by John Q on January 25, 2009
The speed with which bank nationalisation has risen to the top of the policy agenda has found the economics profession largely unprepared. The literature on property rights that developed in the 1970s produced a range of arguments in favour of private as opposed to public ownership which had at least some influence on the widespread adoption of privatisation policies in the 1980s and 1990s. Although subsequent theoretical and empirical developments, such as the discovery of the equity premium puzzle and developments in agency theory cast doubt on the claims of the original literature, the profession as a whole had moved on, and showed little interest in revisiting the issues. The situation was a bit different in Australia.
As Joshua Gans observes,
the main contributions have come from Australian economists who did this research a decade ago only to be told by international journals that as privatisation had occurred everywhere by then, no one was interested in the conditions under which government ownership would be preferable.
and notes “I guess that view is wrong.” Unsurprisingly, I was among those who tried, with limited success, to interest the international profession in this question.
As Joshua’s post suggests, there’s a feeling here that Australia tends to get the short end of the stick in the economics profession. Australia has made some notable contributions to economic thought, with relatively limited recognition. Examples include the work of Trevor Swan (arguably the most significant economist never to win a Nobel prize), Colin Clark on national accounting, and before that the “Australian case for protection” developed by the Brigden Commission and later formalised as the Stolper-Samuelson theorem. In the 1970s, the “Gregory thesis” was an independent analysis of what became known internationally as “Dutch disease”. As these examples suggest, we tend to suffer a bit from being on the far side of the planet from the main centres of activity in the profession.
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by John Q on January 23, 2009
The comments threads are already buzzing with anticipation so I’m very happy to announce that our long-awaited Charles Stross Book Event will be published here in the next few days. It features Paul Krugman, Brad DeLong, Ken MacLeod and of course Charlie Stross himself, along with CT regulars. Keep a lookout, and be ready with comments on your favorite Stross work.
by John Q on January 21, 2009
As James Surowiecki points out here, my views on what’s entailed in bank nationalisation differ significantly from those of Paul Krugman. [1] Krugman, like quite a few other advocates of nationalisation, has in mind models like the Resolution Trust Corporation and the Swedish nationalizations of the 1990s, where the government took insolvent institutions into temporary public ownership, liquidated the bad assets and returned them to the private sector. These solutions worked well because the global financial system as a whole was solvent and liquid, even though some sectors (US S&Ls, Swedish banks) were not.
What’s needed in the present case is not only to fix the problems of individual banks, problems on a much bigger scale than have been seen before (even in the leadup to the Great Depression, the financial sector played a smaller role in the economy than in the recent bubble), but to reconstruct a failed global financial system. It’s kind of like rewiring an electrical system in near-meltdown, while keeping the power on (this is possible, but tricky and dangerous). The job is likely to be much slower than the rescues mentioned above, and the institutions that emerge from it will be very different from those that went in.
But, contra Surowiecki this time, this only strengthens the argument for nationalisation. Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.
fn1. Krugman is well-known for being right when lots of others have been wrong, so take this into account in assessing the arguments.
by John Q on January 19, 2009
All reasonableTM commentators now agree that nationalisation of big banks like Citigroup, Bank of America and Royal Bank of Scotland must take place soon, explicitly or otherwise. As I said at just before the second (failed) Citigroup bailout) banks like Citi are not only too big to fail, they’re too big to rescue with any of the half-measures that have been tried so far.
It’s obvious that “If it were done when ’tis done, then ’twere well It were done quickly” and cleanly, without any dodges designed to hide the reality of nationalisation. The longer these zombie institutions are allowed to run on public money, but under the existing discredited managers, legally answerable to the private shareholders, the bigger the costs the public will ultimately face.
Nationalisation would resolve a lot of the difficult questions around ideas such as the creation of a “bad bank” to hold all the toxic assets accumulated during the boom. That’s critical as long as policy is aimed at turning the troubled banks around while keeping them private, but it’s unimportant once all the debts and assets have been taken on to the public balance sheet. Once the big banks are nationalized, the government can take its time salvaging whatever assets are still worthwhile and preparing for the reconstruction of a private banking system under a completely new system of regulation, a task that is likely to take several years.
The big question is, what should governments do with the banks once they own them? Clearly, there’s an imperative for banks to start lending again, but there is no benefit in making yet more bad loans. And, right at the moment, credit-worthy borrowers are hard to find. The immediate concern must be to ensure that commercially sound loans aren’t being constrained by the need to bolster bank balance sheets. Then, governments need to consider whether some form of support for loans, such as interest rate subsidies or guarantees (secured against assets seen as having a long-term value that exceeds their current market value) should be part of the policy response to the recession. Such policies have plenty of risk associated with them, but the risks are mitigated a bit if the guarantor and the bank owner are ultimately the same (in this case, the public).
Obviously, this is not the kind of question economists have spent a lot of time thinking about until fairly recently. I don’t imagine many of us would have expected, a year ago, to be reading the Wall Street Journal castigating Henry Paulson and the Bush Administration for the (partial) nationalisation of the Bank of America. No doubt plenty of mistakes will be made. But there is no time for leisurely reflection here. As in 1933, the next hundred days will make a big difference, one way or another.
by John Q on January 14, 2009
The Lori Drew case, in which a US woman set up a Myspace account under the name “Josh Evans” to torment a teenage girl who had fallen out with Drew’s daughter, and drove her victim to suicide, has some legal implications of interest to bloggers. Drew was ultimately sentenced to jail, not for her cruel prank and its fatal consequences, but for “unauthorized access to a computer system” by virtue of the false name under which the account was created. On the face of it, the same offence is committed (at least under US law) every time a commenter on a blog or noticeboard uses a sockpuppet to evade bans or blocks, or to post under multiple identities in violation of contractual terms.
UpdateFollowing up on some comments, I was startled to discover that, in some US jurisdictions, obtaining consent to sex through fraud regarding identity (a man pretending to be his brother in the case at hand) is a full defence against a charge of rape, and even more startled to read this post and comments at TalkLeft largely endorsing the court’s finding in this case. This isn’t the case in Australia and, though IANAL, I’m pretty sure it never has been either here of in the UK. (Update ends)
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by John Q on January 7, 2009
I’ve been planning for a while on a post motivated by the discussion of trolley problems a while back, but recent discussions have raised some more serious examples (the Iraq war, Gaza and so on).
Looking at the discussion, it seems as if nearly everyone is concerned about the (foreseeable) consequences of their actions, but there are a lot of claims that some consequences should be treated differently from others (intended vs unintended, direct vs intermediated by the predictable reactions of others, and so on).
To an economist, what this naturally suggests is the possibility of moral arbitrage.
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by John Q on January 5, 2009
This is the second in a planned series of posts assessing the implications of the global financial crisis for the economic ideas and policies that have been dominant for the past few decades. The large-scale privatisation of publicly-owned enterprises both in capitalist countries like the UK and Australia and in formerly communist countries after 1989 played a big role in promoting the kind of triumphalism that characterised much commentary about free-market capitalism in the 1990s and (to a somewhat lesser extent) in the years leading up to the crisis. How well do arguments for privatisation stand up in the light of the financial crisis.
The case for privatisation had two main elements. First, there was the fiscal argument for privatisation, namely, that governments could improve their financial position by selling government business enterprises. This argument assumed that privately owned firms would have higher levels of operating efficiency, and therefore that the value of those firms would be increased by privatisation. The second argument was a dynamic one, that the allocation of capital between alternative investments would be improved if governments were not involved in the process. Both of these arguments have been fatally undermined by the collapse of the efficient markets hypothesis.
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by John Q on January 3, 2009
Microsoft Zune music players stopped working on New Years Day because of a software bug, raising the inevitable comparisons with the Y2K fiasco. The way in which the largely spurious Y2K problem was handled raises some interesting comparisons with the all too real problem of climate change. Although many billions of dollars were spent on making systems Y2K-compliant, there was no serious scientific study of the problem and its implications. The big decisions were made on the basis of anecdotal evidence, and reports from consultants with an obvious axe to grind. Even the simplest objections were never answered (for example, many organisations started their fiscal 2000 year in April or July 1999, well before remediation was completed, and none had any serious problems). There was nothing remotely resembling the Intergovernmental Panel on Climate Change, let alone the vast scientific literature that needs to be summarised and synthesised for an understanding of climate change.
Thus, anyone who took a genuinely sceptical attitude to the evidence could safely predict that 1 January 2000 would pass without any more serious incidents than usual, even for the many countries and businesses that had ignored the problem. The retrospective evaluations of the policy were even more embarrassingly skimpy. I analysed some of the factors involved in this paper in the Australian Journal of Public Administration.
A really interesting point here is the fact that, in the leadup to 1 January 2000, self-described global warming sceptics, for the most part, went along with the crowd. If any of them rallied to the support of those of us who called for a “fix on failure” approach, I didn’t notice it. Of course, I’m open to correction here. I’d be very interested if anyone could point to a piece published before 2000 taking a sceptical line both Y2K and AGW.
by John Q on January 3, 2009
Over at my blog, I’ve started a series of posts on economic doctrines and policy proposals that have been refuted or rendered obsolete by the financial crisis. There will be a bit of repetition of material I’ve already posted and I’ll probably edit the posts in response to points raised in discussion. I’m crossposting here in the hope of getting more discussion, but readers who aren’t interested in econowonk stuff may want to skip this series.
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by John Q on December 22, 2008
There’s been a lot of talk about the idea that the GFC (the in-group shorthand for ‘global financial crisis’) is an example of a ‘black swan’, that is, an event that would be treated as impossible on the basis of induction from past experience, and hence that could not be encompassed by formal models of the kind used by risk managers. All this talk has of course been great for Nicholas Taleb who has a book with this title. It’s good in a lot of ways, but I found it ultimately insufferable in the continuous repetition of the message that only Taleb was smart enough to see all this. ( To be fair, Taleb predicted a global financial crisis, and didn’t simply claim it in retrospect as an unpredictable Black Swan).
I spend a lot of my time working on how to think about unforeseen contingencies and I’m not at all convinced that the GFC should be described in this way. Of course, the models used by the risk managers in investment banks didn’t include this as a possibility; if they had, the implication would have been that all sorts of much-desired deals should not go ahead. But as I pointed out a while ago, very simple models based on well-established principles predicted that the bubble economy would end badly.
The crisis then, involved something more like dark matter, the ‘missing’ matter in the universe that must exist if it is to work as it does, but can’t at presented be detected. Given that risk can’t easily be made to disappear*, it was obvious that the risk associated with lending of all kinds (most obviously, mortages offered to people with no capacity to repay) was being borne by someone, and probably someone who was unaware of it.
The big problem for the Cassandras (and we were certainly both correct and disregarded) was that it was easy to see that the bubble could not continue and much harder to foresee how it would end – it’s one thing to say that dark matter must exist and another to work out what it is really like. Like Brad and Brad, I expected that the problems would emerge first in the form of a run on the US dollar, given that holders of US dollar assets were receiving very little compensation for the obvious risk of large capital losses. In fact, the US dollar actually rose in the early stages of the meltdown, though it has been falling more recently.
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by John Q on December 18, 2008
by John Q on December 17, 2008
by John Q on December 16, 2008
This New York Times article on the (apparently widespread) practice of drug companies drafting and ghostwriting scientific articles favorable to their products, and then arranging for academics to publish the articles under their own names, focuses, reasonably enough, on the potential for such practices to mislead doctors and other readers.
As an academic, though, I was particularly struck by the stress that the drug company Wyeth laid on the fact that the nominal authors of these articles were not being paid and endorsed the contents. In reality, having someone write articles for you amounts to not doing the job for which, as an academic, you are paid and, if the articles are sufficiently numerous and well-placed, promoted. It would be far more ethical (or less unethical) to pay academics for product endorsements, published as commercial advertisements.
Of course, in a world where a $50 billion (or maybe $17 billion, who can tell?) fraud barely makes the front page, and a $100 million rip-off is buried somewhere behind the shipping news, it seems a bit precious to worry about (allegations of) goldbricking academics passing off corporate propaganda as their own work. But at least I can understand how this scam works, as opposed to how a massive Ponzi scheme can be operated for decades under the noses of what are supposed to be the world’s most sophisticated fnancial markets and regulators.
by John Q on December 7, 2008
As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression, there has been a lot of debate about the lessons to be learned from the responses to the Depression in the US, most notably the various policies that made up the New Deal. There’s a lot to be learned there, but it’s also important to remember that the Depression, in the US and elsewhere, continued throughout the 1930s before being brought to an abrupt end by the outbreak of World War II.[1]
Not only did the slump end when the war began, it did not return when the war ended – a huge difference from previous major wars. Instead the three decades beginning in 1940 were a period of unparalleled prosperity for developed countries, with economic growth higher and unemployment lower than at any time before or since.
What lessons can we learn from this experience?
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by John Q on December 5, 2008
The great David Horowitz campaign against evul academics has reached Australia, and has even occasioned a Senate inquiry. It was a load of fun. The report is good reading, as is the minority report by the Liberal (= conservative down under) Party Senators who called the inquiry in the first place, but lost control following their election defeat last year. A snippet suggests that those involved knew how to handle Horowitzism
From the committee’s perspective it appeared as
though it was to be called on to play its part in a university revue. The submissions,
the performance and the style – to say nothing of the rhetoric – presented by some
Liberal Students suggested a strong undergraduate tone. The ‘outing’ of Left and
purportedly Left academics and commentators (masquerading as academics as we
were told at one hearing) was in keeping with this tone. None of those outed objected.
Some appeared flattered to be named in the company of others more famous
The list of leftist academics is, I must admit, a sore point. I never located the full list (the links on the inquiry website were skew-whiff) but clearly I wasn’t on it. What does a leftist have to do to get noticed in this country?