How Mrs Thatcher smashed the Keynesian consensus

Apr 9th 2013, 14:13 by G.I. | WASHINGTON, D.C.

[Greg Ip] In March 1981, 364 eminent British economists published a letter to Margaret Thatcher in The Times condemning her plans to hike taxes even as her monetarist attack on inflation plunged the economy ever deeper into recession. The signatories wrote:

There is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment … [P]resent politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.

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What QE means for the world: Positive-sum currency wars

Feb 14th 2013, 23:24 by G.I. | WASHINGTON, D.C.

Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.

The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.

But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s. To understand why, consider how monetary policy influences the trade balance and the exchange rate.

The Fed, the budget and the economy: Policy fatigue

Policymakers seem helpless in the face of bad economic news

Jun 9th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN America’s economic recovery stalled last summer, Washington swung into action. The Federal Reserve announced it would buy $600 billion of government bonds with newly printed money, pushing down long-term interest rates. Then, at the end of the year, Barack Obama struck an agreement with the Republicans to cut payroll taxes and extend unemployment benefits.

Economic history seems to be repeating itself, in part. A promising recovery is again sputtering as job growth, which averaged 220,000 from February through April, slumped to 54,000 in May. The unemployment rate rose to 9.1%, the second monthly increase in a row (see chart). The economy grew at just a 1.8% annual rate in the first quarter and probably only a little faster in the second. Though not a double dip that barely qualifies as a recovery.

The response from Washington, however, is quite different from last year.

The entire article is linked here.

The history of finance: The man who stamped the crash

How Ferdinand Pecora won the blame game

Nov 11th 2010

The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance. By Michael Perino. Penguin Press; 352 pages; $27.95. Buy from Amazon.co.uk

[Greg Ip] FINANCIAL crises have many causes and multiple actors. Sometimes, though, a single, electrifying interpretation emerges to capture the public imagination and dominate the political response. It has yet to happen with the current crisis. But for the Depression it struck dramatically over a mere ten days in early 1933, just before Franklin Roosevelt took office.

In the years after the 1929 crash, Wall Street, except for a few scoundrels, had largely escaped broad condemnation, portraying itself guilty of nothing more than the same irrational exuberance that had seized ordinary investors. In his entertaining new book, “The Hellhound of Wall Street”, Michael Perino recounts how Ferdinand Pecora, the tenacious and theatrical chief counsel to the Senate Committee on Banking and Currency, altered that impression. By the time Pecora was finished, the public saw Wall Street’s finest not as bystanders but as malicious purveyors of the misfortune that had affected millions.

The original article is linked here.

The Financial Crisis Inquiry Commission: That 1930s show

Jan 7th 2010 | WASHINGTON, DC 
From The Economist print edition

A Depression-era crusade against Wall Street has a 2010 revival

Getty Images

Pecora in his pomp

[Greg Ip] THE battle against the financial crisis may be ending, but the war over why it happened has barely begun. The most ambitious effort yet to settle the story begins next week with the first hearing of the Financial Crisis Inquiry Commission.

Congress gave the ten-member bipartisan commission a sprawling mandate: to investigate at least 22 potential causes, from excess global savings to short-selling, and to explain why specific firms collapsed or needed bail-outs. The report, due by December 15th, is not supposed to contain recommendations but probably will.

Though modelled on the body that investigated the attacks of September 11th 2001, the spiritual father of this venture is the Pecora Commission.

The use & abuse of economic history

 

80 years after the crash that ushered in the Great Depression, we’re not repeating history’s mistakes. We’re making our own.

By Greg Ip

Sunday, October 25, 2009

 Book review of:

THIS TIME IS DIFFERENT: Eight Centuries of Financial Folly,  By Carmen M. Reinhart and Kenneth S. Rogoff, Princeton Univ. 463 pp. $35

THE CREATION AND DESTRUCTION OF VALUE: The Globalization Cycle, By Harold James, arvard Univ. 325 pp. $19.95

The Dow’s recent vault back to the neighborhood of 10,000 inspired a sense of relief far more than it did any urge for celebration. We have been through a dreadful recession, but at least, the market tells us, we have avoided a depression.

Or have we? This week marks the 80th anniversary of the crash that ushered in the Great Depression. In recent months, the Dow’s behavior has eerily mimicked those dark days when the index leapt from its 1929 lows to rally 48 percent into 1930. It was a false dawn: The worst of the Depression was still to come.

A popular refrain during our modern-day financial crisis is that we have forgotten the lessons of economic history. But Americans are not ignorant of the past: Many are obsessed with it. Countless investors scrutinize stock charts and bet on history repeating itself. However, few win this way. Our problem is not ignorance of history but an inability to know which bits are most relevant to the present.

What if Lehman had not failed?

The original article is linked here.

Economics focus

What if?

Sep 10th 2009
From The Economist print edition

If Lehman had not failed, would the crisis have happened anyway?

Illustration by Jac Depczyk

 

[Greg Ip] IN AUGUST 2008 Kenneth Rogoff, a Harvard University economist, briefly rocked world stockmarkets when he warned a conference in Singapore: “We’re not just going to see midsized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one—one of the big investment banks or big banks.” A month later, in the early hours of September 15th, Lehman Brothers filed for bankruptcy.

Response to Meltzer on Depression comparisons

 

Unlike any since the Depression

Posted by:

The Economist l WASHINGTON

Categories:

Monetary policy

[Greg Ip] IN MY many years of reporting on the Federal Reserve, I have turned more times than I can count to Allan Meltzer. Volume One of his history of the Federal Reserve (he’s still working on Volume Two) is one of the most thumbed books on my shelf, and I consider him one of the leading authorities on 20th century economic history. Naturally I was intrigued by his criticism of comparisons between the current period and the Great Depression in the Wall Street Journal.

It’s a fascinating piece but I have several qualms with it.

Government and business in America: Piling on

The original story is available here.

May 28th 2009
From The Economist print edition

In his zeal to fix capitalism, Barack Obama must not stifle America’s dynamism

Illustration by KAL

 

DEFENDING American capitalism these days is a thankless job. Reckless lending by American financiers produced a crisis that has pushed the world into its worst recession since the 1930s. Tales of greed and fraud during the boom years abound.

Small wonder that although Americans still prefer their government neat and local, they are a little less hostile to federal activism these days (see article). Such sentiments, last November, helped propel Barack Obama into the White House and his Democratic Party to bigger majorities in both houses of Congress. As Rahm Emanuel, the president’s chief of staff, says, Mr Obama does not want to waste this crisis. He is using it to create a bigger role for government throughout the economy, from education and health care to banking and energy.

He, and Congress, risk overreaching.

Government v market in America: The visible hand

The original article is available here.

May 28th 2009 | INDIANAPOLIS AND WASHINGTON, DC
From The Economist print edition

Americans have grown slightly more receptive to the idea of an activist government. Will they go along with Barack Obama’s aspirations?

Alamy

 

THE demonstrators thronging the steps of the war memorial in central Indianapolis are a small but spirited bunch. Steps away from the head office of one of the country’s biggest health-insurance companies, they chant slogans calling for a single government-run health plan and wave signs with slogans like “One plan one nation” and “Patients not profits”. One cheekily advises: “Accept personal responsibility. Do your own colonoscopy”. After pursuing their cause for years, advocates of universal health care got a jolt of energy when Barack Obama took office. “Something happened in January that changed our cultural story for ever,” a folk singer tells the crowd before launching into a song, “If not now, tell me when.”

Across the street, an argument breaks out. Dennis Majewski, a public-defence lawyer, agrees with the protesters. “We’ll never rebound until we have national health-care insurance.” But should the government look after “a known druggie whose drug habit gets him to the point he is seriously ill?” queries his cousin, Tom Majewski, a retired executive. Well, yes, says Dennis: “That person has a serious illness.” Tom shoots back: “But it’s a choice!”

The debate in Indianapolis is a microcosm of a broader re-examination by Americans of government’s role in the economy.