He’ll be picking up his Herbert Hoover/Andrew Mellon liquidationist gong just as soon as the government has cratered the money supply, wrung more demand out of an under-spending economy, priced our currency out of the markets and bunged what’s left of government fiscal room to the by-now-almost-disappeared business sector. Good one, Matt. Nice bit of ignoring 80 years of Depression Economics learning. Hat-tip to Stefan Karlsson who mistakenly likes this advice.
Amazing fact of the day: 10 out of the top 10 Tory bloggers have global warming denial tendencies. Wow. Hat tip Next Left.
Martin Wolf blames some bad economic ideas for the meltdown. John Kay, on the other hand, is increasingly convinced by Glass Steagall, instead blaming pantomine villains, the foolish hubristic executives. In an article that is the usual curate’s egg of interesting insight and straw-man whacking:
We need to achieve that – by setting up firewalls between activities, within companies and across sectors, and by breaking down large institutions into parts so that problems of individual elements do not jeopardise the whole (but what about herding?- GW) The best way to safeguard the real economy while protecting the public purse is to ensure essential financial services to individuals and businesses are regulated but to refuse to underwrite risk-taking. (what is essential? Lending money for house buying? = GW), the politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand
Talk to Martin about the regulation matter – for surely if ‘we’ were gripped by wrong models like MW suggests, the mistakes he pinpoints are largely government oversight mistakes. UPDATE: Charles Goodhart seems to have thoroughly Smacked Down John Kay:
it is generally accepted that the greatest error of recent policy was to allow Lehman Brothers to fail. If ever there was a bank that would be characterised, under John’s category, as a casino rather than a utility, it would be Lehman. Presumably John would also have been keen to have Bear Stearns, Fannie Mae and Freddie Mac, and also AIG, declared bankrupt. None held retail deposits or was much involved in the standard payment system. That, of course, would have been a blood bath . . . The proponents of narrow banking focus, almost entirely, on the liability side of banks’ balance sheets, and their concern relates to the need to protect retail depositors and the payments system. While this concern is entirely valid, it has been notable in the recent crisis that virtually no retail depositors lost anything, and the payment systems continued at all times to work perfectly
Now, can I refer you to another post I made a little while back after listening to JK? I said:
it is extremely telling that his description of what a narrow bank should look like fails to say anything much about assets. In other words, the things that banks currently invest in are largely uninteresting to JK – he thinks everything that is not vanilla is casino, a rhetorical point that no doubt wins him fans in the angry brigade, but is ’solving’ the problem of modern finance by simply pretending it is all useless and stupid.
Right all along. JK is solving a problem that hasn’t happened – failure of payments – and creating a whole bigger one. Goodhart:
The modern economy cannot do without credit, and the need to maintain credit flows has been uppermost in the minds of the authorities. The narrow banking proposal would shift virtually all such credit flows out of narrow banking into those parts of the financial system outside the narrow banking boundary, because the narrow banks would be required to invest in safe assets. So had a narrow banking system been in place, the crisis would have been even worse, with a virtually complete cessation of credit flows to the real economy.