical violations of insider trading laws. And, you know, what are the consequences of insider trading? I don’t know. If people believe the market is rigged, then people aren’t going to trade in the market, okay, but the kinds of violations that they go after are not going to cause the same magnitude of damage as selling really risky derivatives to a company to the point where you could blow up that company. I mean, that’s just much more disruptive. But it’s not as clear a violation of the rules as, “Okay, Joe Schmo had material nonpublic information about company X, because he was on the restructuring committee, and then he decided to sell his bonds. Even though maybe that information didn’t have a meaningful effect on the price, technically it’s material nonpublic information, and we are going to punish that guy.” It seems to me they’re focused on the wrong things. Not because they’re bad people or because they’re not intelligent people, but because if you’re a lawyer, that’s how you think.

I was in China, mostly Beijing, a couple of weeks ago, checking on a property investment. The property sector is important: A lot of the pressure on raw materials prices supposedly coming out of China was related to the property sector, to construction. The amount of building that had been going on was enormous and visible, all over Beijing. I saw one luxury housing development after another, most of them just in the process of construction, or recently completed, and…sales had last year just come to a halt. It was amazing, the physical reconstruction of that city. A lot of it had to do with the Olympics, but a lot of it also had to do with property speculation.

And Beijing really is not the city that had the most residential property speculation. The optimism that pumped up that sector was pretty incredible. Here you have a provincial city where there was maybe one 4-star hotel—suddenly there are four 5-star hotel projects under construction, and you just wonder who the heck is going to stay in them. A city that really didn’t have much in the way of luxury housing suddenly has tons of luxury projects sprouting up, a lot of those getting sold to speculators, with nobody at the end of the chain. Toward the end of last year people realized just how far supply had outrun real demand, and how far prices had run up.

[...] some of the banks have come out and said that their business in January and February and March was profitable—Citi was the first to do it, Bank of America said so, Goldman actually reported this week. Personally, I think it’s a load of bollocks. I mean, as a bank, you have a lot of freedom to mark your assets where you please, particularly the loan book. You can show a profit, you can show whatever profit you want. You have a lot of scope to manage your P&L [profit-and-loss statement]. In the emerging markets I’ve often seen banks showing quarterly profits until the day they go belly-up.

[...] the way they think doesn’t admit of a world where Citibank gets nationalized. It’s just so inconceivable to them that they say, “You just can’t do that! It’ll cause all of these horrible problems.” Well, that was true when the economy was in an extremely unstable state and risk aversion was extreme and panic was abroad in the land. But now I don’t think that’s the case, and your lack of imagination is not a good grounds for a policy judgment.

[...] Anybody who worked in sectors where there was a tremendous amount of activity where there shouldn’t have been. So we’re talking about housing. It means the Mexican guy who hammered together the house. It means the logger who cut down the wood that was used in the structural lumber. The guy who worked at the sawmill. It means the steel company that created the steel for the nails. It means the mortgage broker who sold the mortgage. It means the physicists who decided instead of doing physics they should work on Wall Street to create the asset-backed security that helped to fund the mortgages that the mortgage broker was originating. All of these people were doing things that turned out not to be productive.

The mortgage brokers probably spent all of their money. The mortgage-backed securities structurers maybe didn’t spend all of their money. But when you have an economy where contracts can be rewritten and you can go back and try to claw back money from people years after the fact, that’s going to be tremendously destabilizing and it’s going to really disincentivize investment in human capital. And it’s going to incentivize people to work in the gray economy. I think the answer is, for some of these jobs, jobs like in the investment business, going forth contractually, we should create compensation arrangements where there are clawbacks. But you have to do that by agreement and in advance. You can’t reopen contractual arrangements years after the fact. At least not without some strong indications of knowing fraud.

[...] to deal with the fact that we have an eccentric corporate taxation system, we’ve allowed these loopholes to be created so that U.S. companies are not uncompetitive relative to companies from other countries. So he wants to get rid of these loopholes—that’s fine if we’re also going to redo the corporate taxation system so that it’s simpler and more efficient and more in line with what’s going on in the rest of the world. But I haven’t seen any evidence that that’s going to happen. So if you suddenly make it a lot less attractive to be headquartered in the U.S., or, if you’re a start-up company, to be domiciled in the U.S., then that’s problematic.

That the level of profits for the financial sector was too high. If you look sectorially, the financial sector was generating an unusually large share of corporate profits and of GDP. And a lot of that was not sustainable. It was a frenzy of trading that didn’t lead to an ultimately productive result. So those are paper profits. And what happened is it turns out that those loans that were extended went bad, or bets went bad, and the huge losses that were recognized were the reversal of those financial sector profits, right? So again, then are you supposed to believe that once that’s out the financial sector profits go back to that unsustainably high level? No, they don’t.

Another way of saying that is that a lot of that GDP is an illusion.