. . . and in the current situation, that is worrying.
It is politics, not economics, that might dictate a too-fast cutting of the deficit, before the private sector can bear the load (it’s been almost a week since I cited Slash and Grow, though my opinion of it is dipping all the time. If you want a much better account of the role future imbalances might play in the recovery, read Andrew Sentance’s latest speech)
It is politics as much as economics that will determine how Finance is Tamed. Here, can I point everyone to an intimidatingly good (and long) blog post from Steve Waldman? I read it on the Tube, and it’s worth it. The basic theme:
It is almost impossible for bank regulators to be “tough” in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A “conservative” bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank. Moreover, the examiner will be “proven wrong”, again and again, until she loses her job. Her fuddyduddy theories about cash flow and credit analysis will not withstand empirical scrutiny, as crappy credits continually perform while asset prices rise. Valuations can remain irrational much longer than a regulator can remain employed.
H/T Economics of Contempt, a useful contrarian site defending big banks and financial innovation. Simon Johnson at the Baseline Scenario has been banging the drum about the capture of politics by banking for ages. His latest examines a recent Andrew Haldane paper on the overleveraging of banks, and makes the same general point as Waldman: that come the good times, the regulators will fail to exercise their existing powers:
Could some of the changes being proposed suffer the same fate as all previous attempts to regulate big banks? It seems the authors answer is that just moving things to Pillar I (from Pillar II) will help. This sounds like wishful thinking.
In somewhat contradiction of this politics-captured idea, BDL thinks Politics, not economics, will run out of capital first when it comes to the need for another rescue. That is Brad DeLong’s scary verdict when he says the chance of a Great Depression is now 5%. Because the last time we bailed the banks, we got not enough back, and public/congressional impatience is now wearing thin:
the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system:the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible.
Brad DeLong ought to be counted one of life’s optimists – someone who like Krugman thinks we could afford more stimulus – so this is worrying. The next time we have to do it, we must get more skin in the upside. Even more worrying, Bernanke doesn’t seem to think he has it in him to boost growth – or so it seems from an unusually strident Economist blog. Here in the UK our limits may be mor real and traditional: the possibility of real inflation, long before we’re out of the slump properly. Whatever happened to the output gap?
I’m not really sure what Osler at Liberal Conspiracy is trying to say about Rowan Williams or Lloyd Blankfein. He seems to imply that the ArchBish is as qualified to talk about these issues as Katie Price on carbon tech – but wants to share his misguided belief that moral outrage – spoken in time -could have fixed this problem. And the usual I-told-you-so-but-you-didn’t-hear-me from the Left:
Britain’s labour movement now has it on the full authority of Lambeth Palace that the idea of unlimited economic growth is a fantasy, a revelation that a nodding acquaintance with Marxism could have made available to those assembled somewhat earlier.
Trouble is: stopped clocks, parrots, all these things are right from time to time, and Marxism as far as I remember from my econ hist is very complimentary about capitalism’s ability to get loads of growth. It says little about environmental issues. Dave has also got plenty wrong. Basically, the Left writes plenty, predicts loads, and is like the proverbial monkey chucking darts at the FT. Everyone – left, right, Liberal, green, Austrian, etc – thinks this crisis is a Told you so.