Short answer: smaller banks.
Matt Yglesias points out that Poland has weathered the recession fairly well due to an enormous devaluation to restore competitiveness:
This rough inverse correlation between size of economic unit and quality of outcome (USA, Eurozone = failures; Sweden, Australia, Canada, Israel = successes) suggests that this is about power and money. In smaller countries, where banks don't have the kind of money and sheer size to command the complete attention of the world media when they get in trouble, the power gap between them and the regulators is small. The Israeli central bank can engineer a burst of inflation to work through an economic crisis and he isn't garroted by Tel Aviv bankers. Bernanke, on the other hand, looks to have been completely captured by Wall Street.
This is the reason to break up too-big-to-fail banks—not only because they're systematically risky (which can be true of small banks as well), but to break their power. All incumbent creditors will act to keep inflation as low as possible, it seems. If that means years of depression, so be it. But JP Morgan, with assets of $2.26 trillion (together with smaller firms, of course), has the political clout to strangle recovery. That kind of cash means they get to make sure if someone has to eat a loss, it damned sure isn't going to be them.
Matt Yglesias points out that Poland has weathered the recession fairly well due to an enormous devaluation to restore competitiveness:
Polish Zloty to Euro exchange rate. Note the massive decline in mid-2008. |
Matt O'Brien notes that this is largely due to the fact that Poland engaged in massive currency debasement—seen above—at the height of the crisis.
This is, I think, the closest thing you can find to a constant across countries that handled the crisis well. Smaller countries from Poland to Israel to Sweden were willing to engage in a form of expansionary monetary policy that primarily took the form of currency devaluation. Things look a bit different from the standpoint of a larger, less trade-oriented country but the same basic principle ought to apply.The question, then, is why smaller countries are so much better at macroeconomic management. I think we can dispense with the idea that it's a failure of intellect among elite policymakers. These questions are fairly simple:
We don’t lack for technical means to counter people’s self-defeating impulse to hoard cash and safe financial assets. On the contrary, we have a whole cornucopia of options! The squabbling that has preoccupied me lately, between market monetarists and post-Keynesians and mainstream saltwater economists, is an argument over which of many not-necessarily-mutually-exclusive options would most perfectly address address this not-really-challenging problem.There is no better evidence of this than Fed Chairman Ben Bernanke. He made his academic bones by harshly criticizing the Japanese response to their lost decade. His work back then made the case that Japan could easily escape its economy funk if had enough "Rooseveltian resolve:"
With respect to the issue of inflation targets and BOJ credibility, I do not see how credibility can be harmed by straightforward and honest dialogue of policymakers with the public. In stating an inflation target of, say, 3-4%, the BOJ would be giving the public information about its objectives, and hence the direction in which it will attempt to move the economy. (And, as I will argue, the Bank does have tools to move the economy.) But if BOJ officials feel 18 that, for technical reasons, when and whether they will attain the announced target is uncertain, they could explain those points to the public as well. Better that the public knows that the BOJ is doing all it can to reflate the economy, and that it understands why the Bank is taking the actions it does.Yet today the Fed announced that though not only are they missing their employment target and their inflation target, they're still not going to do anything. It's as if we put Richard Feynman in charge of NASA, and he started talking about creationism and homeopathy. Barring mental illness, clearly something else is at work.
This rough inverse correlation between size of economic unit and quality of outcome (USA, Eurozone = failures; Sweden, Australia, Canada, Israel = successes) suggests that this is about power and money. In smaller countries, where banks don't have the kind of money and sheer size to command the complete attention of the world media when they get in trouble, the power gap between them and the regulators is small. The Israeli central bank can engineer a burst of inflation to work through an economic crisis and he isn't garroted by Tel Aviv bankers. Bernanke, on the other hand, looks to have been completely captured by Wall Street.
This is the reason to break up too-big-to-fail banks—not only because they're systematically risky (which can be true of small banks as well), but to break their power. All incumbent creditors will act to keep inflation as low as possible, it seems. If that means years of depression, so be it. But JP Morgan, with assets of $2.26 trillion (together with smaller firms, of course), has the political clout to strangle recovery. That kind of cash means they get to make sure if someone has to eat a loss, it damned sure isn't going to be them.
Ireland had "smaller banks" in your sense, but they were big enough to capture the regulators. It seems that having your own currency matters more.
ReplyDeleteWell, yeah. Probably should have included a disclaimer that the argument holds only for countries with their own currencies, and also that small size is no absolute guarantee against corruption.
ReplyDeleteStill, I'm most interested in the fact that the US does have its own currency and still can't manage to jumpstart its economy, something that should be pretty easy.
I think there has to be something else at work - in smaller countries the banks are smaller, but it's also cheaper to take control of the government. Sheldon Adelson has most of the Israeli government in his pocket, thanks to a free newspaper that supports Netanyahu that he distributes very aggressively. And yet, there's no austerity plan - there's redistribution of money upward, but no deflationary monetary or fiscal policy.
ReplyDeleteHey Ryan, you got a shout out on Slate.com from one of your favorites. Congrats. Famous is around the corner, Rich is coming up. : ) B
ReplyDeleteHere's hoping :-)
ReplyDeleteHere's a decent explanation: Katzenstein, Peter J. 1985. Small States in World Markets: Industrial Policy in Europe. Ithaca, N.Y.: Cornell University Press.
ReplyDeleteDoes devaluing your currency to "restore competitiveness" still work if everyone's doing it at the same time?
ReplyDeleteI've asked the same question myself. Those guys seem to have it easier with the price of their medical care--among other things.
ReplyDelete