world is likely to become a more complicated place without a single hegemonic and dominant public financial institution

From Free Exchange:

"Rodrik roundtable: A global lender of last resort

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Rodrik roundtable

Brad DeLong is a professor of economics at the University of California at Berkeley. His popular blog on economics can be found here

This discussion can be followed in its entirety here.

Dani Rodrik writes:

[T]he most fundamental objection to global regulation...[is that f]inancial regulation entails trade-offs along many dimensions. The more you value financial stability, the more you have to sacrifice financial innovation...Different nations will want to sit on different points along their “efficient frontiers”. There is nothing wrong with France, say, wanting to purchase more financial stability...Nor with Brazil giving its state-owned development bank special regulatory treatment, if the country wishes, so that it can fill in for missing long-term credit markets. In short, global financial regulation is neither feasible, nor prudent, nor desirable. What finance needs instead are some sensible traffic rules that will allow nations (and in some cases regions) to implement their own regulations while preventing adverse spillovers...

Similarly, a new financial order can be constructed on the back of a minimal set of international guidelines. The new arrangements would certainly involve an improved IMF with better representation and increased resources. It might also require an international financial charter with limited aims, focused on financial transparency, consultation among national regulators, and limits on jurisdictions (such as offshore centres) that export financial instability. But the responsibility for regulating leverage, setting capital standards, and supervising financial markets would rest squarely at the national level...

This seems to me to be dangerously wrongheaded. Let me try to explain why.

Go back to 1825, when the Bank of England first explicitly takes on its monetary policy mission in an attempt to stem the systemic impact of the banking crisis of 1825. Before 1825 or so a sudden shock that makes investors seek to hold portfolios of shorter duration and less risk does not have a great impact on values; the economy responds by unloading the trade goods from the ships about to sale for Hudson’s Bay or Batavia or Madras and selling them on the domestic market instead, and the fall in demand for long-duration and risky assets is met by deleveraging the real economy without much impact on values. But by 1825 the capital stock of the economy now has large components that cannot be deleveraged—plantations, canals, factories, and soon railroads. So a crisis shock to the demand for duration and risk now has a big depressing effect on asset prices—and that in its turn has a feedback effect further decreasing demand for duration and risk. And so it is in and after 1825 that we see the origin of central banking—the judgment by First Lord of the Treasury Lord Liverpool that the prices of risky and long-duration assets are too important to be left to the free play of market forces, that it is important for the government to support them, at least in crisis, to prevent mass unemployment by making sure that the firms that should be expanding and hiring workers can get finance to do so on terms that make it profitable for them to expand.

From this perspective monetary policy is and always has been about supporting asset prices at a level that allows firms that ought to be expanding to obtain finance and expand profitably. And ever since 1825 the central bank has done this by, whenever it needs to, taking long-duration and risky assets into its own portfolio—and thus off of the stock that must be held by the private sector whose risk tolerance has collapsed. Given that there are going to be sudden shocks to risk and duration tolerance on the part of global investors, we need a global institution to provide support for asset prices in an emergency—a global lender of last resort.

That lender of last resort needs two things if it is to function. First, it needs to be able to "print money"—to have its own liabilities be and be perceived to be the safest assets in the world so that when it borrows it calms markets by giving them more of the high-quality short-duration low-risk paper for which they suddenly have such a great craving. Second, it needs to know what it is buying—to have sufficient regulatory oversight and control over global finance to be able to limit the growth of potentially toxic assets beforehand and then to understand what prices it should offer when it does decide that it is time to support the market.

As my old teacher Charlie Kindleberger taught me (or, rather, taught Barry Eichengreen, who in turn taught me), when the global financial system has had a hegemonic lender-of-last-resort with the power and the will to exercise this function, things have gone relatively well. And when the possible candidates for the role have lacked either the power or the will, things have gone relatively badly.

Back in the 1997-1998 crisis the American Federal Reserve and Treasury acting alongside the IMF had the power and the will. Right now the American Federal Reserve and the Treasury in cooperation with the IMF and the ECB have the power (but they may not have the will). In the future the world is likely to become a more complicated place without a single hegemonic and dominant public financial institution. To my mind, this creates grave dangers for the next quarter century. But Dani does not see them."

Me:

Don the libertarian Democrat wrote:

March 15, 2009 19:44

"That lender of last resort needs two things if it is to function. First, it needs to be able to "print money"—to have its own liabilities be and be perceived to be the safest assets in the world so that when it borrows it calms markets by giving them more of the high-quality short-duration low-risk paper for which they suddenly have such a great craving. Second, it needs to know what it is buying—to have sufficient regulatory oversight and control over global finance to be able to limit the growth of potentially toxic assets beforehand and then to understand what prices it should offer when it does decide that it is time to support the market."

What about 3?: The LOLR cannot be in such deep and serious debt that its borrowing leads eventually to such a deep hole that no one believes that it can get out of it without defaulting or not paying completely some of its debts.

"when the global financial system has had a hegemonic lender-of-last-resort with the power and the will to exercise this function, things have gone relatively well"

Could this please be spelled out? I'm trying to figure out is this has something to do with Gramsci.

"Friedrich Hayek is going to be out; Friedrich Engels in. Larry Kudlow out; Larry Mishel in."

John Judis sees a resurgence of Marx:

"The Crisis Of '08 Reading List

The best books to help you make sense of Marx, Keynes, the Great Depression, and how we got where we are now.

John B. Judis, The New Republic Published: Wednesday, December 24, 2008

Every few years, someone urges me to do a Christmas book list, and while protesting my ignorance and incompetence, I gladly comply. This year's subject is the current global recession, which threatens to become a global depression. This is a layman's list, because I am strictly a layman on the subject of economics. You don't have to know anything about string theory to read any of the books I recommend.

I learned most (or what little I know) of economics from reading on my own or from study groups we used to hold in the fading days of the new left. I read all three volumes of Capital in a study group organized by the late Harry Chang, a Korean immigrant to the Bay Area who was a computer programmer by day (in the keypunch era) and a Marxist scholar by night. I read Keynes under sporadic supervision of economist Jim O'Connor, the author of The Fiscal Crisis of the State( A GOOD BOOK ), and a fellow member of the collective that published Socialist Revolution (which in 1978 became Socialist Review). And I got my introduction to economic history from historian Marty Sklar, who was also a member of that collective.

A decade ago, I might have been embarrassed to admit that I was raised on Marx and Marxism, but I am convinced that the left is coming back( NONSENSE ). Friedrich Hayek is going to be out( SILLY ); Friedrich Engels in( NO WAY ). Larry Kudlow out( THANK GOD ); Larry Mishel in( I DON'T KNOW HIM ). And why is that? Because a severe global recession like this puts in relief the transient, fragile, and corruptible nature of capitalism( SILLY ), and the looming contradiction between what Marx called the forces and relations of production evidenced in unemployed engineers and boarded up factories and growing poverty amidst a potential for abundance. As capitalism itself--or at the least the vaunted miracle of the free market--becomes problematic, the left is poised for an intellectual comeback( GOOD LUCK ). So here are four topics and some books to read about them, plus a few articles, from someone who learned economics by reading and rereading Paul Baran and Paul Sweezy's Monopoly Capital( INTERESTING BOOK ).

1. The current crisis. I was warning my colleagues of an encroaching disaster a year ago, because I was reading the columns and articles of Paul Krugman, Nouriel Roubini, Larry Summers, and Dean Baker. They were on top of this when Hank Paulson and Ben Bernanke were still telling everyone not to worry. Of the current books I've read (and I haven't read many), I'm very high on Financial Times columnist Martin Wolf's Fixing Global Finance, George Cooper's The Origin of Financial Crises, Jamie Galbraith's The Predator State, and Dean Baker's Plunder and Blunder. Wolf is terrific on the international currency mess--and the Financial Times is the paper to read--Cooper is first-rate on the irrationality of money and finance, Galbraith has a good explanation of how we got to where we are, and how to get out of it, and Baker is the expert on the housing bubble. I also liked Krugman's The Return of Depression Economics when it appeared almost ten years ago (Short take: If it could happen to Japan, it could happen to us). There is a new edition that incorporates some material about 2008, but I haven't read it. ( THESE SOUND GOOD )

2. John Maynard Keynes. Keynes is back in vogue, and rightly so( I AGREE ). One economist--I can't remember who it was--recently warned against reading The General Theory of Employment, Interest, and Money( I AGREE ) because it was written strictly for economists. I don't agree at all. It's a very hard book, especially some of the middle sections, but worth reading and rereading. If you don't have energy for the whole thing, read the first three chapters, some of the middle chapters (7, 10, 16, and 18 are my suggestions) and the last three. I suggest, however, a guide. The best I've found is Dudley Dillard's The Economics of John Maynard Keynes, which, to my amazement, is still in print after sixty years. I also like Hyman Minsky and Paul Davidson's guidebooks to Keynes. But you've got to read Robert Skidelsky's three-volume biography of Keynes, Hopes Betrayed, The Economist as Savior, and Fighting for Freedom (also now available in an abridged one-volume edition). Believe me, this is one of the great biographies( I READ VOLUME ONE. IT IS GOOD ). The way he brings together Keynes, the gay aesthete of Bloomsbury, and Keynes, the economist and man of worldly affairs, is something to behold. Skidelsky's second volume is also the best introduction to Keynes's economics, because you learn that exactly those ideas you found mystifying or most difficult in Keynes were hotly debated between him and his colleagues.

3. The Great Depression. There have been a lot of books on this subject, but most of what I read I read decades ago, so I'm sure I'm going to overlook worthy choices. Still, there are two older books that continue to stand up. George Soule was an editor of The New Republic during the 1930s. He was also an economist and in 1947 published a study of the American economy from 1917 to 1929 entitled Prosperity Decade. Soule shows that well before 1929, there were rumblings of trouble in the American economy--not only in the stock market bubble, but in overcapacity in key industries like auto, and in the rise of technological unemployment( SOUNDS INTERESTING ). You'll see the surprising resemblance to our own decade, including an anticipatory recession in 1926 like the one in 2001. On the international crisis of the 1930s, I like Charles P. Kindleberger's The World in Depression( GOOD BOOK ), which I reread two months ago when I was writing about the current international imbroglio. I want also to mention an essay by Sklar in The United States as a Developing Country. In chapter five, "Some Political and Cultural Consequences of the Disaccumulation of Capital," Sklar puts forward the idea that during the 1920s, capitalism shifted from the accumulation to disaccumulation of capital. That's Marxist jargon, but what it means is that goods production began to expand as a function of the reduction rather than increase in labor-time and in the labor force( I DON'T FOLLOW HERE. COULD BE WORTH LOOKING INTO ). That created an enormous opportunity, but also a potential crisis. The depression of the 1930s, Sklar argues, was the first "disaccumulationist" depression. One of his former students, historian Jim Livingston from Rutgers, has put forward a similar analysis of the current recession.

4. Marx and Marxism. Marx, like Keynes, is best read in his own words. There are a lot of brilliant shorter works, but I'd put the first volume( VOL. 2 IS THE MOST IMPORTANT ) of Capital up there with The Origin of Species, The Interpretation of Dreams, and The Philosophical Investigations on my list( IT'S AN EXCELLENT LIST ) of great books of the last two hundred years. It's not a guide to starting your own business and really doesn't have a theory of crises. Some of that is in the other unfinished volumes. What volume one does is establish capitalism as a phase, and perhaps a passing phase, in world history whose very nature has consisted in disguising that fact from worker and capitalist alike. You read Capital to understand the historical underpinnings, not the mechanics of capitalism. Marx's theory of history has obvious deficiencies( IT'S FALSE I'M AFRAID )--he didn't foresee, certainly, the rise of corporate capitalism and of corporate liberalism. His trademark theory of the falling rate of profit, which you can find in volume three, is also unpersuasive( IT'S FALSE). But these failings pale beside his portrayal of capitalism as mode of production based upon labor power as a commodity and on the accumulation of capital( IF YOU UNDERSTAND VOL. 2, YOU CAN UNDERSTAND HOW JEVONS REFUTES IT ). I wish I could recommend guides to Marx's thought( I.BERLIN ). The economic guides often err by trying to justify his works as modern economics. G. A. Cohen's book, Karl Marx's Theory of History, is a little academic, but of all the books I've read in the last twenty or thirty years, it's the best( IT'S A VERY GOOD BOOK. ).

Have a good, if grim, read of these books--if you have some better ideas, include them in the comments below--and let's hope that the next year brings some better economic news than this one.

John B. Judis is a senior editor at The New Republic."

What we have in the US is our version of the Welfare State. It is a government/private sector hybrid. That is not going to change, nor has it been discredited. In fact, these bailouts are a confirmation that the system is alive and well and functioning according to plan. What was not anticipated is the virulence of the crisis or the impotence of government actions to effectively quell this crisis swiftly. The people who populate the investor class are firm believers in this system. The idea that they are free market fanatics is silly. They simply use the rhetoric when it suits them. Otherwise, they say that the government needs to help them because they are essential to the health of the economy and country, and lobby for government favors and protections.

The Obama Administration is firmly rooted in this system. However, one can hardly imagine anything worse than the recent cronyism driven and interest driven administration that we've just experienced. It simply had an especially obnoxious and incompetent version of our hybrid, which allowed massive fraud, massive government guarantees implicitly guaranteeing the massive fraud, and allowed massive incompetence and graft in the name of party and interest groups associated with it. It has less destroyed the system than robbed it.

Once rid of this pestilence, we will slowly meander back through a thicket of problems to a different point of equilibrium in the balance of the hybrid. However, unless we allow social problems to insert themselves into these largely economic problems, we will retain this hybrid system indefinitely. It is a peculiarly resilient cultural artifact, created by a whole host of political compromises that are not easily disentangled without ruinous consequences.

All of the authors Judis cites might have some use for us, and we should certainly read them and learn from them. But most of the people he cites, certainly Marx and Engels, are defined by their Mechanistic Explanations, as opposed to Human Agency Explanations, and, as such, are likely to do more harm than good. To not understand the importance of panic and fear in this crisis, as opposed to "forces" of production, say, is to miss the whole tragedy that got us into this mess, and will only delay our leaving it behind.

It's too bad humans aren't mechanical for some theories, but they aren't.