Tag: John Plender

Must-read: John Plender: Uncertainty Principles: ‘The End of Alchemy’, by Mervyn King

Posted on by Brad DeLong

Must-Read: John Plender: : “King’s hugely ambitious aim in his book is to put an end to the alchemy…

…that has made financial crises a permanent feature of the landscape and allowed money — a public good — to become the byproduct of credit creation by private-sector banks. Above all, he argues that the crisis of 2007-09 reflected not just a failure of individuals or institutions, but a failure of the ideas that underpin current economic policymaking…. King argues that in a world of what economists now call ‘radical uncertainty’… there is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty…. In King’s terms, the coping strategy of households, businesses and investors involved adopting a narrative of stability while the level of spending ran at unsustainably high levels….

Western consumers’ urge to spend was not strong enough to offset the greater urge of northern Europeans and Asians to save, [so] global interest rates fell. Banks then satisfied investors’ desperate search for income by creating increasingly complex and risky financial products…. Bank balance sheets grew explosively…. The financial crisis changed the narrative. In King’s estimation, policymakers were right to adopt a Keynesian stimulatory response in 2008-9…. They averted a repetition of the Great Depression but, in doing so, created what King calls a paradox of policy. Interest rates today, he says, are too high to permit rapid growth of demand in the short run but too low to be consistent with a proper balance between spending and saving in the long run….

King argues that Bagehot’s famous dictum on central bank crisis management — lend freely on good collateral at penalty rates — is out of date because bank balance sheets today are much larger and have fewer liquid assets than in the 19th century. Central banks are thus condemned in a crisis to take bad collateral in the shape of risky, illiquid assets on which they will lend only a proportion of the value, known as a haircut…. King suggests this lender of last resort role should be replaced by what he calls, with a pleasing irreverence towards central banking mystique, a pawnbroker for all seasons…. Banks would decide how much of their asset base to lodge in advance at the central bank to be available for use as collateral. For each asset, the central bank would calculate a haircut…. The system would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty…

Must-read: John Plender: ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald

Posted on by Brad DeLong

Must-Read: Either Lehman was a reasonable organization caught in a perfect storm–in which case its creditors should have been bailed out as part of its resolution–or Lehman should have been shut down and resolved while there was still enough notional equity value left in the portfolio to cover the inevitable surprises and the likely negative shock to risk tolerance. As I have come to read it, Paulson, Bernanke, and Geithner were afraid to do their job in spring and summer of 2008, and also afraid to take responsibility to do what their forbearance with Lehman in the spring and summer had made prudent in the fall.

Perhaps Paulson, Bernanke, and Geithner thought that although the way they handled Lehman was a small technocratic policy mistake, it was a political economy necessity. Perhaps they thought an uncontrolled Lehman bankruptcy that would deliver a painful shock to asset markets and economies would generate strong political benefits: constituents would feel that shock and then complain to congress, which would then give the Fed and the Treasury a free hand to keep it from happening again. Perhaps such considerations made it the right political-economy thing to do. Perhaps not.

But we have never had the debate over that. Paulson, Bernanke, and Geithner have instead claimed that they did not have legal authority to resolve Lehman in the fall. Combining with their failure to resolve it in the summer to generate the conclusion that they did not understand what their jobs were:

John Plender: ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald: “The collapse of Lehman Brothers in 2008 was… a spectacular curtain raiser…

…Oonagh McDonald, a British financial regulation expert and former MP, brings a regulatory perspective to the story, exploring the multitude of flaws in the patchwork of rules… examines how, one weekend in September, Lehman went from being valued by the stock market at $639bn to being worth nothing at all…. Lehman… was so highly leveraged that its assets had only to fall in value by 3.6 per cent for the bank to be wiped out. The tale of how the management reached this point under the leadership of Dick Fuld is compelling. The response… to the credit crunch that began in mid-2007 was pure hubris. Having survived episodes of financial turmoil when many expected the bank to fail, Mr Fuld and his colleagues decided to take on more risk. Meanwhile, they neglected to inform the board that they were exceeding their self-imposed risk limits and excluding more racy assets from internal stress tests…. Much of the decline in the value of Lehman’s assets came from direct exposure to property….

The conclusion is a broader, provocative exploration of the concept of market value, in which McDonald tilts at the efficient market hypothesis that underlay much of the thinking in finance ministries, central banks and regulatory bodies before the crisis…. The brickbats McDonald aims at regulatory behaviour before the crisis are amply justified. More questionable is her critique of crisis management by the US Treasury and the US Federal Reserve. She thinks Lehman could and should have been bailed out in the interests of systemic stability, but does not address the question of how the troubled asset relief programme would have found its way through a hostile Congress without the extreme shock of Lehman’s collapse…

Must-read: John Plender: “Capitalists Excel at Giving Themselves a Bad Name”

Posted on by Brad DeLong

Must-Read: (1) Cecil Rhodes stole a lot of stuff. (2) Cecil Rhodes got a lot of people dead. (3) Cecil Rhodes built a lot of stuff. (4) Cecil Rhodes tried hard to spend his money to create a peaceful, united, trading world in which people of different countries understood each other–and (5) understood that people of British culture and British race were boss.

It’s fine to celebrate (4). And it’s good to actually spend the pile of money that derives from Cecil Rhodes on (4). But if you want to have a big statue of Rhodes hanging around, shouldn’t it be part of an exhibit that also notes his role in (1), (2), (3), and (5), and puts it all in its proper place?

Monticello these days, I think, does that, and does that properly. Can Oriel College say that it does that? Does Plender have any constructive ideas as to how to do that? And is he willing to head up a fund-raising campaign?

John Plender: Capitalists Excel at Giving Themselves a Bad Name: “Oxford’s dilemma is indicative of how the system can create wealth but often in ways that offend…

…Cecil Rhodes, alas. Or so the governing body of Oriel College, Oxford, must feel as it confronts demands from the student-led Rhodes Must Fall movement…. Rhodes was, of course, a rampant colonialist, unprincipled mining entrepreneur and conspicuous racist. He also happened to establish the Rhodes scholarships to facilitate the celebrated international study programme at Oxford…. Back then I took for granted that the kind of people who endowed Oxbridge colleges were likely to be rich but noxious. Today I rationalise it less casually. Rhodes epitomises the paradoxical nature of capitalism. The genius of the system is that it has an extraordinary capacity for creating wealth and raising living standards. Yet it often does so in ways that many find morally offensive. The difficulty concerns the centrality of the money motive — greed, in a word — in driving economic growth….

There is, in the moral economy of entrepreneurship, a spectrum. At one extreme are those like the robber barons of the American gilded age, such as John D Rockefeller, JP Morgan and Henry Clay Frick…. These were exceptionally nasty men. Their career model consisted of a no holds barred, preferably monopolistic, money grab until old age when they atoned for their misdeeds through spectacular philanthropic largesse…. At the other end of the spectrum were such high-minded model employers as Matthew Boulton, the nonconformist steam entrepreneur who, among other things, pioneered workers’ insurance at the start of the industrial revolution…. The distinctive feature of the assault on Rhodes is that the outrage is retrospective. The question is where such retrospection leads. Should we now spurn the sculptures of Periclean Athens on the basis that its democracy was supported by slavery? And what to do about statues of Thomas Jefferson, owner of numerous slaves?…