Arnold Kling  

Zingales Joins the Swamp

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Yesterday, in Squam Lake or Swamp, I noted that four economists on the faculty at the University of Chicago signed on to a report on financial reform that treats this as a Keynesian moment and ignores Hayekian issues. Today, thanks to a pointer from Mark Thoma, I find that Luigi Zingales writes,

There are few areas in which government intervention is known to create value: reducing the devastating effects of a bank run is one. Only a government that is sufficiently powerful, in terms of legal authority and solvency, can do so. Unfortunately, in the international arena these two conditions are almost never met. Empowering the IMF to take over failed international banks would fill this gap - and chase away our worst nightmare.

Large banks have subsidiaries in many countries. This makes it hard to resolve the failures of these institutions--whose bankruptcy law applies? Hence, Zingales is drawn to a world-government solution.

I cannot imagine a more horrifying idea. Even if you think that the IMF truly would do the best job of resolving international bank failures, does anyone believe that there would be no further expansion of world-government power once this precedent has been set?

From my point of view, it would be preferable to require U.S. banks to divest all foreign subsidiaries unless they can obtain written understandings that resolution of those subsidiaries will be under the jurisdiction of the U.S. legal system.

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COMMENTS (3 to date)
fundamentalist writes:

Zingales: "There are few areas in which government intervention is known to create value: reducing the devastating effects of a bank run is one."

Zingales is simply wrong. The state does not reduce the devastation at all. It merely spreads it out over more people. Instead of the individuals involved in the bank (depositors, owners, employees, etc.) suffering, all tax payers suffer. Zingales is guilty of looking at the immediate effects and not the total effect, the short run vs the long run.

This is TRULY horrifying. What has Chicago wrought? I guess it died with Friedman. R.I.P.

david writes:

Psst. None of this is new; this is the sort of thing you explain in EC101, about the role of the central bank as lender of last resort. And, equivalently, the IMF's failure to do the same.

It's very mainstream and very, uh, Chicago, since the non-Chicago alternative is to limit capital mobility and international finance to begin with.

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