by Henry Farrell on November 19, 2008
Dani Rodrik had a provocative “blogpost”:http://rodrik.typepad.com/dani_rodriks_weblog/2008/11/what-a-surprise.html a little while back:
Here is the dilemma we cannot evade. If we want a truly global financial system, we need to acquiesce in a global regulator and a global lender of last resort. If we do not want the latter, we cannot have an integrated global financial system, so we must acquiesce in–gasp!–capital controls.
The counterargument that I’ve been hearing from people (well, one significant person anyway) involved in the Obama transition process is twofold. First – that it would take far too long to create any global regulatory structure, given differences in national level regulatory schemes. Second, that we don’t need any binding global regulations anyway, and that everything we need to do can be done through dialogue between the national regulators that already exist. Maybe the best way to think this through is to look at the best example that we have of a transnational regulatory system with teeth – the European Union.
The EU’s experience reinforces the claim that it is really difficult to get national regulatory systems to play nicely with each other, and it is _especially_ difficult to get them to play nicely in the realm of banking and financial system regulation, because these regulations are (a) really important, (b) reflect genuinely different national priorities and banking systems, and (c ) also reflect the desires of strongly embedded interest groups in the national systems that like things the way they are (the Italian central bank, for example, is effectively beholden to a number of national banks inside and outside the _salotto buono_ and unsurprisingly these national banks want to keep the current system unchanged).
However, it also provides strong evidence of the problems of weak regulation. One of the major reasons why the European financial system is finding it hard to cope is exactly the lack of a Europe level regulatory backstop and lender of last resort, that could deal with banks that are effectively playing in a Europe-wide (if not worldwide) market. National governments are trying to do what they can, but their efforts are sometimes pretty wobbly. And the EU experience completely belies the claim that regulatory dialogues are a good substitute for comprehensive supranational regulation. If there is one thing that Europe does to a fault, it’s regulatory dialogues. But they do diddly-squat to stop countries defecting when they are in hard situations (e.g. the Irish offer to guarantee bank deposits when its credibility came under attack, Germany’s follow-up behaviour etc). This isn’t to say that one can easily create a global regulator with teeth and genuinely binding regulatory power – building one would be somewhere between very difficult and effectively impossible. It is to say that Rodrik’s conundrum is a real one – and the claim that governments can muddle through with a little more coordination and talk among themselves is almost certainly wishful thinking.
by Kieran Healy on November 19, 2008
by Harry on November 18, 2008
Richard Rothstein’s new book Grading Education: Getting Accountability Right
just got added to my short list of books about education that everyone should read. I presume that EPI has put it in the hands of everyone in Congress, but it might be worth, after reading it yourself, passing it on to a local school board member. Whereas a lot of criticism of NCLB amounts to little more than an unbalanced rant and I would say that most criticism is unconstructive, Grading Education offers a comprehensive, compelling, and constructive critique. It’s comprehensive in that it places NCLB within a (very interesting) discussion of the history of evaluation of schools, and constructive, not in the sense that it suggests a way to fix NCLB (that, the authors say, is impossible) but rather by offering a sensible alternative framework for “getting accountability right”. The authors believe (rightly) that accountability is important, and (again rightly) that the particular method of democratic accountability through locally elected school boards simply doesn’t work. (They do not ask whether NCLB, with all its flaws, when superimposed on a system of local democratic control is superior to local democratic control on its own, which I suspect it might be, but their aim is to influence future policy). The book ought to have a lot of influence over the debates around the re-authorisation, revision, or tacit abandonment of NCLB which, presumably, we’ll start to have at some point.
I hesitate to say too much about it, for fear of releasing you from the obligation of reading it. But the basic argument is as follows.
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by John Q on November 9, 2008
The idea that bad mathematical models used to evaluate investments are at least partially to blame for the financial crisis has plenty of appeal, and perhaps some validity, but it doesn’t justify a lot of the anti-intellectual responses we are seeing. That includes this NY Times headline In Modeling Risk, the Human Factor Was Left Out . What becomes clear from the story is that a model that left human factors out would have worked quite well. The elements of the required model are
(i) in the long run, house prices move in line with employment, incomes and migration patterns
(ii) if prices move more than 20 per cent out of line with long run value they will in due course fall at least 20 per cent
(iii) when this happens, large classes of financial assets will go into default either directly or because they are derived from assets that can’t pay out if house prices fall
It was not the disregard of human factors but the attempt to second-guess human behavioral responses to a period of rising prices, so as to reproduce the behavior of housing markets in the bubble period, that led many to disaster. A more naive version of the same error is to assume that particular observed behavior (say, not defaulting on home loans) will be sustained even when the conditions that made that behavior sensible no longer apply.
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by John Holbo on October 29, 2008
I see Henry just linked to his bloggingheads exchange with Dan “the blogger” Drezner about the end of capitalism as we know it, and such minor political twiddles. I was just about to link to it for him (I thought maybe he was being modest.) Good stuff. I’m John Holbo and I endorse this podcast.
One quick note. Round about minute 21 Drezner remarks that “the $64,000 question is going to be: which bureaucracies are put in charge of these crises?” Funny choice of figurative figures. What is it really? The 640 billion dollar question? 6.4 trillion? (I’d link to that spot in the diavlog but, honestly, the site loads so damn slow for me. I recommend downloading the mp3 or getting it through iTunes or wherever.)
by John Q on October 27, 2008
This story about the IMF rescue package for Ukraine (second of many to come, after Iceland) quotes Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London as saying
`The money is only half of the issue, conditionality is key. We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.”
Mr Ash, just returned from a six-week holiday on Mars, was reading from his prepared boilerplate script and had yet not been advised of the recent nationalisation of the Royal Bank of Scotland.
(found in today’s AFR)
by John Q on October 26, 2008
There’s been a bit of discussion about what Alan Greenspan really conceded in his recent testimony. Although Greenspan was less opaque than usual, I won’t try to second-guess him any further, and will instead ask again what the crisis means for the way we think about economics and the economy. There are two big economic ideas that look substantially less appealing in the light of the current crisis.
The first is the macroeconomic hypothesis, often called the Great Moderation which combines the empirical observation that the frequency and severity of recessions declined greatly from 1990 to the recent past with the explanation that “the deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle”.
The second is the microeconomic idea, central to much of modern finance theory called the Efficient Markets Hypothesis. In its most relevant form, the EMH states that prices observed in asset markets (for stocks, bonds, foreign exchange and so on), reflect all known information, and provide the best possible estimate of the value of earnings that assets will generate.
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by John Q on October 24, 2008
There’s been a fair bit of debate about what, if anything, the current crisis means for economic policy and political philosophy more generally. A lot of this has been hung up on issues of terminology, which I will do my best to avoid here and in future.
Coming to substance, quite a few people have argued that the crisis doesn’t really signify very much, and that, once it is resolved, things will return to pretty much the way they were a couple of years ago. I disagree.
This concession of error by Alan Greenspan is, I think, pretty strong evidence against the view that the crisis is not so significant, in policy or ideological terms.
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by Henry Farrell on October 23, 2008
“Arthur Goldhammer”:http://artgoldhammer.blogspot.com/2008/10/france-inc.html (whose blog on French politics is one of the treasures of the blogosphere).
Sarkozy has announced the creation of a French investment fund with a capital of $200 billion. He is also temporarily suspending the taxe professionnelle. Call it an investment fund or sovereign wealth fund. Call Sarkozy a socialist in wolf’s clothing (as one MEP did the other day). Mock his inconsistency or praise his political versatility. In fact he’s merely doing what leaders of all the advanced industrial countries will be doing shortly, if they are not doing it already: trying to minimize the damage of the recession by turning on massive government investment. This can do a lot of good, especially if it is seen not solely as countercyclical spending but as a chance to do something about decaying infrastructure and make foundational changes with a chance for long-term impact. In France it’s hardly unprecedented for major capital spending to be directed by the state, whether under the Commissariat au Plan, through state-controlled-or-influenced enterprises, or directly by the Ministry of Finance. Sarkozy always danced nimbly between the neoliberal and state-capitalist camps. If the last two decades were the neoliberal decades, the coming two are likely to consecrate the hegemony of state capitalism. Sarkozy has been quicker than most to draw that conclusion and try to get ahead of the tsunami. Let’s see what happens next.
by Henry Farrell on October 21, 2008
Some unkind lefties (including “one of my co-bloggers”:http://examinedlife.typepad.com/johnbelle/2008/10/nation-of-whine.html) were a little dismissive towards “this post”:http://drhelen.blogspot.com/2008/10/how-much-of-financial-crisis-is.html by ‘Dr. Helen,’ blogger and Instaspouse of Professor Glenn Reynolds.
Why the crescendo of economic collapse right before the election? Why didn’t the media and congress act just as concerned some time ago or wait until sometime after the election to go into crisis mode? The timing of the current financial crisis seems too planned and calculating to be just a coincidence. Polls show that people’s number one concern right now is the economy and that for the most part, voters believe Democrats are somewhat more likely to help with the economy. Could it be that the liberal media and those in Congress, knowing that, is blaring the bad economic news from the rooftops in order to manipulate voters into voting for a Democrat? If so, it won’t be the first time.
But now “Barbara Ehrenreich”:http://cscs.umich.edu/~crshalizi/weblog/588.html (via “Cosma”:http://cscs.umich.edu/~crshalizi/weblog/588.html ) has let the cat out of the bag and it’s _even worse_ than Dr. Helen suspected.
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by John Q on October 20, 2008
I did a guest post for the blog site of the Australian Broadcasting Corporation on the topic of ratings agencies, their quasi-official role in regulating investment, and their recent catastrophic failures. I’ve reposted it over the fold – the examples are Australian, but many of the points are more general.
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by Henry Farrell on October 18, 2008
by Daniel on October 17, 2008
It appears to be a commonplace gaining ground every day that the main reason we have a credit crisis (about which I am not writing; this is an essay in recent monetary history) is that bankers created it, and specifically that they created it because they are stupid. Nicholas Taleb (who doesn’t eat foods unless they have a name in Hebrew or Doric Greek, I just bring this up as an interesting fact rather than to suggest that here’s a man who knows stupid when he sees it) has been really quite cutting on the subject, among others. Stupid, stupid stupid. Isn’t it a shame that these stupid people in their stupidity brought this crisis among us? Don’t we need a blue-ribbon commission to make sure that such stupids never have the chance to do so much damage again?
Harrumph.
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by John Q on October 16, 2008
As the various asset price bubbles of the past decades or so inflated, and in some cases burst, there was vigorous debate about what, if anything should be done about them. The two main camps were those who advocated doing nothing (most notably Alan Greenspan), on the grounds that monetary policy should be focused solely on inflation, and those who thought that the settings of monetary policy should take asset prices into account. The first group won the debate at the time, at least as far as actual policy was concerned, with consequences we can all see. Most proponents of Greenspanismhave now conceded defeat
.
In a paper in the (institutionalist) Journal of Economic Issues, which came out in 2006, Stephen Bell and I took a different view of the debate. We argued that there was little scope to respond to asset bubbles by changing the settings of existing monetary policy instruments, and that “any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.” Among other things, we pointed out the fact that given a presumption in favour of financial innovation, asset prices bubbles were inevitable, and that ‘In the absence of a severe failure in the financial system of the United States, it seems unlikely that ideas of a ‘new global financial architecture’ will ever be much more than ideas.’
You can read the full paper
Bell, S. and Quiggin, J. (2006), ‘Asset price instability and policy responses: The legacy of liberalization’, Journal of Economic Issues, XL(3), 629-49.
here
by Henry Farrell on October 13, 2008
As Kieran notes in comments below, the comments thread to Tyler Cowen’s (perfectly reasonable) “Krugman post”:http://www.marginalrevolution.com/marginalrevolution/2008/10/paul-krugman-wi.html is pretty hilarious. But given Krugman’s place of pride in the wingnut demonology, I’m sure that this is only a mere scraping of what’s out there on the Internets today. It furthermore occurs to me that someone (i.e. Me) should do a comments thread to collate and conserve the _very bestest_ blogposts and comments on the Vast Nobel Prize Conspiracy. My “opening bid”:http://volokh.com/posts/1223906449.shtml#459727, from ‘derut’ at The Volokh Conspiracy.
Excellent. He was a pseudo Nobel prize. That he deserves. As his politics is pseudoscientific. Great. Now I can applaude. I am sure many of you have watched him on cable networks. Has anyone else noticed he seems a little off. He speaks like a mouse and his beady eyes have a strange stare. He looks like if someone droped a glass he would scream.
It’s the spellings of ‘applaude’ and ‘droped’ that give it that special something. Anyone able to top that?
Update: “Kathy G.”:http://thegspot.typepad.com/blog/2008/10/warmest-congrat.html had this idea before I did.
