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Saturday 19 Aug 2017 | 23:41 | SYDNEY
Saturday 19 Aug 2017 | 23:41 | SYDNEY

Reader riposte: Government, money and the meltdown



23 October 2008 11:14

John Hannoush writes in reponse to my post arguing that the post-meltdown critique of free markets has been vocal but not coherent:

There is a risk that we are attributing too much coherence to the responses. I think it is possible that everyone, private and public, is making educated guesses but without any certainty they know where things are going. 

One question: to what extent is this crisis about the state's role in governing the supply of money (a lot of the problems seem to be about the creation of credit)? 

And a comment on the infamous 'We're all Keynesians now', which Mark I am sure is quoting ironically: strictly speaking, weren't the real post-World War II Keynesians wedded to the idea that governments could smooth out the business cycle by clever use of fiscal levers? The use of public money to spark things in economic downturns goes back a long way, I thought.

John is right to say that observers may be tempted to attribute too much coherence to the policy actions to date. As I noted in my post, what we’ve been seeing is a bunch of technocratic responses (some of quite varying quality) to a series of market failures, rather than an overall plan.  That said, however, it’s also fair to note that there has been something of a process of convergence to what we might call the British (or Swedish) model. It’s also been interesting to see how the views of academic economists have influenced matters.

On the role of money in this, again I think it’s fair to make the case – as many are doing – that in the US, monetary policy was too easy for too long, and that this was an important contributory factor to the current crisis. I certainly buy the argument that one key problem was the asymmetry in monetary policy. A policy by the monetary authorities of benign neglect to inflating asset bubbles followed by an active response once that bubble starts to deflate has turned out to be fundamentally destabilising. But much like an Agatha Christie Murder Mystery, the list of suspects is a very long one: dodgy mortgage originators, opaque financial structures, the ratings agencies, global savings glut, badly structured remuneration packages and so on. Like the Murder on the Orient Express, they all did it.

Finally, re: Keynes.  What I think is important here is not so much the mechanics of Keynesian policy, but rather the guiding philosophy, and in particular the idea that markets (or capitalists) need governments to rescue them from themselves. This is a quite different way of looking at the world than has typically been the case since the 1980s, at least in much of the developed world. Keynes’ latest biographer, Robert Skidelsky, wrote an entertaining piece on this over the weekend. He included a bunch of quotes from the great man which seem nicely relevant today, such as this one:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

The ‘Old Maid’ analogy cited in Skidelsky's article also rings true.

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