Tuesday, June 12, 2012

Kindleberger: cutting to the chase

Professors DeLong and Eichengreen have an oh-so-hagiographic foreword to a new edition of Kindleberger’s classic text, which I will admit to not having read.  However, as a believer that financial fundamentals matter, as much as politics, in a political economy, I find their worship and Kindleberger’s analysis strangely obtuse.  Kindleberger’s three main points about financial crises make no mention of leverage.

First, panic. Kindleberger argued that panic, defined as sudden overwhelming fear giving rise to extreme behaviour on the part of the affected, is intrinsic in the operation of financial markets.[…]

Kindleberger’s second key lesson, closely related, is the power of contagion.[…]

[T]he third positive alternative of international institutions with real authority and sovereignty is pressing.”


Well, doh!  We created a fiat monetary system that confers huge benefits of seigniorage on banks (just as MMT would do for governments) and one thing you can say about human primates is that, historically speaking, they’re as greedy and nasty as chimpanzees.  What group of humans given the ability to print money wouldn’t end up abusing the privilege?

Once the banks capture the regulators, leverage shoots up, and the potential for entirely rational panic, and rationally justifiable contagion, skyrocket. 

Only Acemoglu and Robinson get it, fundamentally.  Mainstream economics is still discussing mechanical models of the economy in the Newtonian mode.

There will be no economic recovery until there is political reform.  And that won’t happen as long as Citizens United vs. US stands as is.

The priests of the status quo always look to the pope for the solution….

As we write, the North Atlantic world appears to have fallen foul to his bad outcome (c), with extraordinary political dysfunction in the US preventing its government from acting as a benevolent hegemon, and the ruling mandarins of Europe, in Germany in particular, unwilling to step up and convince their voters that they must assume the task.

I love that—a “benevolent hegemon”!  If only I could believe that what they don’t mean by that is transferring more bad debt onto the backs of taxpayers, whether overtly or through monetary debasement, aka QE.

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