I’ve been enjoying Brad Delong’s agro for a while. Luigi Zingale is a very smart guy with some interesting proposals. I’m reading an excellent article of his right now on “The Future of Securities Regulation“. But Delong is not impressed with his line that ‘we have a banking crisis, so we should be fixing that, rather than expanding demand’. Delong’s argument has been to agree that we have a banking crisis, indeed in an earlier post the crisis took four of his five points, with falling spending being the fifth one – the one that brought the need for stimulus into play.
Anyway, in a long and (so it seems to me) accurately argued subsequent post, Delong concludes. . .
Thus, as best as I can tell, Luigi Zingales’s argument comes in four steps:
- Our problem is in the banking system.
- Keynesian deficit spending will not fix the banking system.
- Keynesians say that even though Keynesian deficit spending will not fix the banking system, it will keep unemployment from rising much higher while we do other things to fix the banking system.
- The weakness of this Keynesian argument is–LOOK!! THERE IS HALLEY’S COMET!!!!
Nicholas, there is an issue with Brad Delong (like Paul Krugman) because he is a strong partisan for Democrat policies, to the point where he has a credibility problem. For example he described opponents of bailouts and big spending as “ethics-free Republican hacks”. http://delong.typepad.com/sdj/2009/01/stupidest-party-alivetm.html
That is not a fair comment on economists who also opposed the big spending of the Bush administration.
He is also accused of truncating comments on his blog to avoid confrontatin with views that he dislikes. http://austrianeconomists.typepad.com/weblog/2009/03/why-not-to-bother-with-brad-delong.html
Rafe I was referring to the argument, not to the casual mudslinging of Austrians. Neither Delong nor Krugman are particularly ideological or indeed left wing. They have a general preference for free markets unless there’s a good case for the contrary – which they both find in finance (as did Milton Friedman) and the distribution of income. That’s pretty much it.
But the Republican Party is not like our right of centre mainstream parties (as much as they like styling themselves on the Republicans). It’s full of creationists (One Secretary in Reagan’s administration publicly questioned the point of planning too far ahead given the likelihood that The Rapture wouldn’t make it unnecessary.
They’re crazy Rafe. They’ve led a campaign to torture people, develop new nuclear weapons, starve tbe beast (until they’re not in government that is) and on it goes.
Rafe, I’ve just spent half an hour trying to make sense of the De Long/Murphy/Horwitz thing, and I can’t for the life of me see what breach De Long is supposed to have committed against Murphy.
For an insight into how silly and rigidly ideological the Chicago school have become about the fiscal stimulus, check out this post from Chicago doyen Eugene Fama and his research partner Ken French about “capitalism under Obama”.
Note their disparaging remark about “liberal” Democrats and their admiration for European “mismanaged” economies – to which one would reply that this must be in comparison to the superiorly managed American variety?
Fama and French also declare their desire that the “pioneering free enterprise spirit” of American capitalism can quickly reassert itself. I would have thought that was precisely what got us all into this sorry mess.
This is the problem of the neo-libertarian school in US economics. They are hopelessly compromised by an increasingly irrational Republican Party, which as Nick observes is now dominated by looney religious nutters, gun enthusiasts and flat earth “there is no such thing as society” wackos.
We need a return to the pragmatic, rational centre – one that sees the free market as an ideal only and that does not try to force the world to fit its pie-in-the-sky agenda.
Well TM, Austrians would place the Bush administration as ‘Keynesian’ in the broader sense because they turned a blind eye to the monetary pumping of Greenspan, etc and fought a war on tick. Ditto the Howard Govt and the Reserve who deliberately targetted that 2-3% monetary induced inflation which as Gerry Jackson points out saw M1 grow 185% between Mar96 and Dec 2007. Now that’s one helluva lot of popn growth and productivity to explain it away, although the Howard Govt/Reserve would have been a paragon of virtue by global comparison. It alone(excluding Asian savers) would have finally returned the ledger to the black, which allowed some small leeway for fiscal stimulus now(not the Rudd profligacy)
Massive monetary pumping throughout the West drove credit and leveraging and consumption on tick, with poor monetary signalling for all and the ultimate ponzi scheme exacerbated by Asian savers and their predatory lending/exchange rate manipulation. As the credit boom gathered pace it should have produced massive inflation or currency devaluation in the West but demographics fooled all as it began to drive asset prices with retirement in mind. That aside both the public and private sector gorged on funny money tax receipts and financial returns unril the bubble finally burst with all looking rather stupid now. basically Austrians would say it could never have happened without all that money creation. they’d argue that gold backed money appreciating by 1 or 2%/year could never have allowed it all. Sure, you can have animal spirits in a particular sector of the market but if money is quietly appreciating, rather than the Keynesian norm of deliberate theft by stealth, then consumption must fall elsewhere. That’s the Austrian lesson and the corollary that monetary pumping will always cause malinvestments, the size and scope to be unwound in the ensuing bust, will be dependent on the size and scope of the credit boom. That’s why Govt borrow and spend is so futile now in this whopper of malinvestments yo be unwound. The only medicine is the sooner the liquidation the better we’ll all be.
Of course it won’t happen quickly because of all the Keynesian handwringing and obfuscation. Welcome again to the the barons of bailout and the princes of the printing press and groundhog 1930s/the Japanese disease. They’d rather bailout Wall Street, etc than admit the Austrians are right. It’s that pathological for them to be seen to ‘do something’ and pull some levers somewhere, somehow, they’d even stoop to that. Pathological dear Watson, pathological!
Delong’s summary of Zingales is enough to convince me that Zingales has an excellent argument. Particularly the bit about the comet.
Obama’s stimulus package is primarily a distraction that will ensure protection of the guilty and encourage everyone to forget the liars, cheats and thugs who got them into this mess. Probably this explains it better (and in more civil tones) than I can:
http://www.americanchronicle.com/articles/view/93966
Mind you, I also read that Karl Rove is finally going to testify, it only took 3 congressional subpoenas and a “deal” to get him there. I guess we will see just how much he says.
The LOOK!! THERE IS HALLEYS COMET!! is really their call for more regulation to deflect attention from- ‘Look! It’s the money supply stoopids!’. Anyone who thinks it’s all just a lack of regulation need only read Harry Markopolos’ 14 page step by step guide to the SEC to spell out Madoff=Ponzi whatever Madoff’s investment strategy and yet as usual the regulator ends up being a bunch of professional mourners, compliments of the taxpayer. Worse than caveat emptor, it makes some investors believe they’re somewhat safer than that, when all they’re really doing is wearing the collective cost of professional mourners. Won’t stop the usual suspects from arguing for more highly paid mourners though.
We certainly don’t need any more regulation or regulators to tell all the economic actors now, the bleeding obvious. You can’t flog any of that funny money driven alphabet soup of financial derivatives to anyone of voting age anymore and everyone from public Treasurers to company execs are running about like headless chooks trying not to appear as stupid as the ratings agencies now, as they deal with the new imperatives. You see it everywhere. In my state of SA, Treasurer Foley who late last year was beginning to smile at finally paying down the State Bank debt legacy from 1992, watched in horror as a $1.5bill revenue black hole developed in a matter of months. GMH execs are cutting their pay and that of senior management as they contemplate their lot in life and way off in LA in the US the LA authorities have put 9000 teachers on notice they might have to go to meet new economic realities. It’s happening everywhere as whole nations who were long on debt and short on cash have to crash the gears straight into reverse to become longer on cash and shorter on debt now. Keynesian money from helicopters is as futile as the Rudd Govt trying to print jobs with its IR legislation, but that won’t stop them trying. The market is doing its job perfectly to expunge all the rottenness out of the system that has built up over such along period.
You’re right Observa. And I agree with you entirely about the funny money creation. But the pity is that ordinary wage slaves have to pay for all that finance-driven excess by losing their jobs. (And yes I know we are ALL guilty for living on tick in some form or other in recent years. But the charlatans at the heart of this actually KNEW about the risks that were being taken).
As for your comment in your previous post about Bush being as big a Keynesian as anyone, De Long deals with this on his blog by pointing out that pro-cyclical deficit spending was never part of the Keynes prescription.
TM, I would have thought Bush/Greenspan was just following the inevitability of Keynesian prescription, given human frailty and the ever-present temptation of the printing press. Just ask yourself when any of the powers-that-be will say to themselves or anyone publicly- ‘Oh, Oh, we’re clearly in boom times now and must save accordingly to prepare for the down times’. It aint gunna happen and so naturally we get ratchet up Keynesianism which is why Austrians want to remove the temptation of the printing press and its running mate, exchange rate manipulation(how’re you all doing now clever Asian manipulators?)
Austrian theory predicts the first cab off the rank with funny money will be the big winners and guess who that was for so long? If Keynesians are sour on subsidising Wall Street types now, Austrians would simply say we keep telling you so over and over again you dumbclucks.
That’s all very well to point out that the battler’s best interests lie in quietly appreciating ‘money’ in future, but how to deal best with the sins of the past is now the critical issue. As I’ve pointed out numerous times demographics had a big part to play in making fools of us all with the Great Moderation, coupled with the propensity to save by Asians and the directions/machinations of their Keynesian overlords, but should future generations bail out baby boomer profligacy and incompetence? My take is no. We stuffed it so we own it and hence my solution to the banking problem. Baby boomers hold most of the toxic assets and funny money savings so let them wear it. Scrap the 100% future taxpayer guarantee for a 60% one and if a bank fails, poof with the shareholder equity and the bank reopens with every depositor/bondholder’s savings reduced by 40% and that becomes the new prorata equity, with the central bank lending ‘their bank’up to the other 60% at prevailing interest as the need arises. As shareholders they get to appoint new management and approve their remuneration(I do like my compulsion delicately nuanced)and they’re free to hold their shares or cut and run on the stockmarket. The Govt can even stand in that market to increase liquidity via open market operations if desired. My take is we should get this policy hunkered down and ready before any crisis and ‘meetooing’ all those OS experts. At the moment the banks are sucking in short cash from a long credit marketplace with future taxpayers ready to bankroll every dodgy loan out there. Hey, fine for me and the missus personally but what about the kids?
Nice idea on the bank guarantee, Observa, though I can’t see any government (without a death wish) implementing it in the current environment. Getting a loan is hard enough as it is.
BTW, you’ll be gratified to hear the disciple of doom Nouriel Roubini paying homage to the Austrians in this article, cited by Seeking Alpha.
Observa, I think you’re right; the conversion of debt to equity should, where necessary, play a part in resolving the financial system solvency crisis (let’s leave aside for the moment whether things will get to that stage in Australia).
However, wouldn’t it be better not to give depositors a haircut? The system would be unnecessarily destabilised and, in fairness, most people have been led (or at least allowed) to believe that deposits with banks are safe. In any case, there’s probably enough debt outstanding in most cases to provide, through conversion, the necessary equity. The percentage to be converted (and the order in which any such conversion might occur) could be tailored according to an institution’s individual financial circumstances and the nature of its debt structure.
Most of the arguments against this approach seem based on the fear that the flow on effects on the holders of these bonds (like insurance companies and pension funds) will be disastrous. And also that banks’ ability to raise new debt will evaporate if potential buyers view mandatory conversion as a real possibility. While both these concerns seem reasonable enough (although there surely can’t be too many dead — sorry, debt — holders still unaware of the possibility), they don’t seem strong enough to counteract the potential benefits of this sort of scheme.
In any case, as you say, the simple truth is there’s no easy way out of this mess. It’s going to hurt one way or another and the focus should surely be, wherever possible, on working within existing legal structures, and on ensuring that governments don’t jeopardise their creditworthiness. Once that happens, things really do get a whole lot more difficult.
If you don’t want to obey rules, there are three potential options:
[1] just break the rules and be tough enough to deal with what comes your way.
[2] campaign for the removal of those rules and get some numbers behind you.
[3] encourage the creation of vastly more rules until no one has any idea how it all fits together anymore, then get in sweet with whoever ends up trying to enforce this unholy mess and find lots of trivial tasks to keep those guys busy (then do [1] under cover of the confusion, plus you now have the plausible denyability that no one else understands what is going on either).
I often try to explain to people why giving the same guy more work to do is essentially just de-prioritizing everything that guy is already doing. Same holds for law enforcement or any type of central regulation. When we have a few simple rules that everyone understands (and better still, that the majority of people agree with), the enforcers/regulators can focus their efforts, the common folk can accept their position, the bad guys are obviously visible, and the system works. When we have vast numbers of pointless rules, the enforcers/regulators lose the plot and just start selective enforcement (because it is easier), the common folk know they are screwed so they just keep their heads down and get by using whatever means come to hand, the bad guys blend into the crowd (and that crowd is beyond caring) and the system as a whole breaks down badly.
The EU is rapidly heading down the same path, from a common currency they just had to make themselves feel important by adding regulation after regulation until they hit the insanity threshold, then they discovered people don’t like them anymore so they have to get strongarm and pushy. Now people are sure they don’t like their new EU overlords, and the gloves come off and we sit around waiting for the spatter noises. All so depressingly predictable and pointless. If only those handful in authority could learn to leave well enough alone when the going was good.
“wouldnt it be better not to give depositors a haircut? The system would be unnecessarily destabilised and, in fairness, most people have been led (or at least allowed) to believe that deposits with banks are safe.”
Well there are a few threads there that need clarifying. Yes you’re right that depositors like me are basking in the warm inner glow of that 100% guarantee and have come to expect it. That should never have come about because Swan opened his big mouth about the $20k legislation and let the cat out of the bag that there was no formal guarantee. Furthermore setting any fixed amount guarantee was always going to promote deposit spreading and then of all things Turnbull who should have known better upped the ante to $100k provoking the ultimate. Well that got rid of deposit spreading outside the protected sector but gave the banks a whopping free ride to the detriment of the rest.
Now to whether depositors should get a haircut in the event of a run. Firstly you have to bear in mind it is a temporary haircut that can be ameliorated over time as bank dividends are returned to them and/or the value of their marketable shares rises.(the ANZ have just cut dividends and the share price rose accordingly)The alternative for depositor haircuts is that the jurisdictional taxpayers get to wear the insurance costs and how fair is that in a globalised world?(ie think Iceland)I choose my bank for whatever reason to enjoy the service and returns so in the event of a solvency crisis(as distinct from a liquidity crisis)why should outsiders pay to insure my free market choice, albeit I shouldn’t be asked to pay full tote odds for the sins of the past. That 40% virtual haircut sounds reasonable for the times, on the understanding it’s the same for all. Also by taking it in a crisis I immediately protect the other 60% and have the opportunity to get my other 40% back over time, bearing in mind this is a much recapitalised bank.
You’re right that it will be politically impossible to renege on that 100% pledge in time of crisis, which is why we need to garner bipartisan support for it now and change the rule so everyone is clear about it. It can be sold as necessary to unlock the financial sector more generally and be fairer to all investors. Besides what can depositors do about it anyway if it has bipartisan support?
When you think about that 40% immediate haircut for depositors cash a couple of things could happen. Their $1 shares might list and trade at say 30c which you’re free to cut and run with. OTOH other investors may be prepared to pay say 65c to borrow them for a set period to gain the dividends and any capital gain. There are many market possibilities to ameliorate individual positions. I was reminded of that by a report by David Goldman in the Asia times about a lady with a mortgage who was approached to cut her mortgage by 30% and at a much lower interest rate for repayments. She thought it was a scam until it was explained that the new holder had bought it from an originator at a much discounted price and was passing on the savings to make their borrower a much safer income stream. Need I say more about sensible asset liquidation and markets?
Nicholas (and TM) , I am not defending either mudslinging or the Republican party. The Austrians who I read have been crtical of the Republican Party both for its foreign policy and its domestic big spending, including the first bailout. They object to Delong’s description of bailout objectors as ‘ethics free Republican hacks’, or words to that effect.
They may object to it, but Brad’s point is that the people who are objecting to deficits now are ‘starve the best’ Republicans, and that if McCain had won would have been ‘starve the beast’ supporters of what would have been similar policies (albeit no doubt with greater emphasis on tax-cuts with a particular focus on the wealthy)
“Youre right that it will be politically impossible to renege on that 100% pledge in time of crisis . . . ”
Fair enough. From your earlier comment, I thought you were suggesting a depositor haircut should be applied during this crisis.
“The alternative for depositor haircuts is that the jurisdictional taxpayers get to wear the insurance costs and how fair is that in a globalised world?”
If I’ve read you right, the issue you’re touching on here is fascinating; namely how best to handle failures in countries where the banking system is disproportionately large and much of the depositor base offshore. I think you’re probably right that a caveat emptor approach may be the only realistic choice. In some cases, the disproportion is so great that an attempt to make all depositors whole in the event of a failure would probably lead to a run on the whole damn country. Iceland, as you say, is the obvious example; the other prime candidates are apparently Switzerland, Belgium, the Netherlands and, surprisingly enough, Britain.
Not sure if you happened to catch an article late last year by William Buiter. It was called (somewhat dramatically) “How likely is a sterling crisis or: is London really Reykjavik-on-Thames?”. Anyway, if you haven’t seen it, you can find it here.
Nicholas, do you really think it is fair comment to describe Steve Horwitz and Peter Boettke on The Austrian Economists blog as “ethics free Republican hacks”?
Can you clarify “starve the beast”, does that mean small government or just zero deficits?
More allegations of comments being delted for dissenting from Brad’s views.
http://austrianeconomists.typepad.com/weblog/2009/03/no-encouraging-critical-thinking-by-undergraduates-in-delongs-world-i-guess.html
Possibly not Rafe. I don’t really seek to defend Delong as a person – it would be a bit of a distraction to what he’s saying. It would be distraction enough if I liked the guy, as I must say I do Krugman (from what I’ve seen and read of him in books, and other media). In fact I’ve listened to Delong’s lectures and I find the tone of his voice insufferably arrogant. But so what?
I’m also glad that he’s conducting this particular campaign because it seems to me he is right (I don’t mean here that the policy prescriptions he’s proposing are right, but that he’s demonstrated that people like Fama have made elementary, long exploded logical fallacies. As he says, only one person can be right about such things, and it seems to be him. Amazing isn’t it, that someone of Fama’s stature (or someone of Delong’s stature) could be simply, obviously wrong in a way that we’ve known since the thirties. Who do you think is right about that and why?
And the stuff about him deleting comments, well who knows? But if he did it would show nothing that is germane to what I’m talking about here. (And it seems too silly for words. He’s entitled to remove comments that give him the irrits I guess. It’s his blog. He doesn’t seem to be trying to hide criticism of him. Some of it is on his sidebars, for instance – admittedly it seems to be served by Google, but his side bar has links to posts that criticise him – like
bs: Brad DeLong Giving The Economics Profession A Bad Name
The Edge of Tomorrow: Brad DeLong Is An Ethics-Free Partisan Hack …
But if he were really trying to avoid criticism, he’s picked a strange medium and a strange way of doing it. He seems to enjoy the stoushing (a bad sign usually, but not if one is ferreting out genuinely bogus arguments.)