Arnold Kling  

Today on the Eurozone Crisis

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Patria, Parenti, Amici... Various Sentences to Ponder...

Tyler Cowen writes,


Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

He strongly praises Ben Bernanke, for having the Fed greatly expand its balance sheet. Because it has long-term, risky assets (mortgage securities) and short-term riskless liabilities (bank reserves), the rest of the financial sector can do the opposite.

Implicit in Cowen's point of view is the assumption that what we need to avoid right now is a shrinking banking sector. I find that notion hard to swallow. My view on fiscal policy is similar. There are those who argue that now is not the time to cut government deficits, because that would be contractionary. My reaction on cutting back both bloated banking and bloated deficits: if not now, when?


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CATEGORIES: Eurozone crisis



COMMENTS (5 to date)
Andreas Moser writes:

Why is the Eurozone crisis not on Christmas holiday?

Jack writes:

To a large extent, isn't this equivalently the old Keynesian view vs. the modern, empirically based view (i.e. Alesina)? We think we cannot afford to shrink right now, but what newer evidence suggests is that we may not get out of the recession *until* we shrink.

Mark Michael writes:

"If not now, when?" Hear! Hear! We officially exited the recession in June 2009, 2 and a half years ago. The economy has been growing at a modest rate since then. If we can't cut bloated government now, then I fear that there will never be a time when we can.

It need not be said that our national debt grows another trillion dollars each year with our current occupants of Washington. Our foreign exchange current account grows another $600 billion to $800 billion each year, too, adding to the sum of our public+private national debt. Yes, we have the world's reserve currency, and there's no ready alternative, but is this a blessing or a curse? It lets our pols "kick the can down the road" some more. We see the US & EU become bigger & bigger debtors and East Asian countries bigger and bigger creditors.

When does this growing imbalance become "unsustainable"? There isn't an obvious alternative to fiat dollars, euros, yen at this point. Maybe global inflation will finally drive investors away from our fiat currencies: the pain of inflation becomes worse than finding hard assets to buy with all of their inconveniences.

Oh, yeah. I blame the central banks! They're the enablers. They're supposed to "take the punch bowl away when the party gets going," but they just keep it refilling it with paper currency.

Harrison Searles writes:

"My reaction on cutting back both bloated banking and bloated deficits: if not now, when?"
That is my thought. I would also think that if there is going to be a dramatic restructuring of the American economy with respect to either the banking or public sector, it best happen during a recession. That way entrepreneurs would be able to coordinate their future plans and adapt their expectations to a future with those restructurings already taking place rather than to disturb the new patterns of coordination that have emerged from the recession with the shifts. I mean, is not the entire point of a recession is to get rid of economic inefficiencies and rot that have plagued the system up to the point?

Derek Scruggs writes:

"That way entrepreneurs would be able to coordinate their future plans and adapt their expectations to a future with those restructurings already taking place rather than to disturb the new patterns of coordination that have emerged from the recession with the shifts."

My feeling is that truly disruptive entrepreneurs don't adapt their expectations to the future, they already live in the future and build stuff that will be necessary when everyone else catches up. Do you think the founders of Google, Apple, Oracle or even (ahem) Homestore.com sat around and worried about government policy when they were starting out? They capitalized on new technology and would have done so regardless of the fiscal climate.

Also, I really doubt meaningful cutback of government bloat is politically possible. The only solution is to grow the economy enough that it falls back to its historical share of 18-20% share of GDP.

We can all argue (and do!) about how best to grow the economy, but cutting government spending by more than a few points here and there is a years-long process that businesses will not wait for.

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