My column in yesterday’s Australian Financial Review was about the Geithner Plan. It’s paywalled, but I often republish on my blog the day after (can a right like this be acquired by prescription) and I thought readers might be interested in this one.
From the category archives:
Economics/Finance
“This”:http://www.economist.com/blogs/charlemagne/2009/03/do_not_believe_this_talk_of_eu.cfm seems pretty plausible to me.
The opening hours of EU summits can often be a little slow (so can the closing and middle hours of some of them, to be frank). But the sense of calm, even drift, is a little eerie this time. … behind this time of phony war there lurks the prospect of a proper policy fight. Not about stimulus plans, but about future regulation of the financial sector. And, to simplify things, what is really, really going on is that the camp led by France and Germany are determined that Europe’s common position, going into the G20 summit, should be to bang the table and demand an end to light-touch regulation, of the sort that flourished for so long on Wall Street and in the City of London, and which they see as more or less the sole cause of the current mess. But the French and Germans do not trust the British to support that common position. Once the Americans are in the room in London, they fear the British will scuttle away from the European position, side with the Americans, and seek to defend the wheeler-dealers of the City.
The post finishes with some obligatory Economist-style harrumphs about how the unregulated bits of global capitalism aren’t really the problem &c &c, but its analysis of the underlying politics seems spot on. Differences between national regulatory systems are still enormously important, and help explain why we have seen so little international coordination on common frameworks for financial regulation. Not only are differences in regulation associated with different national interests, but also with very different analyses of what the underlying problem is (which of course in part stem from those interests). Abe Newman at Georgetown and I have a paper on historical institutionalism in international relations that talks a _lot_ about the persistence and importance of these national level differences in explaining international outcomes. Our framework (as others, such as Dan Drezner’s) would predict likely stalemate in negotiations of this sort. I honestly hope that we’re wrong (although I suspect that we are not). But even if we are, the problems that the EU faces in coordinating a regulatory response are, of course, dwarfed by the problems of coordinating such a response at the global level, which is where it _really_ needs to take place (but is highly unlikely to, for the reasons given).
Here’s the latest in my series on theoretical and policy doctrines in economics that have been refuted, or at least rendered highly problematic by the global financial crisis. Mainly of technical interest, I think, but I’m posting it here to keep numbering continuous.
The idea that central banks can and should act independently of governments is, fairly clearly, inoperative for the duration of the crisis in many countries. The combination of massively increased liquidity provision and large-scale bank bailouts requires close co-ordination between central banks and national treasuries, though the form of this co-ordination is inevitably different in different countries.
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A reader has pointed me to this fascinating site showing the impact of the Mont Pelerin Society on Iceland. According to the material prepared for its 2005 conference in Reykjavik, the Society’s intellectual influence directly guided those responsible for making Iceland what it is today.
According the Wikipedia front page yesterday “… author Guillaume Prévost created The Book of Time series to help children understand that history can be fascinating?”
I wonder how many readers, at the critical point in this sentence, expected “econometrics” in the place of “history”? I think I need to get out more.
This Bloomberg story gets the headline (“Bonds beat stocks in earth-shattering reversal”) right., but the lead (or lede) wrong. The intro “Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president. ” is wrong – bonds have beaten stocks in quite a few years since then.
Bonds beat stocks (Bloomberg)
The finding in the chart is much more dramatic, to the point that “earth-shattering” is justifiable hyperbole. What it shows is that, over the entire period since 1979, a strategy of buying 30-bonds (trading so that the portfolio always holds the most recently issued bond) has outperformed the strategy of buying stocks and reinvesting the dividends.
Every now and then back in the Dark Ages, I would have to deal with the late, unlamented MS-DOS operating system. It wouldn’t be long, as a rule, before I encountered the message “Abort, Retry, Fail?”
Of these, “retry” sounded the most hopeful so I’d choose it a few times, but I don’t think it ever worked. Usually the best thing was to shut down the machine and start again.
This trilemma struck me when looking at the options for US-based banks, and Citigroup in particular.
A reader of my blog sent me, for comment, one of those letters that circulate through the Intertubes. This one is sent as “an explanation of the stimulus bill”. I wouldn’t call it that, but it is quite a good exposition of what’s known as the “Treasury View”[1]. If you believe that the economy is like a swimming pool, and that no matter how big a splash some shock (such as the collapse of the financial system) might make, the water in it will rapidly find its own level, then you will agree that there is no need for, or possible benefit from, the stimulus package. And conversely, if you think the economy is not like this, you are entitled to wonder about the kind of economist (regrettably not imaginary) who would employ such an argument.
fn1. The reference is to the British Treasury, circa 1929
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Tyler Cowen has a short post which covers a number of themes I’ve been going on about for ages, though never with a fully satisfactory analysis. He starts by pointing to work by Michael Mandel suggesting that much of the measured productivity growth in the US has been bogus (see also Matt Yglesias on this). I agree, particularly as regards the financial sector.
More interestingly, Cowen goes on to note that
there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don’t prop up the revenue-generating sectors of the economy as one might have expected.
I agree and I think the implications are profound, if still hard to predict with any accuracy. There has been a huge shift in the location of innovation, with much of it either deriving from, or dependent on, public goods produced outside the market and government sectors, which may be referred to as social production.
Some suggestions, not fully argued, over the fold
With even Alan Greenspan and Lindsey Graham now in support, and the alternatives canvassed in the Geithner “plan” thoroughly discredited (even Wall Street hated it), large-scale nationalization of US banks now looks inevitable. But, as Obama has observed, this kind of thing seems alien to US culture.
This looks like a classic Lakoff framing problem. How can the obviously necessary, also be made to seem natural? There have been a couple of approaches so far.
The first is to emphasise that the Federal Deposit Insurance Corporation routinely takes over failed banks. So, as Paul Krugman puts it “nationalization is as American as apple pie“.
The second is to focus on the ultimate goal which is to return the banks to solvency and private ownership. Hence the lovely euphemism coined (I think) by Calculated Risk “preprivatisation”
One of the big points to emerge from the collapse of the investment banking industry is that sky-high salaries for CEOs and star performers in banking aren’t just immoral and unjustified; they are an indication of unsound risk management practices. Such reward systems create an incentive for one-way bets with other people’s money. If high risk investments pay off, the genius who advocated them gets the rewards of stardom. If they go wrong, the worst that can happen is the loss of a job, and there may well be another one waiting.
The evidence for such an analysis has been available at least since the big disasters of the 1990s, such as LTCM and Barings Bank. But when was it first put forward, and who deserves the credit.
From “an article on growing protectionism”:http://online.wsj.com/article/SB123388103125654861.html in the Wall Street Journal:
bq. The U.S. is planning retaliatory tariffs on Italian water and French cheese to punish the EU for restricting imports of U.S. chicken and beef.
Well I guess Americans can just drink different water, and Europeans can eat their own beef and chicken. But the cheese thing, that’s just masochism.
I guess Anthem is finally in public beta, under the guise of Microsoft SongSmith.
I think maybe it was that rich crab dish – part of a delicious Indian dinner Belle and I shared last night with Neil, the Ethical Werewolf. Anyway, I had the most vivid and bad novelistic zombie nightmares all night long. But it was all oddly economically-themed. Zombies and the recession. Zombies and liquidity traps. (Obviously I’ve been reading way too much Crooked Timber recently.) Yes, I know: other people’s dreams are boring. But who among you has suffered actual, macroeconomically-themed nightmares over the past few months?
Jim Henley asks a lot of good questions
There’s an awful lot of right/conservative/soft-libertarian economics I consider well and truly refuted by events. That said, I haven’t seen progressive thinkers grappling with the global nature of the current downturn, which seems to be falling on the social democracies and neoliberal regimes and post-mercantile states alike. What does it mean that pretty much all national economies are in a tailspin, regardless of model? Are the safety-net features of the social democracies successfully blunting the impact on their citizens? In ways that can be sustained through another year, say, of recession? Is the protectionism of post-mercantile states in East Asia protecting their industries more than the less protectionist regimes of the neoliberal countries?
I’ll try and answer these, with more confidence on some points than others.