Stiglitz: Financial Regulation (10 years ago)

I’ve been trying to do some work on the late nineties Asian Financial Crisis, and in my article hunting I uncovered this work by (who else?) Joseph Stiglitz. Its coverage of the Asian Financial Crisis is used minimally only to bring home a point about financial regulation: that it is necessary. In this 2001 article, Stiglitz mentions that banks in liberal are forever enjoying a moral hazard in that they are typically bailed out when their lending gets mucky – a point that has recently (by that I mean relatively, within the last year and a half) become the buzz topic on most economic blogs (TBTF ! TBTF!). Here is what, according to Joseph Stiglitz, financial reform should have looked like ten years ago:

Joseph Stiglitz: Principles of Financial Regulation: A Dynamic Approach

“…when opting for some form of supervisory forbearance, it is important to avoid exacerbating moral hazard problems through more stringent supervision and regulation.”

[1/7/10] p.s., for more information on the Asian Financial Crisis, you can find a comprehensive chapter in Professor Stiglitz’s popular book, Globalization and its Discontents

Greenspan 1996: Irrational Exhuberance and the Fed

Although this deviates from the Journal/research paper trends, I think this speech by Greenspan in 1996 is appropriate for highlighting, because a) it is certainly a primary source which maintains the mission of After the Gold Hush, and b) it has been likened, by baseline scenario (among others), to Bernanke’s defensive speech in Atlanta of this month (Jan. 2010).

Greenspan made this speech in 1996, evaluating the functions of the Federal Reserve, its history, and its duties. It’s a quick, informative, and enjoyable read.

“I wish I could say that there is a bound volume of immutable instructions on my desk on how effectively to implement policy to achieve our goals of maximum employment, sustainable economic growth, and price stability. Instead, we have to deal with a dynamic, continuously evolving economy whose structure appears to change from business cycle to business cycle”

Happy new year.

Roger Garrison: Setting Straight the Austrian School

Roger Garrison wrote this piece to set the record straight about the theoretical and moral sentiments of the Austrian school. He attacks the (mis?)interpretations of the Austrian school presented by mainstream macroeconomists Bradford DeLong and Paul Krugman (both whose works have been previously featured here in After The Gold Hush – I’m trying to stay balanced here!).

So here we go… Mainstream Macro in an Austrian Nutshell:

“In the long run, a boom will get you a bust; but in the short run a boom will get you votes.”

Less Taxation or More Fiscal Stimulus?

Harvard Economist Gregory Mankiw analyzes Keynesian foundations in a column for the New York Times – in it he presents three papers that show that loosening tax policy may have more of an effect in recovery than fiscal stimulus. I provide you with the papers:

Christina and David Romer: The Macroeconomic effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

Andrew Mountford of the University of London and Harald Uhlig: What Are the Effects of Fiscal Policy Shocks?

Olivier Blanchard and Roberto Perotti: An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output

Yummy.

America’s only peacetime inflation

I’m reading this one for my class on monetary and fiscal policy, but it’s a mighty fun one:

America’s Only Peacetime Inflation: The 1970s

J. Bradford De Long – December 19,1995

“It may be that for every conceivable policy there is an economist who can wear a suit and pronounce the policy sound and optimal, and that to a large degree Presidents and Senators get the economic advice that they ask for”

Fixed Phillips curve my ass…

Aftermath

The Aftermath of Financial Crises
Carmen M. Reinhart
University of Maryland. NBER and CEPR
Kenneth S. Rogoff
Harvard University and NBER

The authors of This Time is Different (I’m still waiting for my copy in the mail) present a study of the historical duration of economics bust cycles and subsequent housing price declines – and what these data sets imply about the shape of our own crisis.

“…one would be wise not to push too far the conceit that we are smarter than our
predecessors. A few years back many people would have said that improvements in
financial engineering had done much to tame the business cycle and limit the risk of
financial contagion.”

Banking on the State

This paper has been making a lot of noise during this crisis, evaluating the history of financial relationship between banks and states.

Banking on the state

“It is an open question whether reform efforts to date, while slowing the swing, can bring about that change of direction.”

Paper by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Mr Piergiorgio Alessandri, based on a presentation delivered at the Federal Reserve Bank of Chicago twelfth annual International Banking Conference on “The International Financial Crisis: Have the Rules of Finance Changed?”, Chicago, 25 September 2009.

John Hicks evaluation of Keynes (part 1) – A Suggested Interpretration of a Suggested Interpretration

John Hicks begins his article by claiming that despite the brilliance of Keynes’ book, The General Theory of Employment, he has made a clear mistake: The “Classical Economics” that Keynes attacks is really not all that classical.

Thus Hicks fixes upon establishing a classical model of economics, and poses the question, Does Keynes’ alternative ideas of economics significantly differ from the norm? In part 1 (of 2), here, I attempt to review and analyze Hicks’ and Keynes’ idea of classical ecnomics:

The Assumptions:

We are dealing with a short period of time in which the quantity of physical capital (i.e. equipment) is fixed and depreciation is negligible.

Labor is homogeneous – that is, he lumps all jobs into one (actually, we will see, two categories) and we all have the same skill sets.

The rate of money wages per head is fixed and = w

The Variables and their relationships:

x = Output of investment goods

y = Output of consumption goods

Nx = Number employed in production of investment goods

Ny = Number employed in production of consumption goods

Since capital is fixed => x = fx(Nx) and y = fx(Ny)

M = Given quantity of money

Since in competitive markets the price of a good is equivalent to its marginal cost, we can determine the price levels of investment and consumption goods:

P(x) = w(dNx/dx) ; P(y) = w(dNy/dy)

(we use the derivative of the labor function as this will give us the marginal productivity of each worker, and multiply it by the wage rate to determine the marginal cost)

John Hicks

I start this blog for a basis of economic theory. It is not entirely concerned about today’s political nor economic issues. Quite simply, this is an exercise of thought.

I think a proper place to begin with is John Hicks’ article Mr. Keynes and the ‘Classics’.

This article was written in 1937, and it summarizes Keynes’ General Theory in a mere 14 pages. It is also known for being the first ever drawn and derived ISLM macro model ever.

Although it is dated, I find Hicks’ writing very clear and accessible, and I highly recommend this read.