I thought this article was more interesting than CAPRU today. There will still be a CAPRU, but you will have to go to 1337hax0r.com to see it as I should only post one article a day on DailyKos.
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This is slightly older news, but with Geithner's plan being announced at the beginning of this week, and the DJI jumping 500 points in a single day after the announcement (up 600 points so far this week), I thought it would be appropriate. Remember, like Geithner or not, he's not going to be leaving anytime soon because if he did the whole system would be in a worse mess than it already is. Regardless, we are finally seeing the end of the cult of Friedman and I personally believe it's a good thing. It's about time for economics to rethink the ideological crap that is being peddled as "fact" or "truth." The same crap that led to the credit crisis and this recession.
Brad DeLong at the Week has a nice overview of how exactly an overapplication of Friedman economics is a big cause of the current global economic crisis:
The power of Friedman’s theory was, in part, rhetorical. "Keep the money supply growing smoothly" sounds like it means to keep the presses in the Bureau of Engraving and Printing rolling at a constant pace, printing out a steady flow of pictures of George Washington. But that is not how "money supply" actually works. In economic reality, "money supply" means not just cash money but also credit entries the Federal Reserve has made in commercial banks' accounts at the Fed; plus all the credit entries commercial banks have made in households' and businesses' checking accounts; plus savings account balances; plus (usually) money market mutual-fund balances; plus (sometimes) trade credit and the ceilings between credit card limits and consumers' current balances.
No central banker controls all these vast and varied sluices of the money supply – at least not in economic reality. When banks and businesses and households get scared and cautious and feel poor, they take steps to shrink the economic reality that is the "money supply." Businesses extend less trade credit. Credit card companies cut off cards and reduce ceilings. Banks call in loans and then take no steps to replace the deposits extinguished by the loan pay-downs. Without a single bureaucrat making a single decision to slow down a single printing press, the money supply shrinks—disastrously in episodes like the Great Depression. Thus in emergencies, to say that all the central bank has to do is to keep the money supply growing smoothly is very like saying that all the captain of the Titanic has to do is to keep the deck of the ship level.
So now the central bankers have thrown up their hands, and asked for help to stimulate spending through tax cuts and government expenditures. Because they have run out of means to "keep the money supply growing smoothly."
Today, we have reached the end of the line for the Chicago view of financial deregulation. Friedman thought (a) that the central bank could exercise enough influence over the money supply to effectively control it, and (b) that banks and other financial intermediaries would be regulated tightly enough that what is now happening would be impossible. But he never resolved the tension between his view that banks need controls and the Chicago view that business must be unfettered.
While I agree that monetarism ca nbe a great government policy when the economy is balanced, it really fails when the black swan of massive banking collapses occur and it is completely unprepared for positive black swans as well. Since monetarists don't encourage diversity (as Ulanowicz discusses in his white paper to be published soon) in any sectors, including the banking sector, there is no buffer to deal with major bank collapses. I understand the populist anger that the men who perpetrated this crap need to be punished, but now is not the time for beating eachother up and laying blame -- It is important to get the money supply moving again, and these toxic assets out of the system.
At the risk of being hugely unpopular, I think Geithner's plan is actually a reasonable way to get credit moving again without exposing the US taxpayer to a lot of risk. Once it is in place, however, it is essential that the Obama administration (and administrations worldwide) sit down and establish diversity based policies to deal with the possibility of future bank collapses. In other words, force a diversity of banks at the loss of efficiency, that way if one bank goes bad you don't have so many eggs in one basket.
This is similar to the "hit-by-a-bus" rule of human resources. (i.e. Make sure that if any person in your organization were to be hit by a bus, the entire business structure doesn't fail.) By regulating banks and enforcing some level of diversity, it actually leads to less need to have an abundance of regulation overall. Why? Because if some banks fail, the entire system doesn't fail as the network is more resilient.
Similarly, by having more diversity there is not only a better chance of weathering bad "black swans", but a good chance of picking up more positive "black swans," for the benefit of everyone. More banks == more competition == better for everyone in the end.
Unfortunately, this fundamentally requires some form of regulation (or government policy) to force diversity over efficiency and now that the Friedman stranglehold over our economics discussions has finally been released, this may happen.
Regardless, I know regardless of what happens, we'll all come out of this stronger.
1337hax0r.com