Lance Taylor, Professor, New School for Social Research is asked this question. He answers it as No!
Archive for the ‘Speech / Interviews’ Category
First of all, Happy Diwali to all the viewers of this blog. Hope you all had a great time and continuing to have one on a really extended set of holidays.
It has been a while since this blog last posted. What better way to start than to point a speech linking Diwali with central banking. I had pointed earlier how Central Bank of Trinidad and Tobago celebrates Diwali keeping all these mythological stories as its theme. Earlier ones were on Ramayana and this year it is on Lord Shiva:
Linkages are obvious. But we usually do not see a speech where one talks about financial centres.
Thomas J. Jordan chief of Swiss National Bank gives a speech on the topic. Most don’t know but Swiss have had three financial centres – Geneva, Basel and Zurich. Eventually, Geneva emerged as the preferred one.
Prof. Frederic Payor of Swathmore College has had some experience in life. He was mistook for a spy in East Berlin due to his dissertation on Russian economy! The topic of dissertation was on the foreign trade system of the Soviet bloc.
All this interesting titbit was hardly known till Steven Spielberg/Tom Hanks did not play the events in their recent movie – Bridge of Spies.
In this interview, Prof Payor narrates the experience and how closely the movie captures reality:
Nice interview of later Prof. Stanley Hoffmann, a longtime , professor of international relations at Harvard University.
Michal Matlak: Europe is not in good shape.
Stanley Hoffmann: Any American newspaper will tell you this. Those poor Europeans, they don’t know what they are doing! I am originally from France, and I recently went back to see some friends. It looked perfectly normal to me. They are not exactly doing brilliantly, but the notion that the whole thing will collapse, that there will be no EU, is plainly absurd. There are ups and downs—this is a period of down, but it is not the end of the story.
This is big irony really. India is one of the highest (ok “the highest”) growing country in the world. But it feels like a recession here.
Good stuff on Europe, history, politics and so on..
Nice interview of Patrick Barron of Mises Institute. Exposes all the fancy talk done by central bankers across the world:
Our guest this week is Patrick Barron, a professor of economics and a student of global currency markets. Patrick and I dissect the Fed’s big announcement this past week not to raise interest rates, and consider whether Janet Yellen and other central bankers really believe in what they’re doing.
Is it all just to save themselves from the judgment of history, by kicking the can down the road? Have they read, or even considered, Austrian arguments on money and banking? Or are they simply so wedded to Keynesian orthodoxy that they literally don’t know what else to do? And what type of precipitating events might spell the end of US dollar imperialism?
Most pessimists of a certain economy/economies have their day someday. So, time is ripe for China’s pessimists and they go abuzz saying “Didn’t I I tell you”? All this while those who built their careers over China’s optimism have been shrugged aside. How quickly the tides turn really.
Jim Chanos the China pessimst is one such fugure. In this interview, he calls the country as an emperor with no clothes. It is still not naked but is getting there:
Prof Marc Lavoie of University of Ottawa has written a book on curriculum reform in economics – Post Keynesian Economics; New Foundations. He talks about the need to rethink economics and what his book has to offer:
Mainstream economic theory has been increasingly questioned following the Global Financial Crisis of 2008. The disconnect between reality and theory manifested itself most clearly when the Queen of the United Kingdom pointedly asked why no economist saw this coming. In truth, there were a handful who did get it right, but they were generally ignored in favour of Ivy League educated neo-classical economists, whose assumptions proved incapable of integrating the financial and real sides of the economy.
This is a problem which extends all the way to the classroom, which is why Marc Lavoie, a professor of economics at the University of Ottawa, wrote a new economic textbook as a coherent substitute to conventional textbooks. The book, “Post Keynesian Economics; New Foundations”, outlines alternative macro and microeconomic foundations, the upshot being a book that acknowledges that we live in a world of fundamental uncertainty, where the role of finance goes well beyond the simplistic reserve banking models that populate most undergraduate studies.
In this interview, Lavoie discusses the methodological foundations of heterodox economics, and offers a very different model of money and credit, firms and pricing, consumer theory, effective demand and employment and growth theories. As Lavoie himself argues, economists essentially had 3 reactions to the recent financial crisis. The first group has been to say that existing mainstream theory is fine, but that it needs to be slightly tweaked and improved so as to take into account elements that were previously left aside and which explain why the crisis could not be predicted. The second group, the so-called “freshwater economists” argue that the crisis was caused by misguided regulations, bad government interventions, ill-advised decisions by central banks, public profligacy and unsound fiscal policy. The third camp (to which Lavoie belongs and which forms the basis of the books prevailing theme) is to claim that recent institutions, regulations, and economic policies have been based on erroneous economic theories, and that these need to be eliminated, starting with the way we teach economics – hence the rationale for the new textbook.
Should be an interesting read. Though, I think we already know what is wrong. Much has been written about it already. We now need action on this front..
Oliver Blanchard, the outgoing chief economist of IMF gives this interview on lessons learnt (both for himself and IMF) and way going forward.
He is joining the Peterson Institute for doing more serious research on the lessons he has learnt over these years. This is really interesting to see. How most US based economists actually look forward to doing more research after holding such high offices. They just join the thinktanks/univs and devote more time to research. In most other countries, we usually see such experts shuttling from one high office to the other. The econs in US wished to be known for their academic contribution and not just some policy hogwash.
Moving to the lessons learnt:
How times have changed. Earlier any mention of markets automatically meant it is real and good for the people. Not anymore.
Mark Carney of BoE (while releasing the Bank’s Fair and Effective Markets Review Releases Final Report) says we need to build such markets:
Almost 350 years ago, the Great Fire destroyed the City of London and rendered 100,000 people homeless. It took half a century to rebuild. The legacy of the Great Fire endures, including such Wren masterpieces as St Paul’s and his twenty-five other steeples that survive today within the City’s precincts. But the Fire’s legacy is not limited to how the City looks, it extends to what the City does.
The blaze led Nicholas Barbon to establish the first insurance company, an innovation to fulfil a social need: the sharing of risk. Public authorities complemented private initiative.
There was a Royal Proclamation that set standards for wider roads and houses built from brick and stone instead of timber. And Parliament passed the Parish Pump Act to prevent “mischiefs that may happen by fire” by establishing fire brigades and improving water supply. So that spark in Pudding Lane ignited much more besides the Great Fire itself:
- the provision of liquidity to limit contagion;
- a recognition that clear, well-understood codes contribute to the greater good; and
- a belief that financial markets can solve real world problems.
From the coffee houses that served as meeting places for entrepreneurs and merchants; to the exchanges that supported the trading of financial claims; to a central bank that acted as lender of last resort: a rich infrastructure developed to support markets that served the UK and the world. As it grew into the world’s leading economic and trading power, the UK also became its centre of financial capitalism.
By the early 20th century, though no longer the world’s largest economy, the UK was still its hub of international finance. It held close to a half of the world’s stock of overseas investments and traded one third of all negotiable instruments.
The City has retained its pre-eminence through market innovation. From eurobonds to emerging market debt, credit derivatives and centralised clearing; the City has continually created new financial products and markets to serve the real economy. Today the City remains the leading global financial centre. The UK is the venue for 40% of foreign exchange trading volume, half of all trades in OTC interest rate derivatives, and more than two-thirds of trading in international bonds. More international banking activity is booked in London than anywhere else, and the UK is host to the world’s third largest insurance sector as well as its second largest asset management industry. UK markets matter for global commerce. But above all, our markets matter for our prosperity.
How this crisis changed things:
Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes.
Poor ‘soft’ infrastructure such as codes of conduct that too few read and too many ignored.\ Faulty ‘hard’ infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and Weak banks whose light capital and heavy reliance on short-term funding created a tinder box.
Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings. That informality was well suited to an earlier age. But as markets innovated and grew, it proved wanting.
Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability. This has had direct economic consequences. Mistrust between market participants has raised borrowing costs and reduced credit availability. Falling confidence in market resilience has meant companies have held back productive investments. And uncertainty has meant people have hesitated to move job or home. These effects are not trivial, and they have reduced the dynamism of our economy in the post-crisis years.Widespread mistrust has also had deeper, indirect costs. Markets are not ends in themselves, but powerful means for prosperity and security for all. As such they need to retain the consent of society – a social licence – to be allowed to operate, innovate and grow. Repeated episodes of misconduct have called that social licence into question.
We have all been let down by these developments. And we all share responsibility for fixing them.
It is really surprising to see such reflections. For all you know, BoE and London were seen as the benchmarks for anything in finance.
What are real markets?
I believe everyone in this room would agree: we need real markets for sustainable prosperity. Not markets that collapse when there is a shock from abroad. Not markets where transactions occur in chat rooms. Not markets where no one appears accountable for anything.
Real markets are professional and open, not informal and clubby. Participants in real markets compete on merit rather than collude online. Real markets are resilient, fair and effective. They maintain their social licence. Real markets don’t just happen; they depend on the quality of market infrastructure.
Robust market infrastructure is a public good, one in constant danger of under-provision because the best markets innovate continually. This inherent risk can only be managed if all market actors, public and private, recognise their responsibilities for the system as a whole. The City has a special responsibility given London’s pre-eminent position in global markets, which is why it has already brought so many ideas and such energy to advance financial reform.
He then goes onto the various reforms underway to make financial markets real markets. It is ironical to see markets being shaped by govts and central banks of all players.
The key is humility and not let hubris set in. For years we have been told that we have arrived at a perfect real market framework which will continue to deliver prosperity to people. And then it was upto others to inch towards this kind of policy setting. And now we know how much of these ideas were not just plain wrong.
Stan Fisher sums up the lessons he has learnt over the years.
He misses the most important lesson – know the financial history and know it really well. Infact history is not even a word in the speech. Infact, if one follows history then you are unlikely to hype certain phases of economic and stock market growth as a new dawn or something. And then as the crisis enfolds, you know what you have to do. After all, there is nothing unique about having a crisis. History keeps you humble and grounded.
Another thing is how despite likes of Prof. Fisher wanting to be seen as market promoting economists, actually just talk about government and central bank interventions. These evry interventions end up sowing the seeds of the next crisis.
Personally, I think IDFC was made into a bank a wee bit too early. Given how China and even India is pushing new development financial institutions to fund infra, we might have to soon look at domestic front too. We actually might need a few more IDFCs in future. Anyways, nothing can be done now. In finance, we have to go in circles and keep pulling out old wine in new bottle.
In this interview, IDFC chief Rajiv Lall explains how the transition is happening. Interestingly, the bank starts big from MP of all places:
Nice speech by G Padmanabhan, retiring ED of Indian central bank http://www.bis.org/review/r150410c.pdf
He handled the forex department and tells this useful story of evolution of Indian forex market. A good read..
One big lesson from the recent crisis should have been to ignore whatever econs and their inspired central banks have been telling us for some years now. Their role should have been marginalised. But the dependence on them and their wisdom has only risen.
We were told by celebrated econs that how central banks could have avoided great depression only if they eased their policy for an extended period of time. This became a wisdom of sorts and accepted at a wide scale. We could have only known the utility if this wisdom if there was another such crisis and had to wait for nearly eighty years for such an event to occur. And as the event struck, the ideas were implemented in frenzy. This was to ensure if Lords of Finance part II is written, it has just the opposite results. Alas we now know the limitations of this frenziness. It is all over the place.
In this spirit, it is interesting to read this speech by Kirsten Forbes of BoE. She invokes the lessons from King of Midas and how central banks behaved like one:
When the legendary King Midas initially received the power to turn everything he touched into gold, he deemed it highly successful; the benefits of being able to create immense wealth with simply the touch of his finger far outweighed any costs. During the financial crisis, many central banks used less glamorous tools to create base money – sharp reductions in interest rates and quantitative easing. These measures played a critically important role in helping economies stabilize and recover.
King Midas soon realized, however, that this power of wealth creation came with unexpected side effects – from making his food inedible to turning his daughter into a lifeless statue. As these costs accumulated, King Midas eventually wished to give up his “golden touch” and return to normality. Similarly, is the current UK policy of near-zero interest rates beginning to generate substantial costs? Is there a point where any costs accumulate such that they outweigh the benefits? Could near-zero interest rates become less “golden”?
And then we have a similar kind of story. What were cited as the benefits of low rates have become limitations as well.
But the Ms. Forbes story is incomplete. It is actually the case that central bankers behave like King Midas most of the time. They wash their hands but then quickly forget the lessons and become the king again. Whether rates are low or high, they try and behave like King Midas. The whole idea is to show that there is some magic to their actions and things will indeed turn into gold. They have a huge audience in the name of market players and media which keeps wishing for the magic. The monetary policies have become a huge magic show of kinds in the process.
In reality central banks are like those tailors which designed clothes for the king with economy being the king. Only to realise the king had no clothes really. If the illusion works, they are called as magicians and all kinds of awards are honored. As reality sicks in, the yesteryear heroes are discarded and new ones created. The game of illusion goes on.
As academicians, they keep warning us over the monetary illusion but there is a huge demand for being an illusionist. The aura and power of being the king is too tempting for anyone to ignore.
So the game shall continue…