Galbraith on the Texas Energy Debacle

This piece shows very clearly the limits to deregulation in the case of energy markets. Jamie's oped was published in Project Syndicate, and a slightly different version is available here at INET, in which we find out that radical free market policies ended up in what he termed 'selective socialism.' The relevant paragraph:

the price mechanism failed completely. Wholesale prices rose a hundred-fold – but retail prices, under contract, did not, except for the unlucky customers of Griddy, who got socked with bills for thousands of dollars each day. ERCOT was therefore forced to cut power, which might have been tolerable, had it happened on a rolling basis across neighborhoods throughout the state. But this was impossible: you can’t cut power to hospitals, fire stations, and other critical facilities, or for that matter to high-rise downtown apartments reliant on elevators. So lights stayed on in some areas, and they stayed off – for days on end – in others. Selective socialism, one might call it.

There is a short video here too. 

Sunanda Sen on financial integration and national autonomy in China and India

Also in the new issue of ROKE. From the abstract:

The narrative as well as the analysis of deregulated finance in the global economy remain incomplete unless one relates to the surges as well as volatility in capital flows which are experienced by the emerging economies. An analysis as above needs to consider the implications of capital flows in those economies, especially in terms of the ‘impossibility’ of adopting monetary policies which benefit growth in the national economy. There is also a need to recognise the role of uncertainty and the related changes in market expectations in the (precautionary) accumulations of the large official reserves as are held by these countries. The consequences are found to affect the fabric of growth and distribution in these economies. Recent experiences of China and India, with their deregulated financial sectors, bear this out. 

Financial integration and free capital mobility, which are supposed to generate growth with stability in terms of the ‘efficient markets’ hypothesis, have failed, and not only in the advanced economies but also in the high-growth developing economies like India and China. Deregulated finance has led these countries to a state of compliance, where domestic goals of stability and development are sacrificed to make way for the globally sanctioned norms relating to free capital flows. 

With the global financial crisis and the spectre of recession haunting most advanced economies, issues as above in the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete by ignoring the structural changes that result in these developing economies — which are of much relevance to the pattern of financialisation and turbulence in the global economy as a whole.

 Whole paper available here.

Solow on Greenspan's new book and the misrepresentation of the mainstream

Solow's review was published in the New Republic here (h/t Robert Vienneau). Solow has lost nothing of his ironic and acerbic style of criticism. As noted by Vienneau there is a great line at the end about Greenspan's mentor Ayn Rand:

"It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested."

So basically he says Greenspan might be a crank after all. Yet, Solow has actually a couple of nice things to say about the old 'maestro.' For him, the injection of liquidity after the 1987 crash, and allowing the unemployment rate to fall below 6% or so (what most considered the natural rate) suggest that "it is only fair to say that he was a very good chairman of the Fed."

This in spite of his "two big mistakes." One mistake was allowing (I would say almost promoting) the housing bubble. The other, the relevant one for Solow, was his:

"deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike."

If  being a monetary crank that shares responsibility for the deregulation of the financial sector and the current global crisis (let alone his role in the Bush tax cuts, or his promotion of cutting Social Security benefits) does not make him a terrible Fed chairman, I don't know what would.

Also, I think Solow is right, Greenspan does not represent well the more moderate New Keynesian mainstream. Yet, in many respects his sort of fringe radical right wing Ayn Rand version of the mainstream, like supply side and Austrian economics, is also part of the mainstream and shares several crucial elements. I would argue that the problem with Greenspan is NOT that he misrepresents the mainstream, but that his deregulation mantra is perfectly compatible with the mainstream. Lets not forget that Larry Summers (a New Keynesian that favors fiscal expansion and is concerned about the possibility of secular stagnation now) was during the Clinton era presiding over deregulation.

Gennaro Zezza: Fiscal and Debt Policies for Sustainable U.S. Growth

New paper by Gennaro Zezza

From the abstract:

In our interpretation, the Great Recession which started in the United States in 2007, and propagated to the rest of the world, was the inevitable outcome of a growth trajectory based on fragile pillars. The concentration of income and wealth, which started rising in the 1980s, along with the stagnation in real wages made it more difficult for the middle class to defend its standard of living, relative to the top decile of the income distribution. This process increased the demand for credit from the household sector, while deregulation of financial markets increased the supply, and the U.S. economy experienced a long period of debt-fueled growth, which broke down first in 2001 with a stock market crash, but at the time fiscal and monetary policy managed to sustain the economy, but without addressing the fundamentals problem, so that private (and foreign) debt kept increasing up to 2006, when a more serious recession started. At present, the long period of low household spending, along with personal bankruptcies, has been effective in reducing private debt relative to income, and, given that the problems we highlight have not been properly addressed yet, growth could start again on the same fragile basis as in the 1990-2006 period. In this paper, adopting the stock-flow consistent approach pioneered by Wynne Godley, we stress the need for fiscal policy to play an active role in (1) modifying the post-tax distribution of income, which along with new regulations of financial markets should reduce the risk of private debt getting out of control again; (2) stimulate environment-friendly investment and technological progress; (3) take action to reduce the U.S. external imbalance, and (4) provide stimulus for sufficient employment growth.

Read the rest here.

Kevin Gallagher on China and financial deregulation

Kevin Gallagher explains why financial deregulation in China would be a huge mistake. In his words:

"Rumor has it that China is set to accelerate the de-regulation of its financial system.

For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country.

While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth."

Read the rest here.

Financial sector growth before the Global Crisis

The graph below shows the the share of the Finance and Insurance industry in the GDP of the United States, estimated from 1850 to 2007 (source here; h/t to Eric Mielants for bringing the paper to my attention).

Note that basically there are three periods of increase in the financial sector's participation in GDP, the late 19th century, the 1920s, and if one discounts the partial recovery from the collapse during the Great Depression and WW-II period, the 1980s onwards. Deregulation has obviously something to do with this increase.