Arnold Kling  

Worth Reading

Correction on the Swedish Cons... Macaulay on Signaling...

The latest issue of National Affairs has a number of interesting articles. Scott Winship challenges the claim that economic life has become more risky. Note that this is separate from Winship's article on income mobility, which also is worth a read.

Charles Calomiris makes a case for contingent capital for banks (I am skeptical that this is a solution, by the way. I wonder how bankers and regulators would adapt to subvert the intent.) In his final paragraph, he drops this bombshell:

The recent financial crisis of 2007-2009 is just the latest (and most severe) in a long line of episodes that demonstrate the terrible costs of combining government protection of banks with ineffectual regulation. Since 1980, more than 100 countries have experienced banking crises (defined as episodes in which the negative net worth of failed banks exceeds 1% of annual gross domestic product); across those episodes, the negative net worth of failed banks averaged 16% of GDP. Such frequency and severity of bank loss are historically unprecedented, and are clearly consequences of the brave new world of government protection of bank debts. Consider that, a century earlier, from 1874 to 1913, banks were at least as important to the financing of trade and industry -- and yet I have been able to identify only four episodes of bank-insolvency crises worldwide during those years, with an average negative net worth of 6% of GDP.

It seems as though we were better off before the Fed, the FDIC, and the IMF.

John O. McGinnis says that new technology would allow policy makers to take more advantage of knowledge. He mentions Hanson (on prediction markets) but not Hayek. My view is that large organizations are inherently awkward and clumsy. Technology does more to exacerbate that problem (by making smaller organizations more capable) than to mitigate it.

Finally, Tevi Troy argues that think tanks are doing less thinking and more talking.

those think tanks that were founded earlier tend to have significantly more scholars with Ph.D.s today than do younger institutions. Among a representative group of think tanks founded before 1960, for instance, 53% of scholars hold Ph.D.s. Among a similarly representative group of think tanks founded between 1960 and 1980, 23% of scholars have such advanced degrees. And among those founded after 1980, only 13% of scholars are as highly educated.

Compared with that, the economics blogosphere would seem to me to be more credentialed. Anyway, Troy concludes,

...Every incentive -- political, financial, and professional -- points toward the further politicization of think tanks. The countervailing force would probably need to come from policymakers themselves: If elected officials, alert to the depths of the policy challenges they confront, were to actively demand from think tanks more rigorous, innovative research and less communications strategy, they might just get what they asked for. Of course, if we had political leaders inclined to such thinking, we might well have avoided our troubles to begin with.

COMMENTS (3 to date)
Daniel Kuehn writes:

re: "John O. McGinnis says that new technology would allow policy makers to take more advantage of knowledge."

This is what they said computers would do for the Soviet Union too, didn't they?

How'd that turn out for them?

I'm sure information technology will make government work better than it otherwise would, but ultimately the information obstacles that really constrain government have to do with the information that the market is able to aggregate.

J Oxman writes:

@ Daniel Kuehn,

Prof. Hayek, is that you?

fundamentalist writes:
It seems as though we were better off before the Fed, the FDIC, and the IMF.
Interestingly the most benign period was the Gold Standard era from 1880 to 1913. Here banking crises did occur but were fairly limited and currency and twin crises were limited compared to subsequent periods. Since the global financial system was fairly open at this time, the implication is that globalization does not inevitably lead to crises. The recent period is not as bad as the interwar period but is nevertheless fairly bad...

The most recent period does indeed appear more crisis prone than any other period except for the interwar years. In particular, it seems more crisis prone than the Gold Standard Era, which was the last time that capital markets were as globalized as they are now.

The above quote is from "Understanding Financial Crises" by Franklin Allen and Douglas Gale, p.11 and p. 13.

Franklin Allen is the Nippon Life Professor of Finance and Professor of Economics at the Wharton School of the University of Pennsylvania.

Douglas Gale received his PhD in Economics from the University of Cambridge and is currently a Senior Fellow of the Financial Institutions Center at the Wharton School of the University of Pennsylvania.

For all the hatred that mainstream economists pile on that barbaric relic, it did a better job than the Fed has done.

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