An amazing article from Harold James. Europeans are looking for lessons the way Alexander Hamilton planned and stitched the US federal financing system (this paper is superb). James provides a short discourse on the topic.
Archive for March 9th, 2012
After Raghuram Rajan’s famous book Faultlines there has been a lot of talk about inequality and how it cause the crisis. Rajan says inequality was rising in US and in order to avoid protests, politicians let people eat cheap credit. As people got cheap money, there were there were no real protests on rising inequality and people moved on. However rising credit led to other weaknesses in the financial system and as it happens in most crisis, a credit euphoria led to a bubble and then a crisis. So that is broadly Rajan’s discourse on why the crisis happened.
This has been countered by Daron Acemoglu saying politicians have stopped responding to needs of lower class a long ago. They have just been looking at the top income class. The latter has captured the former as a result we see higher incomes at the top and rising inequality. The seeds of the crisis were sown by this risk seeking top income class which took up higher leverage and made more and more money. When the risk turned other way, we had a huge crisis on hand.
So if you see the flow of though is quite different. Rajan says the problem came from wrong incentives created by politicians which led lower income class taking higher loans. Acemoglu says politicians created wrong incentives for higher income class seeking more risks and giving out more loans…
So what about the empirics? What does history of previous crises say?
A superb post from Acemoglu/Robinson. Earlier they had pointed how school children in Uzbekistan were forcefuilly made to pick cotton from fields during their school hours.
One of the readers has responded saying schools were not anything different in Egypt either. Instead of devoting school hours to learning, students were forced towards devoting time to singing praises for then-President Mubarak and family.
The quarterly growth rate in investments in India has contracted for second consecutive quarters (Jul-Sep 2011 and Oct-Dec 2011). This has not happened in a while and even during Lehman the decline was for just one quarter (Oct-Dec 2008). Hence, we are looking at much worse times now than even seen when the global crisis got worse.
Kiichi Tokuoka reflects on this decline in investment in this paper and suggests ways to boost it. He says apart from improving macro environment some micro measures like improving financial access, improving doing business rankings etc.