In Which Martin Wolf, Eric Rauchway, and Paul Krugman Watch Those Crying “Flood, Flood!” in Surtur’s Fire, and Warn of an Even Bigger Fire Next Time: Daily Focus
The erudite Eric Rauchway has a very nice review of Martin Wolf’s excellent The Shifts and the Shocks:
Debt Piled Up:
“Martin Wolf… holds that we knew how to avoid, counter and cure these troubles…
…we have simply–largely out of wilful ignorance and lack of courage–failed…. This system was vulnerable to shocks, which bankers and regulators either failed to predict or succeeded in ignoring…. Ben Bernanke… collapses in unreliable securities were ‘unlikely to seriously spill over to the broader economy or the financial system’–a view that Wolf describes as ‘almost clueless’…. Keynes is only one of a canonical series of economists who remain right, and ignored…. Wolf asked… Summers whose analyses he finds useful…. Summers suggested Walter Bagehot… Kindleberger… Keynes… Minsky…. The same Summers who served a US government that ignored their recommendations. We know what to do, but we will not do it: hence the impatience of Wolf, and also of Paul Krugman….
Wolf says finance desperately needs a bit of that old-time repression now… more capital… deprived of their ability to generate money at whim…. Both these solutions were… also Keynes’s ideas, published and defended before the Great Depression…. Even though he has carefully reinvented the Keynesian wheel, Wolf despairs of seeing anything like the necessary reforms implemented, mainly because they would inconvenience terribly rich people…. And so this politically moderate Commander of the British Empire, a stalwart of the Financial Times features pages, concludes his book with a chapter title borrowed from… James Baldwin…. It is in the nature of the system that there will be another shock, and surely we will see ‘fire next time’.
I keep going around and around and around this without resolution. Back before World War I, you see, there was a deflation caucus–a great mass of wealth committed to investments in long-term nominal bonds and in real estate rented out in long term leases at fixed nominal rates. This deflation caucus had a very strong material interest in the hardest of hard monies and, by virtue of its wealth, a dominant political voice.
Since every nominal asset comes with a nominal liability, arithmetic tells us that, as far as economic material interest is concerned, the soft money-caucus has as much at stake at the margin as does the hard-money caucus. But back before World War I a great deal of the soft-money caucus did not have the vote. Combine the restriction of the formal franchise with wealth’s dominance of the informal franchise and it is not surprising that–except in times of total war or revolution–hard money ruled in the North Atlantic core of the global economy from the days of Sir Isaac Newton to World War I. In between World Wars I and II ,as the material power of the hard money caucus ebbed, it made sense that its ideological power would wane only with a lag.
Since World War II, however, there has been no material hard-money caucus: all of the rich have broadly diversified portfolios. And everyone has the franchise. Since World War II, the stakes in the zero-sum hard-money soft-money debate are now very low. Since World War II, we all have a common interest in full employment and shared prosperity–we are all the 100%.
So whence come the many policy disasters since 2007? How are we to explain what has happened? We have managed to throw away between 5%-10% of the potential wealth of the North Atlantic, and we appear to have thrown it away permanently. How? Why? And why can’t we fix it?
And, of course, why haven’t we drawn the obvious and transparent lessons from the past seven years of what we need to do in order to keep this from happening again? Let me turn the microphone over to Paul Krugman:
“I find myself in meetings with international financial types…
…It’s all the usual discussions, and they don’t like to talk domestic U.S. politics, but then at some point, somebody says, what if we had another major financial crisis? What if we really needed something like TARP again? What are the chances that something like TARP could actually happen in this political environment? And everybody goes quiet, and looks down at their blotter…
713 words