Liberty & Power: Group Blog
Entries by Jeffrey Rogers Hummel
Sunday, March 7, 2010
Excellent EconTalk Podcast
Check out Russ Roberts's recent interview with Michael Belongia (University of Mississippi), in which they discuss the operations of the Fed. Although I do not agree with all of Belongia's proposed reforms, he has many insightful observations that complement some of the arguments that David Henderson and I have made. For instance:
1. An early draft of our article on Greenspan exposed the Vockler myth, arguing that Vockler's monetary policy was not as tight as many believe and that his role in bringing down inflation in the early 1980s is grossly exaggerated. That section was edited out of all the published versions as too much of a digression, but Belongia offers some surprising (and even chilling) confirmation of our claim.
2. Belongia not only wholeheartedly agrees that interest rates are a poor way of gauging monetary policy, but he goes so far as to argue that, over the period when everyone claims that Greenspan's policy was expansionary, it was in fact too tight.
3. Belongia manages to score some significant points against the Taylor Rule, pointing out that if it had been subjected to the same standards that led to the rejection in the mid-1980s of money stock measures as a target for monetary policy, the rule would have been abandoned long ago. (For more on the ambiguity of the Taylor Rule, see this post by Brad DeLong.)
Friday, March 5, 2010
Excellent Short Discussion of the Crisis
Gary Gorton is a monetary and financial historian who wrote a widely cited and well respected paper a couple of years ago on "The Panic of 2007," in which he explained more clearly and in greater detail than anyone else how such recent innovations as CDOs and SIVs worked and then interacted during the financial crisis. He has now written a shorter "Questions and Answers about the Financial Crisis," which I think is one of the most important contributions to explaining what happened. It ranks right along side the EconTalk interview with Charles Calomiris. Basically Gorton argues that there was a sudden, partly unrecognized panic in the market for repurchase agreements (also known as RPs or Repos) at the end of 2007.
RPs are close money substitutes. Bank-issued overnight RPs were an important way banks got around regulations so they could pay high interest to large depositors in the 70s and early 80s, and were counted in M2 until 1997, when the Fed moved them into M3, where it already counted term RPs issued by banks. Gorton's analysis implies that I was seriously mistaken about the insignificance of the Fed's ceasing to report M3 in February 2006. M3 was discontinued just at the moment it was diverging from M2 and providing important information not otherwise available about certain monetary instruments.
Gorton's paper also clears up some other things that puzzled or intrigued me. Among them:
Monday, January 18, 2010
Haiti's Earthquake as France's Problem
Tunku Varadarajan has written an article for the Daily Beast that is well worth reading. Libertarians will disagree with the author's policy prescription, not holding today's French taxpayers responsible for misdeeds of the French government done in the past. Nonetheless, his historical perspective deserves more attention.
Hat Tip: Bill Evers
Monday, December 21, 2009
The Velvet Revolution: 1989
A recent issue (November 5, 2009) of the New York Review of Books has an insightful review of several books about the collapse of Communism. Written by Professor Timothy Garton Ash of Oxford and the Hoover Institution, one of the most important paragraphs is the following, vividly illustrating the advantages of an unintentional non-intervention on the part of the U.S.:
"Yet even though Washington's cautious attitude partly resulted from a misassessment, this was actually the best possible position it could have taken. This time around, unlike in 1956, no one in Moscow could suggest with even a jot of plausibility that the United States was stirring the cauldron in Eastern Europe. On the contrary, Bush personally urged General Wojciech Jaruzelski to run for Polish president, as a guarantor of stability, and he was obsessed with doing nothing that could derail Gorbachev. Sarotte suggests that American restraint made it easier for the Soviet Union, too, to step back and let events unfold on the ground in East-Central Europe. With some exaggeration, one might say that Washington got it right because it got it wrong."
Saturday, October 31, 2009
Daylight Savings Time
As we approach the annual ritual of coming off Daylight Savings Time (or more properly, Daylight Saving Time, without the "s" as the end of "Saving"), we should remind ourselves of the dubious and unsavory origins of this seemingly innocuous form of government central planning. Like so much else the government does, Daylight Saving Time arose during war. Germany, pioneer of so many other forms of modern statism, was the first to impose the practice as an energy saving measure during World War I. Most of the other warring governments, including the United States under the perniciously meddlesome administration of president Woodrow Wilson, soon followed Germany's lead. Considered only an emergency act, Daylight Saving Time was repealed within the U.S. in 1919, over the veto of Wilson, who as an avid golfer wanted to keep the practice permanent. The repeal was supported by Wilson's heroic successor, President Warren G. Harding, who considered Daylight Saving Time a "deception."
During World War II, Congress enacted YEAR-ROUND Daylight Saving Time, again to conserve energy. In September 1945, at the war's end, what was officially designated as "War Time" was again repealed, leaving the practice entirely up to states and localities. This created a patchwork system, in which different states would start or come off Daylight Saving Time on different dates, if at all. As a result, United Airlines reportedly had to publish twenty-seven different time tables each year. So it was the airlines, along with other transportation industries, that lobbied for national uniformity, which was embodied in the federal Uniform Time Act of April 1966.
Under this act, state governments can exempt themselves from Daylight Saving, as long as the exemption applies to the entire state (or if the state is divided into more than one time zone, to at least the area encompassing one of the zones). Only two states still take advantage of this option: Arizona and Hawaii. Congress also subsequently played around with the starting and ending dates, shifting them for assorted reasons, with the last change (so far!) being enacted in 1987.
Yet there has never been any solid evidence that Daylight Saving Time saves energy. For an economic critique of the practice, see the article by William F. Shugart II, "Time Change Could Prove Hazardous to Your Health":
Monday, September 21, 2009
Depression Discussion at Cato Unbound
My contribution to this month's discussion, "Monetary Lessons of the Not-So-Great Depression, at Cato Unbound has just been posted. The original contribution form Scott Sumner, (of The Money Illusion blog), appeared last Monday, followed by comments from James Hamilton (who posts at Econbrowser) and George Selgin.
Tuesday, September 8, 2009
Books to Baghdad
I just received this worthy request from a colleague:
Dr. Fariq Kasem in History Department at the College of Education, Basrah University needs the works below for his research. Anyone wishing to donate photocopies of the works (or the works themselves), please send them to the address given below:
1, Adenauer, Konrad. Memoirs, 1945-1953, Vol.III. Washington, DC: Regnary Publishing, 1983 (or any English edition).
2. Anders, Wladyslaw. The Crime of Katyn: Facts and Documents. London: Polish Cultural Foundation, 1965.
3. Catudal, Honore Marc. Kennedy and the Berlin Crisis. Berlin: Verlag, 1980
4. Wandycz, Piotr. The United States and Poland. Cambridge: Harvard University Press, 1980.
5. Mikolajczyk, Stanislaw. The Rape of Poland: Pattern of Soviet Aggression. Whitefish, MT: Kessinger, 2008 (or any English edition).
6. Zochowski, Stanislaw. British Policy in Relation to Poland. New York: Vantage Press, 1988.
7. Polish-Soviet Relations, 1918-1943: Documents. New York: Polish Information Center, 1943, (also Wash. DC: Polish, 1943).
8. Any books on Indonesia, 1945-1950.
Please send books, donations, or queries to:
Books to Baghdad Program, Dr. Jonathan P. Roth, Department of History, San Jose State University, San Jose CA 95192-0117, (408) 924-5505, jonathan.roth@sjsu.edu
Monday, August 17, 2009
Unveiling Lincoln as Politician
In the New Republic for July 15, 2009, Sean Wilentz has an extended review essay covering seven recent books on Abraham Lincoln. Highly critical and sometimes a bit too unkind with trivial criticisms, the essay is still well worth reading. One of the books Wilentz negatively reviews was written by John Stauffer, who also has been involved in controversy over his co-authored book on the Free State of Jones, as reported by David Beito in a recent post on this blog.
Wednesday, August 12, 2009
Harvard Economist Ken Rogoff on the Future
"Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three."
Rogoff shows his political bias by leaving off the elimination of government programs as one of the theoretical options, although he may think of that as default. But he still has the dilemma right. He also appreciates the fundamental problem in the financial system:
"The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance. The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe."
Read the article here.
Hat Tip: Arnold Kling
Sunday, August 9, 2009
Article by Hetzel on the 2008-2009 Recession
I recently read a somewhat technical but quite good article by Robert L. Hetzel on "Monetary Policy in the 2008-2009 Recession," from the Spring 2009 issue of the Federal Reserve Bank of Richmond Economic Quarterly. Like Scott Sumner, whose blog alerted me to this article, Hetzel argues that a minor recession (brought on possibly by the housing shock) was turned into a major panic by monetary policy that was too tight! Hetzel thus agrees with David Henderson and me in exonerating Greenspan of much blame for the crisis. He also alludes to something that has been ignored by many commentators: how Milton Friedman's research on the Great Depression, which emphasized the demand-side impact of the bank panics, is quite different from Ben Bernanke's, which emphasized the supply-side impact. This difference implies significantly different policies: a general increase in liquidity in the case of Friedman versus targeted (and until last October, sterilized) bailouts in the case of Bernanke. Hetzel goes on to distinguish between credit-cycle views of recessions versus quantity-theory views (like Friedman's). Credit-cycle views are all the rage now, among economists and non-economists alike, including Bernanke and many at the Fed, but Hetzel blames such mistaken theories for remedies that aggravated both the Great Depression and the current recession. In the process, he resurrects strong historical evidence from Friedman and Schwartz's monetary history demonstrating the falsity of credit-cycle explanations for the Great Depression. Despite some inevitable disagreements and reservations, I think Hetzel's article is well worth study.
Friday, August 7, 2009
Small Coins and Britain's Industrial Revolution
History News Network has just posted my review essay on George Selgin's excellent book, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821.
Wednesday, August 5, 2009
Sovereign Default Under Fiat Currencies
In a recent comment on my article predicting Treasury default, Bruce Ramsey asked, "When has a government ever defaulted on debt in its own fiat currency? It's difficult to imagine this." I'm reminded of a quotation from a 1991 Gordon Tullock article: "There is a myth that floated around the banking community not many years ago that governments do not go bankrupt. I cannot imagine who dreamed that one up."
Admittedly, looking at only defaults under fiat currency excludes all the notorious cases before the mid-twentieth century. So I decided to do a little research, and discovered that Standard and Poor's reports 84 sovereign defaults from 1975 to 2002. The following is from their list of States (along with the dates) that defaulted either on their domestic debt, on their foreign debt, or on both. I've excluded cases like Mexico (1982-1990), where the default was not on government securities but on foreign-denominated bank debt, which shortens the list considerably. But some governments, like Argentina's have had more than one default.
Angola (1976), Argentina (1982, 1989-1990, 2002-04), Bolivia (1989-97), Brazil (1986-87, 1990), Congo (1979), Costa Rica (1984-85), Croatia (1993-96), Dominica (2003-04), Dominican Republic (1975-2001), Ecuador (1999-2000), El Salvador (1981-96), Gabon (1999-2004), Ghana (1979, 1982), Guatemala (1989), Ivory Coast (2000-04), Kuwait (1990-91), Madagascar (2002), Moldova (1998, 2002), Mongolia (1997-2000), Myanmar (1984, 1987), Nigeria (1996-88, 1992, 2002), Pakistan (1999), Panama (1987-94), Paraguay (2003-04), Russia (1998-99), Rwanda (1995), Sierra Leone (1997-98), Solomon Islands (1996-2004), Sri Lanka (1996), Sudan (1991), Ukraine (1998-2000), Venezuela (1995-97, 1998), Vietnam (1975), Yugoslavia (1992), Zimbabwe (1975-80).
Monday, August 3, 2009
Why Default on U.S. Treasuries is Likely
Liberty Fund has just featured my article on "Why Default on U.S. Treasuries is Likely." Here is the first paragraph:
"Almost everyone is aware that federal government spending in the United States is scheduled to skyrocket, primarily because of Social Security, Medicare, and Medicaid. Recent "stimulus" packages have accelerated the process. Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal."
Latest GDP Revisions
The media has widely reported the new figures released last Friday by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. Real Gross Domestic Product (GDP) declined at an annual rate of 1.0 percent in the second quarter (April through June) of 2009. (Since this is an annualized figure, real GDP actually fell by only about 0.2 percent during the quarter, and even that percentage is not the raw change but seasonally adjusted.) Each new report typically revises the estimates from the previous few quarters, so now the BEA tells us that during the first quarter of 2009, real GDP fell by an annual rate of 6.4 percent rather than the 6.1 percent first reported, or the 5.7 percent in the agency's preliminary revision, or the 5.5 percent in its first final revision.
But the current release does more than revise the recent estimates. Using new input-output analysis, the BEA has just completed a comprehensive revision of all the numbers in the National Income and Product Accounts going way back to 1929. Consider the slight difference this can make in the story of the current recession, which the National Bureau of Economic Research (NBER) dates as beginning in December 2007. The old estimates reported that real GDP fell by 0.2 percent in the fourth quarter of 2007, whereas the new estimates report that it rose by 2.1 percent. For the first quarter of 2008, the old estimate is a 0.9 percent rise; the new estimate is 0.7 percent fall. Second quarter of 2008: old, 2.8 percent rise; new, 1.5 percent rise. Third quarter of 2008: old, 0.5 percent fall; new, 2.7 percent fall. Fourth quarter of 2008: old, 6.3 percent fall; new, 5.4 percent fall.
Sunday, August 2, 2009
Kenneth Stampp, R.I.P.
The distinguished historian of the Civil War and slavery, Kenneth Stampp, passed away in Oakland, California, on Friday, July 10, at the age of 96. For a fairly good obituary, check out the press release from the University of California, Berkeley, where Professor Stampp taught until his retirement in 1983. I had the pleasure of meeting Ken in the early 1990s, when I was working on my Civil War book. Not only did he read the manuscript and give me helpful comments (as well as a book blurb), but also he was instrumental in getting the University of Texas at Austin to reopen my candidacy so I could finally end my long sojourn as an A.B.D. and complete my Ph.D. in history.
One part of the press release, however, is a bit misleading. It states that in his first book, And the War Came: The North and the Secession Crisis, 1860-1861 (1950), "Stampp rejected the then-common theory that sectional compromise might have saved the Union, and he also traced the cause of the Civil War to slavery." I suspect that this characterization comes from Leon Litwack, a former student and colleague of Stampp's, who is quoted extensively elsewhere in the release. Although a fine scholar who has written important books of his own, Litwack has tended to be more polemical in support of his left-liberal politics than Stampp ever was.
Be that as it may, And the War Came focuses not on southern motives for secession but, as the subtitle indicates, on the northern reaction. It therefore shows better than any other work that slavery played only a marginal role, compared with numerous other concerns, in the Union's decision to suppress secession. Indeed, it is the work in which Stampp came closest to implying that secession may have been legitimate, despite slavery--a position he later backed away from.
Stampp's next book, The Peculiar Institution: Slavery in the Ante-Bellum South (1956), still remains one of the best introductions to the subject, notwithstanding all the mountains of subsequent research and writing on American slavery. Using traditional historical methods, The Peculiar Institution anticipated nearly all of the valid conclusions in the controversial cliometric study of Robert William Fogel and Stanley L Engerman, Time on the Cross: The Economics of American Negro Slavery (1974), without slipping into what I consider to be some of Fogel and Engerman's errors. Overall, Ken was a scrupulous and meticulous researcher, a lucid and compelling writer, and an inspiring and influential teacher, exemplifying historical scholarship at its best. He will be sorely missed.
Sunday, June 28, 2009
THE NEW YORKER on Countrywide
The June 29 issue of The New Yorker contains an interesting article by Connie Bruck, entitled "Angelo's Ashes: The Man Who Became the Face of the Financial Crisis." It is about Angelo Mozilo, former head of Countrywide Financial Corporation. Here is the article's most telling section:
In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. Robert Gnaizda, former general counsel of the Greenlining Institute, a nonprofit organization focused on minority rights, sent the report to Mozilo and other mortgage bankers. "I received a harsh response from Mozilo," Gnaizda told me. Privately, however, Mozilo was appalled. He ordered that all Countrywide's records on rejected minority applicants be sent to him, and he retroactively approved about half of them. Then he dispatched African-Americans, posing as prospective borrowers--he called them "mystery shoppers"--to Countrywide branches, and concluded that they were indeed treated differently from white borrowers.
Countrywide opened new offices in inner-city areas, created counseling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company's loans to African-American borrowers rose three hundred and twenty-five percent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.
Thursday, June 25, 2009
The US Unemployment Rate Revisited
At the beginning of this month, Bob Higgs posted an excellent discussion, Two Views of the Labor Market in the Deepening Recession. There was some confusion, however, in the comments section over whether U.S. government statistics counted military personnel as part of the labor force or counted just the civilian labor force. Bob quite correctly insisted that currently the Bureau of Labor Statistics (BLS) only reports the civilian labor and the civilian unemployment rate. But I (along with one of the commenters) was aware that back in the 1980s the total unemployment rate, which did include military personnel, was also reported. So I asked one of my students, Justin Rietz, to do some digging for me. Here is what he found out.
Up until 1983 the government measured only civilian employment and unemployment. This made complete sense as long as the U.S. had a military draft. A large portion of the armed forces was thereby analogous to the prison population and logically excluded from the labor force for the same reason. But with the ending of conscription, it made more sense to treat military personnel like regular employees responding to wage and benefit offers. This is probably why the National Commission on Employment and Unemployment Statistics, in its report of 1979, recommended compiling total employment and unemployment, including resident military personnel, as well. This new series was initiated in January 1983 but lasted only a decade. Because of certain statistical ambiguities, the BLS effectively discontinued labor force measures that included the armed forces in June 1994. For those who want to know the details, what follows are the answers that Steve Hipple of the BLS provided to Justin's questions:
Friday, June 19, 2009
Diego Garcia: The US Island of Shame
The May 28 issue of The New York Review of Books has an outstanding review by Jonathan Freedland of an important new book that reveals a disgraceful but relatively unknown episode in the history of U.S. imperialism: David Vine's Island of Shame: The Secret History of the US Military Base on Diego Garcia. Diego Garcia is a British-claimed island in the Indian Ocean on which the U.S. established a military base during the Cold War. So secret that no journalist has been allowed to visit, the base has become a key staging post in the War on Terror, both for the launch of bombers and for the CIA's illicit "rendition" of suspected terrorists. In the process of creating the base, the British and U.S. governments cooperated in lying about the island's lack of permanent inhabitants while forcibly expelling all 2000 residents. Beginning in 1971, U.S. soldiers armed with M16s went through shooting all the islanders' pet dogs. Eventually, the islanders' were crammed into cargo ships and dumped more than a thousand miles away in Mauritius or the Seychelles with no homes and absolutely no compensation. See also the exchange from letters about the review in a subsequent issue.
Friday, June 5, 2009
The National Debt versus the Deficit
A student recently asked me "why do the annual federal budget deficits not match increases in the national debt." It is an excellent question, since the national debt is a stock, and the deficit (or surplus) is the annual flow altering that stock. As we will see, the answer takes on particular significance in these days of fiscal stimulus and bailouts.
But first we must distinguish between the gross national debt and the outstanding national debt, both of which the government regularly reports. The gross national debt includes the holdings of the various federal trust funds for Social Security, Medicare, and several smaller government programs. These programs have run surpluses that are in essence loaned to cover other government expenditures. Consequently, the figure to which most economists and commentators refer is the outstanding national debt, net of the trust funds (i.e., the debt held by the public, including the Federal Reserve). Changes in neither measure of the national debt match annual deficits or surpluses, nor do the changes in either measure match each other.
Let me start with the debt held by the public. When the U.S. government borrows money to cover ordinary expenditures, the full amount appears in annual outlays, the annual deficit, and the annual increase in the outstanding national debt. But when the U.S. government borrows money to make direct loans to private parties, usually only the net present value of those loans is counted as an outlay and part of the deficit. Under the Federal Credit Reform Act of 1990 (applied retroactively in all official budget statistics), the net present value of each loan (and loan guarantee) is the estimated amount of the subsidy (or cost to the government, exclusive of administrative costs). The subsidy is analogous to the loan loss reserves that banks set aside when they make loans. The outstanding national debt, in contrast, increases by the full amount of the loan. The national debt can therefore increase by more than the deficit when the U.S. government makes direct loans and by less than the deficit when the loans are repaid.
This accounting practice today is affecting how the TARP (Troubled Asset Relief Program) bailouts are reported. The Congressional Budget Office puts the TARP's contribution to the fiscal year 2009 deficit at $184 billion, even though the TARP is expected to add an additional $461 billion to the outstanding national debt during the same fiscal year. That means President's Obama's reported budget, coming in at nearly 28 percent of GDP (the highest since World War II), significantly understates the increase in federal spending on a pure cash-flow basis.
Friday, May 15, 2009
Amazing Graphics on Economic Growth
Although not perfect, this video from a TED conference dramatically illustrates the benefits of economic growth. But what is even more amazing is how Hans Rosling's advanced graphics mange to display statistical information meaningfully.
Wednesday, May 13, 2009
NEW YORKER on Bankruptcy and Debtors' Prison
A recent issue of the New Yorker (April 13, 2009) has an excellent article by Jill Lepore. Entitled "I.O.U.: How We Used to Treat Debtors," it reviews the evolution in both Britain and the United States from debtors' prison to bankruptcy. My only disappointment is that she neglected to mention that Kentucky became the first state to eliminate all imprisonment for debt (except for fraud) under the leadership of that great Jacksonian radical, Colonel Richard M. Johnson, who went on to regularly propose similar legislation in Congress and eventually served as Martin Van Buren's Vice President. The link to the article is here, but unfortunately it is gated.
Tuesday, May 12, 2009
Riggenbach on Revisionism
Jeff Riggenbach's latest book, Why American History Is Not What They Say: An Introduction to Revisionism has just been published by the Mises Institute. The entire text is also available online here. The book is less a dry, scholarly survey of historical debates and more a lively series of essays in the spirit of H. L. Mencken and Edmund Wilson. Choosing to be insightful rather than comprehensive, selective rather than definitive, Riggenbach even evaluates the historical fiction of Gore Vidal and Kenneth Roberts as well as the works of academic historians. I must confess he says nice things about my own book on the American Civil War. I don't always share his judgments but always find his presentation instructive and rewarding.
Saturday, April 18, 2009
Hummel and Henderson in FORBES
In our ongoing effort to set the record straight on Greenspan and the housing boom, David Henderson and I now have an article in Forbes.
Friday, April 3, 2009
Government Guaranteed Pensions
On top of deposit insurance and too-big-to-fail, the U.S. government guarantees private pensions that are of the defined benefit (rather than defined contribution) sort. The agency that does so is the Pension Benefit Guaranty Corporation (affectionately known as Penny Benny), and a recent article from the Boston Globe indicates that it may be going bankrupt soon as well. Here is a link to the chart that goes with article. One interesting unintended consequence: unions have an incentive to force their financially troubled employers into bankruptcy so the government will take over the guarantee of their pensions.
Hat Tip: Malcolm Greenhill
Update: Time reports that the Boston Globe story has jumped the gun. The planned shift in the PBGF holdings toward more equities had only begun to be implemented. But of course the fund is in trouble anyway.
Hat Tip: Jack Dean
Monday, March 30, 2009
The Myth of Bubbles
The current financial crisis has helped popularize the belief that markets are subject to irrational asset bubbles. This belief has even spread among professional economists, who previously tended to dismiss it. But now the Centre for Independent Studies, an Australian think tank, has published a systematic analysis of the concept of bubbles by Stephen Kirchner. It is entitled Bubble Poppers: Monetary Policy and the Myth of 'Bubbles' in Asset Prices, and I recommend it highly.
Rather than summarize Kirchner's well-researched Policy Monograph, I can best give you a feel for his conclusions by quoting it directly: "The idea of 'bubbles' in asset prices quickly breaks down as soon as one tries to give it analytical coherence or empirical substance. Most commonly, the idea of a 'bubble' is little more than a tautology or circular argument."
Friday, March 27, 2009
Little Noted Fact About AIG
In all the recent brouhaha over American International Group, very few have pointed out that AIG is not just an insurance company but also a thrift holding company. AIG first emerged from an insurance agency established in Shanghai, China, in 1919. It moved its headquarters to New York in 1949 with the rise of Mao, and soon expanded internationally. The company went public in 1969, but the critical date is December 1999, when AIG chartered AIG Federal Savings Bank in Wilmington, Delaware. It subsequently acquired other thrifts, such as Wilmington Finance, Inc., and American General Finance.
This put AIG under the regulatory umbrella of the Office of Thrift Supervision (OTS). The Federal Reserve has regulated all multi-bank holding companies since passage of the Bank Holding Company Act of 1956 and all single-bank holding companies after the act was amended in 1970, whereas the Office of the Comptroller of the Currency (OCC) regulates all nationally chartered banks. After the S&L crisis, when OTS was set up in the Treasury Department alongside OCC to give thrifts a parallel regulatory structure, OTS became the regulator of all nationally chartered thrifts. But in one of the many byzantine inconsistencies in U.S. regulations, thrift holding companies also fall under OTS rather than the Fed. And many of the other early failures in the current financial crisis were of OTS regulated institutions, providing an intriguing historical link to the S&L crisis.
Thursday, March 26, 2009
Investing Wisdom
Less Antman is an investment advisor and CPA, whom I've known personally for over twenty-five years. He recently did an online interview for the Kirk Report, and I cannot recommend it too highly. It is long but lively, lucid, and informative: well worth working through. If you would like a short sample of the interview first, check out David Henderson's blog post about it.
Wednesday, March 25, 2009
Treasury Default and Intrade
I just discovered that the Intrade Prediction Market has a contract allowing you to bet on the probability of a U.S. Treasury default occurring before the end of the year. Currently the contract is around 5 percent. That seems high even to me. For some of my previous posts on this topic, go here, here, and here.
Sunday, March 8, 2009
100 Percent Reserves?
Tyler Cowen, among others, has observed that M1 (the narrowest measure of the money stock that includes bank deposits) has had a money multiplier of around 1 since November. This means it is covered 100 percent by bank reserves. But this is just another manifestation of both (a) the Fed's mistake of paying interest on reserves and (b) the irrelevance of M1 as a monetary measure. As a result of Greenspan's deregulation, most individual checking accounts are now classified as savings accounts (under the regulatory category of "money market deposit accounts") in M2 and are not part of M1.
Friday, March 6, 2009
George Washington and John Adams
Several of those commenting on my presidential rankings have questioned my rating of George Washington as the 15th worst president in U.S. history and John Adams as the 10th worst. So I thought I would devote a separate post to explaining myself.
I knew my rating of Washington would raise some eyebrows. To start with, I believe that the replacement of the Articles of Confederation with the Constitution was a terrible mistake in American history. The major problem with the Articles is that it created a central government that was too strong, not one that was too weak. So to the extent that Washington contributed to the Constitution's success, he earns a minus from me rather than a plus, as most historians would give him.
But even ignoring that, we still confront Washington's appointment of Alexander Hamilton as Secretary of the Treasury, with Hamilton's State-aggrandizing and mercantilist financial program: including an array of internal taxes (all later repealed under Jefferson), the assumption of state government debts (when the states should have assumed the federal debt, if not repudiated it outright), the establishment of the First U.S. Bank, and the creation of a government mint. For more detailed discussion of these issues, see an article I published back in 1988 in the British libertarian publication, Free Life, v. 5, n. 4, entitled "The Constitution as Counter-Revolution: A Tribute to the Anti-Federalists."
Thursday, March 5, 2009
Presidential Rankings
Predictably, last year's presidential election and the subsequent inauguration of Barak Obama brought forth a new set of historical rankings of United States presidents. The London Times presented their rankings in October, whereas C-Span offered theirs on February 15. These rankings are always based on surveys of prominent historians, political scientists, and other scholars, and as the Wikipedia entry on the subject reveals, the variation since the first Arthur M. Schlesinger, Sr., poll of 1948 is fairly minimal. Conventional historians and political scientists suffer from a nationalist bias that makes them appreciate a strong executive who lastingly contributes to the growth of central authority. They thus have a particular weakness for wartime presidents. Unless the commander-in-chief turns out to be utterly inept, war allows him to show off forceful, dynamic leadership, which is what impresses these authorities.
Fortunately, libertarians have begun to challenge the Statist bias of presidential ranking. One of the first works to do so was a Mises Institute collection (to which I contributed a chapter), published back in 2001 and edited by John V. Denson: Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom. More recently the Cato Institute has published Gene Healy's The Cult of the Presidency: America's Dangerous Devotion to Executive Power (2008), and the Independent Institute has published Ivan Eland's Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty (2008). Only Eland's book actually ranks all the presidents, although the Denson volume contains a wonderful article by economists Richard Vedder and Lowell Gallaway offering a tentative ranking based on the growth of government.
I have been privately circulating for some time my own rankings, so I thought this might be an appropriate occasion to update and unveil them to the general public. They differ significantly in some respects from Eland's. I cut off obviously before Barak Obama and don't count William Henry Harrison, who was in office only a month. The one ranking I've actually elaborated on in print is my choice of Martin Van Buren as the least bad president. The article appears both in the Independent Review and the Denson collection (which kept my preferred title, "Martin Van Buren: The American Gladstone"). And of course, my book, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, implicitly explains why I rank Abraham Lincoln the worst.
Wednesday, March 4, 2009
Mark-to-Market Accounting versus Capital Requirements
Mark-to-market accounting has received a lot of criticism during the current financial crisis. But a recent email from Less Antman, a CPA and financial planner, offers the best explanation I've seen of why government-mandated capital requirements are the real source of the problem. Economists now realize that reserve requirements, designed to make banks more liquid, have the unintended reverse impact during a panic, tying up cash that banks need to pay out in order to stem the panic. As a result, reserve requirements are fast disappearing as a tool of bank regulation. Similarly, capital requirements, designed to make banks more solvent, also have the reverse impact during a crisis. What follows is Less's analysis:
Tuesday, March 3, 2009
Treasury Default?
According to this site, the much and unfairly maligned Credit Default Swaps are now ranking IBM, Pepsi, and McDonald's less likely to default than the U.S. government.
Thursday, February 19, 2009
“Geithner Plan”
John Hempton of Bronte Capital offers an excellent critique of the "Geithner Plan." It makes the following important points (among others):
1. There are up to five different ways of defining bank insolvency, and most discussions equivocate among them. While many of the banks may face "regulatory insolvency" because of failure to maintain mandated capital, they are not necessarily insolvent under GAAP (generally accepted accounting principles). The government imposition of the former is worsening the situation.
2. The capricious nature of government policy is making it more difficult for the banks to weather the crisis and is piling on losses much larger than they otherwise would suffer.
Hat Tip: Tyler Cowen
Friday, February 13, 2009
The American Spectator on the Housing Boom
Peter J. Wallison of the American Enterprise Institute has an article on "The True Origins of the Financial Crisis" in the February 2009 issue of the American Spectator. It only covers the housing boom and contains nothing strikingly new, but it is a excellent survey that ties things together nicely, with answers to common objections.
Thursday, February 12, 2009
Lincoln's Birthday
Today's (Feb 12) Chicago Tribune contains my op-ed, “Taking the gloss off the Great Emancipator.”
Wednesday, February 11, 2009
Economists Opposed to the Stimulus
Reason Online surveys me, Bob Higgs, and other economists for our opinions on the stimulus package.
Monday, February 9, 2009
What Really Caused the Crisis?
Check out this short article by Viral Acharya and Matthew Richardson, two economists at New York University. They summarize the conclusions from a forthcoming book they edited, Restoring Financial Stability: How to Repair a Failed System, based on papers from a series of conferences held at NYU on the current financial crisis.
The authors essentially argue that the reason the crisis spread beyond housing is because of all the explicit and implicit government guarantees for large financial institutions. Thus, they emphasize that the problem was most definitely not the spreading of risk through securitization and fancy credit derivatives. Rather, the problem was the financial system’s failure to spread risk. The large institutions used these innovations to engage in regulatory arbitrage in order to take on and concentrate excessive risk.
Let me quote a central paragraph: “In a world without regulation, creditors of financial institutions (depositors, uninsured bondholders, etc.) would put a stop to excesses of risk and leverage by charging higher costs of funding, but lack of proper pricing of deposit insurance and too-big-to-fail guarantees has distorted incentives in the financial system. And, for years, regulation—capital requirement in particular—has targeted individual bank risk, when the justification for its existence resides primarily in managing systemic risk. It is to be expected that financial institutions would maximise returns from the explicit and implicit guarantees by taking excessive aggregate risks, unless these are priced properly by regulators. ”
I’ve been claiming for some time that deposit insurance was central to the crisis. It is striking to have that analysis confirmed by mainstream economists who in no way share my opposition to government guarantees and indeed explore ways (ultimately futile, in my opinion) to “fix” them. This should make their book, when it comes out, one of the more important on this enormous government failure.
Hat Tip: Tyler Cowen.
Friday, February 6, 2009
Watchmen
Many libertarians were quite taken with the movie, V for Vendetta, based on the graphic novel of the same name, written by Alan Moore (and illustrated mostly by David Lloyd). Alan Moore is also the author (along with artist Dave Gibbons and colorist John Higgins) of a second graphic novel, Watchmen, which will be released as a movie this March, following a copyright dispute between two movie studios. Watchmen is not as explicitly anti-Statist as V for Vendetta, but it has received even greater critical acclaim, including being listed among Time Magazine’s 100 best English-language novels from 1923 to 2005. For those who are interested in the novel, the movie, or the graphic-novel genre in general, you must definitely check out Ross Levatter’s new site: V is for Veidt: A Watchmen Guide. It promises insightful panel-by-panel elucidation of the novel’s themes and hidden meanings.
Wednesday, February 4, 2009
Fiscal Policy, the Great Depression, and World War II
With everyone blogging about the stimulus bill these days, I thought I’d throw in my two cents. Not a lot of what I have to say is particularly new, but the recent debate appears to have caused too many economists and historians to forget what was at one time widely accepted.
One of the more persistent fallacies credits fiscal policy during World War II with ending the Great Depression. Genuine fiscal policy, of course, requires an increase in government borrowing, either by the government spending more, taxing less, or doing both. By that standard, as the classic 1956 article by E. Cary Brown demonstrated, neither Presidents Hoover nor Roosevelt conducted much in the way of fiscal policy prior to the war. Both were believers in balanced budgets, and so strived to accompany their expenditure increases with tax increases. Indeed, their most serious peacetime deficits resulted from congressionally enacted veterans’ benefits that they both resisted.
Monday, February 2, 2009
Update on the Fed
Only a week after I complained about the way the Fed was reporting currency swaps on its balance sheet, the Fed has altered its reporting. (Not that I’m suggesting that my post had anything to do with inspiring the change.) The details are in the Fed’s H.4.1 Release for January 29, and as a result, currency swaps are now much easier to track. I will explain how further below, but I first should note another development. The Fed has sold off over $100 billion worth of commercial paper over the last week. So its total balance sheet has dropped again, to $1.93 trillion. The monetary base is also around $100 billion off its peak, leaving it at about $1.63 trillion. Of course, that still represents a near doubling of where the base was four months ago.
Monday, January 26, 2009
Is the Fed Reining Back?
James Hamilton at Econbrowser observed two weeks ago a recent decline in total Federal Reserve assets. Thus, as reported in the Fed’s H.4.1 Release, Fed assets, after peaking at over $2.3 trillion in mid-December, have fallen by nearly $300 billion to $2.0 trillion. Hamilton presents a nice graphical display of this apparent reversal.
Yet the monetary base has fallen hardly at all. As of January 14, according to the Fed’s H.3 Release, it had climbed to $1.75 trillion, 2.9 percent higher than two weeks before, which translates into an annual growth rate of over 100 percent. The Fed reports changes in the base only every other week, but you can estimate the base weekly from the Fed’s balance sheet (I will explain how below, in the last paragraph), and as of January 21, the base was still at $1.70 trillion.
So how is this possible? Hamilton observes that the decline in Fed assets is mostly concentrated in lending to banks through the new Term Auction Facility. But Fed borrowing from the Treasury has declined even further: from around half a trillion to only around $245 billion. Most of this borrowing is through a special Supplementary Financing Account, which involves issuing Treasury securities specifically for this purpose, but this account is now being worked down. So only $200 billion remains in these special Treasury deposits at the Fed, while an additional $45 billion is in regular Treasury deposits at the Fed (up from only $4.5 billion a year and a half ago).
When you couple that with an additional $150 billion plus decline in the Fed’s holding of foreign currencies in its reciprocal swaps with foreign central banks, it explains why the base can continue to grow. Part of the fall in Fed assets represents a decline in dollars that the Fed has loaned abroad and that are not counted in the base. And while domestic assets have also declined somewhat, that decline was more than offset by the Treasury releasing into the economy part of its base-money holdings (that took the form of deposits at the Fed).
Saturday, January 24, 2009
Stimulus Skeptics
As the economics profession sinks into a new Keynesian dark age, and economists who should know better line up behind Congress's Hail Mary pass, it is nice to see that there remain a few Stimulus skeptics. Particularly heartening was a recent University of Chicago panel with John Huizinga, Kevin Murphy, and Robert Lucas. Read David Henderson's report on the panel at EconLog, and then invest the hour to watch it online. It is well worth your time.
Tuesday, January 20, 2009
Minor Correction on the History of Bank Regulation
The following misleading statement appears in a recent Marginal Revolution post by Tyler Cowen about "Itty bitty banks": "By the way the 1927 McFadden Act banned interstate branch banking." I mention this not to pick on Tyler but because the error is frequently repeated in Money and Banking texts.
In fact, it was the National Currency Act of 1864 that banned any branching whatsoever (interstate or intrastate) on the part of nationally chartered banks, except for a few grandfathered state-chartered banks who already had branches and who charter switched. The McFadden Act of 1927 was actually a relaxation of this restriction, granting nationally chartered banks the same intrastate branching authority enjoyed by state-chartered banks in whatever state they happened to reside.
I should add that none of these laws applied to state-chartered banks, who until the end of the twentieth century had never enjoyed interstate branching privileges, and whose intrastate branching was always governed by state law. Most of the state bans on branching emerged in the antebellum era, and many were part of state free-banking laws.
Wednesday, January 14, 2009
Potential U.S. Government Default
I have long been predicting an eventual U.S. government default on its debt. Sunday's Washington Post has an excellent article by Greg Ip on this potentiality, linked to by both Greg Mankiw and Tyler Cowen. Ip reports that as a result of the government's fiscal stimulus, both implemented and projected, credit default swaps have raised the probability of a U.S. default over the next ten years from 1 to 6 percent. (Credit default swaps have been unfairly maligned as a major cause of the current financial crisis, although recent evidence indicates they have weathered the storm quite well.)
Ip also considers whether the U.S. might resort to inflation rather than default in a fiscal crisis, pointing out that Russia in 1998 is just one recent example of many where governments chose debt repudiation over inflation. He however overlooks an even stronger argument. Now that the Fed is paying interest to banks on their reserves, it effectively eliminates much of the remaining revenue (seigniorage) from inflation. Increasing the monetary base is now just an alternative way of issuing government debt.
Meanwhile, Senator Tom Coburn (R-OK) said the following on the floor of the US Senate on Sunday, January 11th: "I believe we are at the ultimate tipping point in this country. I believe if we don't make drastic changes over the next year and a half, that 2012 will see the default of the U.S. Government on its bills. I honestly believe that. There are a lot of economists who agree with me on that point." Full text and video is available here.
Hat Tip: Marc Joffe
Sunday, January 11, 2009
Plastic vs. Paper
The latest issue of the San Francisco Weekly (Jan 7-13, 2008) has an outstanding article on the heavy environmental costs of San Francisco's recent ban on plastic bags. Written by Joe Eskenazi, it is entitled "Baggage." David Henderson highlights the article's important paragraphs over at EconLog.
Thursday, January 1, 2009
More Economists Worry About Interest Earning Reserves
More and more economists are beginning to worry about the dangers resulting from the Fed paying interest on reserves. James Hamilton does so in a post that has some wonderful visual displays of recent changes in the Fed's balance sheet. Steve Randy Walman comes out against the innovation in even harsher terms at Interfluidity. And Tyler Cowen at Marginal Revolution expresses concerns.
Sunday, December 21, 2008
Tax Changes and the Housing Boom
Several economists have started to focus on Clinton's 1997 Taxpayer Relief Act as a source of the housing boom. It allowed people to avoid capital gains on home price appreciation without having to rollover the gains into a bigger house. See the article in the New York Times of December 19 and Russ Roberts' post at Cafe Hayek.
The good news about this factor is that it gets the timing right for the beginning of the housing boom, unlike the attempt to pin the blame on Greenspan's monetary policy. The bad news, as Mark Brady has pointed out, is that U.S. tax changes can only explain the U.S. housing boom and not the European housing booms. Moreover, it can only explain a boom and not a bubble. A tax change should cause a real appreciation in home values that is permanent (until the exemption is repealed), not self-reversing. But then again, that should help prevent real housing prices from returning to their 1997 level.
Hat Tip: Warren Gibson
Thursday, December 18, 2008
Footnote on Bank Clearing Systems
Only after my recent comment on "Paradoxes of Paying Interest on Reserves," did I become aware of an important, related article by George Selgin. Entitled "Wholesale Payments: Questioning the Market-Failure Hypothesis" and appearing in the International Review of Law and Economics, 24 (2004): 333-350, it tellingly critiques the worldwide effort of central banks, culminating in the 1990s, to replace deferred net settlement clearing systems with real-time gross settlement (RTGS) systems. Pressure was applied even to private clearing systems, such as CHIPS, using spurious market-failure arguments.
Wednesday, December 17, 2008
Toward a Libertarian Reconstruction of Neoclassical Welfare Theory
The latest issue of the Journal of Private Enterprise, v. 24, n. 1 (Fall 2008) contains my article: "Toward a Libertarian Reconstruction of Neoclassical Welfare Theory." Unfortunately, the issue is not available online except through library subscriptions.
Here is the abstract: Many libertarians, especially those inclined toward the Austrian school of economics, counter the market-failure justification for government
intervention by denying any legitimacy whatsoever to the neoclassical concept of efficiency. But properly interpreted, neoclassical efficiency,rather than providing an open-ended justification for all sorts of government intervention, provides one of the most powerful and
comprehensive objections to government coercion in general.
Tuesday, December 16, 2008
Outstanding Panel Discussion of the New Deal
This link will lead you to a post by Bryan Caplan at EconLog. He in turns links to a video of an outstanding panel discussion on the New Deal that includes distinguished historian David Kennedy, along with Canadians Eric Lascelles and Joe Martin and economists Russ Roberts and Lee Ohanian. The discussion is well worth 35 minutes of your time. Note how Kennedy at the outset concedes that the New Deal failed to bring any recovery and then tries to make the peculiar claim that its goal was not recovery at all but reform. I link to Bryan's post rather than directly to the video because Bryan's comments are also worth your attention.
Wednesday, December 10, 2008
Paradoxes of Paying Interest on Reserves
When the Federal Reserve began paying interest on bank reserves on October 9, the justification in its press release was to permit the Fed to hit its Federal funds target interest rate more reliably. But the full explanation is more complicated than that.
The Fed also serves as a clearinghouse for banks, and that function is in tension with monetary policy. When the Fed was first created in 1914, it provided clearing services to all member banks for free, driving out of business the various private clearinghouses that had arisen and were solving some of the liquidity problems associated with the destabilizing National Banking System. Then in 1980, the Depository Institutions Deregulation and Monetary Control Act required the Fed to offer its clearing services to all depository institutions--whether banks or not, and whether members of the Fed or not--but at a fee that allowed the reemergence of private alternatives.
Thursday, December 4, 2008
Apocryphal Washington Quotation?
"Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master." This widely repeated apocryphal quotation from Washington may indeed be genuine after all. It cannot be found in any of the collections of Washington's writings. But some time back, I discovered an old, popular compilation of quotations that attributes it to a Washington speech of January 7, 1790, reported in the Boston Independent Chronicle of January 14, 1790. The Stanford Library has the Boston Independent Chronicle from that period on microform, but I've never found time to go there and check it out. A speech on January 7 would have taken place the day before Washington presented his first annual message to Congress, and given that the capital was then in New York City, having the speech reported a week later in a Boston newspaper is not implausible. Maybe somebody else has time to follow up on this.
Tuesday, December 2, 2008
NEW YORKER on Bernanke
The latest issue of THE NEW YORKER (Dec 1, 2008) has an interesting profile of Ben Bernanke by John Cassidy: .
Although Cassidy tries to survey Bernanke's responses to the current crisis, it is clear Cassidy is a little beyond his depth. He misses completely what financial developments caused Bernanke to hit the panic button after September 17, as well as the extent to which Bernanke then amped up Fed policy.
But the profile has a chilling ending, when Cassidy reports that "Bernanke, in a search for inspiration and guidance, has been thinking about two Presidents": not only F.D.R., as already widely reported, but even worse, Abraham Lincoln. Let me quote in full:
"From the former he took the notion that what policymakers needed in a crisis was flexibility and resolve. After assuming office, in March, 1933, Roosevelt enacted bold measures aimed at reviving the moribund economy: a banking holiday, deposit insurance, expanded public works, a devaluation of the dollar, price controls, the imposition of production directives on many industries. Some of the measures worked; some may have delayed a rebound. But they gave the American people hope, because they were decisive actions.
"Bernanke's knowledge of Lincoln was more limited, but one morning the man who organizes the parking pool in the basement of the Fed's headquarters had given him a copy of a statement Lincoln made in 1862, after he was criticized by Congress for military blunders during the Civil War: 'If I were to try to read, much less answer, all the attacks made on me, this shop might as well be closed for any other business. I do the very best I know how the very best I can; and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won't amount to anything. If the end brings me out wrong, ten angels swearing I was right will make no difference.'
"Bernanke keeps the statement on his desk, so he can refer to it when necessary."
Sunday, November 30, 2008
A Reply to George Selgin
(and En Passant, Other Libertarian Critics)
by Jeffrey Rogers Hummel and David R. Henderson
George Selgin posted a thoughtful critique of our Cato Briefing Paper on "Greenspan's Monetary Policy in Retrospect." His criticisms, rather than shaking our confidence in our evaluation, have strengthened our conviction that Greenspan's monetary policy is widely misunderstood by both detractors and apologists.
In some respects our disagreements with Selgin are not as severe as he believes. He devotes an early section of his critique to establishing the relationship between low interest rates during 2002 to 2004 and the growth of risky subprime mortgages. But we never denied that relationship and, indeed, think it was as important as he does. What we disagree about is the primary cause of the low interest rates during that period.
Nor does our paper argue, as Selgin asserts, that "Greenspan's Fed was innocent of any role in encouraging the housing boom [emphasis ours]." Indeed, we state: "Particularly alarming is the way the lender-of-last-resort function has been expanding the moral-hazard safety net and mispricing risk, a trend to which Greenspan no doubt contributed." We not only accept that the Federal Reserve's contributions to moral hazard may have been a major factor in the housing boom, but also stipulate at the end of our paper: "Minor blips in total reserves under Greenspan may have played some poorly understood role in any of these three events [the recessions of 1990 and 2001 and the current one]." Our disagreement is with the widespread and extravagant accusations that "easy Al" was conducting an exceptionally expansionary monetary policy after 2001.
Greenspan and Velocity
Before returning to the subject of the current crisis and its ultimate causes, let us take up Selgin's most serious challenge. Our Cato Briefing Paper argues that as a result of significant deregulation, the Fed lost most of its lingering control over the short-run movements of the broader monetary aggregates (M2, MZM, and M3), whose behavior therefore approximated what Selgin himself, along with Lawrence H. White and Steven Horwitz, contend would happen under a system of completely free, unregulated banking. Fluctuations in the money supply approximately responded to and offset fluctuations in money velocity, helping to stabilize the macroeconomy. Selgin correctly notes that a stable MV necessarily implies a stable nominal Gross Domestic Product (Py), as expressed in the equation of exchange (MV = Py). He then questions the actual stability of nominal GDP under Greenspan, buttressing his reservations with a graph (Chart 4 in his critique) showing the growth rate of final sales of domestic goods (nominal GDP minus changes in private inventories) from the recession of 2001 to the present.
Nominal GDP, however, is simply the product of real output and the price level. A decline in volatility of both output and inflation, therefore, strongly suggests that the volatility of nominal GDP has also declined. We never claimed that Greenspan's policies were perfect, and in fact our paper explicitly criticized them for being "too discretionary." After all, the Greenspan era did encompass two minor recessions, a decade apart. Yet surely Selgin does not wish to dispute the noticeable dampening of both business cycles and inflation variability during the Greenspan era, a dampening that macroeconomists now refer to as "The Great Moderation." Consider the follow two graphs.
ZOOM
Figure 1 (from the Federal Reserve Bank of San Francisco Economic Letter 2008-6, February 15, 2008) depicts the striking decrease after 1987, during the Greenspan era, in the volatility of real GDP (as measured by a five-year moving average of the growth rate's quarterly variance). Over the past twenty-five years, beginning in 1983, the U.S. economy has been in recession (as defined by the National Bureau of Economic Research) a mere 5 percent of the time, as compared with 22 percent of the time over the previous twenty-five years.
Monday, November 10, 2008
Causes of the Crisis
David Henderson's and my Cato Briefing Paper on Alan Greenspan's monetary policy has come in for some severe criticism. We will never be able to reply in detail to all the critics, but we do plan to take up some of the more serious or interesting challenges in due course. The economy's current downturn occupies only a part of the briefing, but it seems to be the most controversial part. So to put the controversy into context, I thought I would offer a preliminary summary of my general views about what brought on the current recession. (These remarks are a revised version of an email I sent to Liberty Fund historian Hans Eicholz, as a reply to his comments on my past post on "Recent Fed Machinations.")
The current financial turmoil is very complex, and no one knows the whole story yet. Anyone who claims otherwise is oversimplifying. The historian in me would like to wait five to ten years, until the dust has settled, to dispassionately analyze the causes. After all, not until Milton Friedman and Anna Schwartz published their MONETARY HISTORY OF THE U.S. in 1963 did we get a relatively complete understanding of the Great Depression, and economic historians are still debating details. All considered, I think a bit of epistemic humility is in order.
Sunday, November 9, 2008
Bankruptcy Law and the Current Crisis
Changes in bankruptcy laws are an under-explored topic relating to the current financial turmoil. Less Antman alerted David Henderson and me to the potential role in triggering the subprime crisis played by the Bankruptcy Abuse Prevention and Consumer Protection Act of April 2005 and the subsequent Office of the Comptroller of the Currency ruling on credit cards that went hand-in-hand with the new law. But until recently, only David's and my INVESTOR'S BUSINESS DAILY article and a James Surowiecki column in THE NEW YORKER (April 7, 2008) seem to have mentioned the possibility. Now an October 30 article in THE FINANCIAL TIMES suggests that bankruptcy changes may have been a major factor in the failure of Lehman Brothers and AIG. And Tyler Cowen provides further discussion at the Marginal Revolution blog.
Monday, October 27, 2008
A Keynesian Liquidity Trap?
The recent explosion of the monetary base has caused some to raise the specter of a Keynesian liquidity trap, because nearly all of the increase has so far gone into bank reserves. Bryan Caplan challenged this concern over at Econ Log. I chimed in with the following comment:
"But this hardly indicates a liquidity trap, for at least four reasons: (1) Base money can only be held as reserves or currency, and the allocation of a massive base increase between the two tells you absolutely nothing about the overall demand for base money. (2) At the same time that the Fed stomped on the monetary accelerator, it began paying interest on bank deposits at the Fed, obviously increasing the demand for reserves. (3) A sudden SHIFT outward in the demand for base money does not in and of itself demonstrate a liquidity trap, as the history of bank panics teaches us. (4) You must allow for lags to see whether this incredibly sudden base increase works its way into the broader monetary aggregates. The year-to-year annual growth rate of M1 has already risen from 0 to over 7 percent, whereas that of M2 is up slightly from 6 to 7 percent."
Bryan also questioned whether all of the base increase was indeed going into reserves. Again, my comment:
"Accurate numbers on bank reserves are devilishly difficult to get and interpret, because the official figures are often adjusted for changes in reserve requirements and do not include excess vault cash, required clearing balances, and Fed float. But you can tease out recent estimates by going to the Fed's weekly H.3, H.4.1, and H.6 releases and by checking against how much of the base increase has ended up as currency in the hands of the general public. Using these means, I put total reserves for the entire banking system (not adjusted for changes in reserve requirements and not seasonally adjusted but counting all vault cash and clearing balances) at $72 billion in August. Currently, as of October 22, total reserves are somewhere between $343 and $358 billion. Notice how close this comes to matching the corresponding increase in the base, from $847 billion to $1,149 billion. The remaining increase constitutes currency in circulation."
Saturday, October 25, 2008
Recent Fed Machinations
Recent Federal Reserve activity is unprecedented. For a dramatic visual, go to Greg Mankiw's blog.
Many believed that Ben Bernanke had begun pumping up the money supply as early as the end of last year in response to the financial situation. But in fact, the Fed did not actually open the monetary spigots until a little over a month ago. Up until then, Bernanke effectively sterilized all his monetary injections, either by directly trading Treasuries from the Fed's portfolio for riskier financial securities, or by indirectly loaning to financial institutions with money recouped by selling Fed-held Treasuries on the open market. Either way, there was no major impact on the monetary base. As a result, the annual rate of growth of the monetary base remained in the neighborhood of 2 percent through August 2008, whereas total bank reserves remained virtually constant.
Friday, October 24, 2008
Libertarian Party Candidate Makes THE NEW YORKER
The latest (October 27) issue of THE NEW YORKER has a mixed but accurate report on Bob Barr, Libertarian Party candidate for president. It even covers his falling out with Ron Paul.
Wednesday, October 22, 2008
Four Myths About the Financial Crisis
Three economists from the Minneapolis Federal Reserve have just released a working paper on "Myths About the Financial Crisis of 2008." Finally, some common sense! They identify and refute four myths:
1. The myth that bank lending to nonfinancial corporations and individuals has declined sharply.
2. The myth that interbank lending is essentially nonexistent.
3. The myth that commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. The myth that banks play a large role in channeling funds from savers to borrowers.
The paper is reported on in two blogs, those of Alex Tabarrok and Arnold Kling, and they both provide links to a pdf copy of the paper itself.
Hat tip to David Henderson for alerting me to this major development.
Wednesday, October 15, 2008
Credit Tightening: Reply to Bob Higgs
In a comment on my October 11 post about "Interest on Bank Reserves," Bob posed the following question:
"You refer twice in this post to a tightening of credit last week. I am wondering about what evidence of such tightening you have in mind. . . . Consulting the Fed's website, I see that issuances of commercial paper increased last week from roughly $179 billion on Monday and Tuesday to roughly $205 billion on Thursday and Friday. This 14 percent increase would not seem to comport with a situation of 'credit tightening.'"
Given the subject's import, I've decided to make my reply to Bob a separate post:
Monday, October 13, 2008
Interest on Bank Reserves and the Recent Crisis
One frequently overlooked provision of the Bailout Act is that it gave the Federal Reserve permission to pay interest on bank reserves immediately, rather than in 2011. The Fed therefore announced last Monday, October 6, that it would begin doing so this past Thursday, October 9. Here is the Fed press release.
The long-run rationale for this change is to permit the Fed to hit its target Federal funds interest rate more reliably, and other central banks throughout the world have already implemented this reform. The short-run rationale is that troubled banks will now be earning interest on their reserve assets, which previously earned no interest.
But I am concerned that in the midst of a potential liquidity crisis, this change can have unintended negative consequences. I can think of four:
Saturday, October 11, 2008
History of the Government-Printed Ballot
The October 13, 2008, issue of THE NEW YORKER had an outstanding article by Harvard historian Jill Lepore detailing how American elections evolved from voice voting to the current "Australian" ballot, printed by the government, and the consequent decline in voter turnout. (Unfortunately the article is not yet available online.) Those interested in further elaboration on how Progressive era reforms made U.S. elections far less representative, see the excellent Mark Lawrence Kornbluh, WHY AMERICA STOPPED VOTING: THE DECLINE OF PARTICIPATORY DEMOCRACY AND THE EMERGENCE OF MODERN AMERICAN POLITICS (New York: NYU Press, 2000). Contrary to the implications of Bryan Caplan's MYTH OF THE RATIONAL VOTER and the impressions of many libertarians, government policies--at least in the U.S.--were at their most libertarian when voter turnout was highest.
Tuesday, September 30, 2008
Voices of Sanity
Although the bailout question has temporarily become moot, I think it worthwhile to recognize some of the better critiques of the underlying economic need for any government action whatsoever. Perhaps the most insightful and informative was David R. Henderson's article in FORBES. Allan Meltzer was at least one prominent monetarist economist who was not taken over by the bailout body snatchers from outer space, and his National Public Radio interview was quite good. Another amazingly sound voice that came out against the bailout on NPR was David Cay Johnston, a former NEW YORK TIMES financial reporter. Finally, check out the CNN critique from Jeffrey A. Miron, a Harvard economics lecturer and self-described libertarian.
Wednesday, August 20, 2008
U.S. Government Default: Good, Bad, or Just Plain Ugly? Comment on Cowen and Kling
Back in 1993 I gave a lecture at Golden Gate University, "The National Debt: Good, Bad, or Just Plain Ugly?" Toward the end of the lecture (which I have presented many times since), I discussed the problem created by the unfunded liabilities of Social Security and Medicare. Given that politicians have little incentive to fix the problem, I predicted an eventual U.S. government default on Treasury securities, possibly within my lifetime. Even some of my most rabid libertarian listeners thought at the time I was going off the deep end. But over the intervening fifteen years, several commentators have started to take seriously the prospect of a risk premium on Treasuries, including David Romer of Berkeley, the WALL STREET JOURNAL, and Moody's Investors Services. In fact, economist Laurence J. Kotlikoff himself predicts such a default in a recent issue of the ECONOMISTS' VOICE, edited by Joseph Stiglitz.
Now two of the most prominent libertarian economists on the blogosphere have started to discuss government default as well, possibly arising from other causes. Tyler Cowen wrote: "When it comes to the mortgage agencies, there is no real choice but to bail out the debt holders. The alternative is a run on the dollar and collapse of faith in U.S. government securities and the end of the world." This inspired Arnold Kling to consider the potentiality of such a government default in two successive posts: here and here.
There seems to be a certain tension between Tyler's argument for bailouts and some of his other opinions. He wrote in a subsequent post that although "I have very much favored the 'bailouts' to date [,] I don't favor that they were necessary." The statement is difficult to interpret. If it means anything more than that Tyler prefers utopia if possible, it suggests that he wishes the U.S. had a macroeconomic regime in which the alternative to bailouts was not "the end of the world." Yet Tyler has also dismissed free banking and/or a gold standard as providing no significant benefits over the current system of central bank-managed fiat money. But isn't fiat money managed by a central bank a major feature of what, in Tyler's opinion, links the future of the mortgage agencies to the future of the U.S. dollar?
More important, would a U.S. government default indeed be "the end of the world"? Tyler's scenario contains many implicit assumptions that require examination. The first is that saving Freddie Mac and Fannie Mae decreases the probability of U.S. default. As Mark Brady pointed out to me, one could plausibly argue just the opposite. In fact, a firm refusal to bail out the mortgage agencies would establish a strong barrier between U.S. Treasuries and the fortunes of not only the mortgage agencies themselves but also the myriad other institutions that we can imagine receiving similar treatment. Wouldn't that in fact help maintain confidence in U.S. government securities?
Thursday, August 7, 2008
My FEE Lecture on Fractional Reserve Banking
At another Foundation for Economic Education event in mid-July, the Young Scholars Colloquium, I gave a lecture provocatively entitled "Why Fractional Reserve Banking is More Libertarian than the Gold Standard." Since both Bryan Caplan and Larry White have given it nice plugs on their blogs, I might as well do so myself. You can find it here, along with all the other podcasts from this summer's FEE seminars, including some by Bryan and Larry, and all those from the History and Liberty seminar mentioned in my previous post.
Bryan returned to the subject of my lecture, discussing a question he had posed to me during the seminar's recorded Q & A: "Agree or disagree: In developed countries during the last 10-15 years, central banks have become (close to) the most efficient state enterprises." After some hesitation, I had to reluctantly agree, despite my unequivocal advocacy of the Fed's abolition. But I throw the question open to discussion: what is your candidate for the least inefficient state enterprise?
Bryan of course approves of my answer, which is why he posed the question. But his reasons are somewhat different than mine. He gives two in his post: (1) the public's exaggerated fears of inflation partially offset the time-inconsistency problem that would otherwise cause central banks to generate higher inflation; (2) central bank independence allows them to rely more on economists, who do a better a job than mere mortals.
Podcasts of History Seminar at FEE
At the end of June, I had the privilege of giving three lectures at a week-long History and Liberty seminar put on by the Foundation for Economic Education in Irvington-on-Hudson. The other lecturers included a stellar line up of libertarian historians: our own David Beito, Steve Davies, Burt Folsom, David Hart, and Bob Higgs, as well as Andy Morriss and Sheldon Richman. As Steve Davies put it: "Historians usually find that you're the one person on a program with whole lot philosophers, political scientists, and economists. So to have an all history program is a great treat." Podcasts of all sixteen lectures are now available here.
Tuesday, June 3, 2008
NY REVIEW OF BOOKS Re-opens Global Warming Debate
The latest issue of THE NEW YORK REVIEW OF BOOKS (June 12, 2008) has a surprising review by Freeman Dyson of two books about global warming. The first book is William Nordhaus, A QUESTION OF BALANCE: WEIGHING THE OPTIONS ON GLOBAL WARMING POLICIES. Nordhaus is an economist who, as the review states, "is not concerned with the science of global warming." Instead he "assumes that the science and the damage are specified, and he compares the effectiveness of various policies" on a strictly cost-benefit basis. Dyson is impressed with Nordhaus's conclusion that the Stern and Gore proposals are "disastrously expensive," that Kyoto without the U.S. is a useless wash, that Kyoto with the U.S. has marginal benefits, and that the optimal carbon tax, enforced globally, would be three times as beneficial. But none of these policies compare with the benefits of what Nordhaus calls the "low-cost backstop" relying on the development of new technologies.
But truly exceptional is Dyson's assessment of the second book he reviews: GLOBAL WARMING: LOOKING BEYOND KYOTO, edited by Ernesto Zedillo, head of the Yale Center for the Study of Globalization. At the heart of the book is a debate about the effects of global warming between Stefan Rahmstorf, a German professor of physics of the oceans representing the mainstream, and Richard Lindzen, professor of atmospheric science at MIT, who "does not deny the existence of global warming, but considers the predictions of its harmful effects to be grossly exaggerated." Here is Dyson's assessment of the debate:
"These two chapters give the reader a sad picture of climate science. . . . Their conversation is a dialogue of the deaf. The majority responds to the minority with open contempt. In the history of science it has often happened that majority was wrong and refused to listen to a minority that later turned out to be right. It may--or may not-- be that the present is such a time. The great virtue of Nordhaus's economic analysis is that it remains valid whether the majority view is right or wrong."
Dyson goes on to add that "all the books that I have seen about the science and economics of global warming, including the two books under review, miss the main point. The main point is religious rather scientific. There is a worldwide secular religion we may call environmentalism, holding that we are stewards of the earth. . . . The ethics of environmentalism are being taught to children in kindergartens, schools, and colleges all over the world. Environmentalism has replaced socialism as the leading secular religion."
Dyson himself believes that "the ethics of environmentalism are fundamentally sound." Yet he admits that "unfortunately, some members of the environmental movement have also adopted as an article of faith the belief that global warming is the greatest threat to the ecology of our planet." However, many of the global-warming skeptics themselves "are passionate environmentalists. . . . Whether they turn out to be right or wrong, their arguments on these issues deserve to be heard."
This is noteworthy both for Dyson's intellectual honesty and for the fact that his review appeared in such a prestigious and widely read establishment publication. I cannot wait to see the firestorm of letters the review generates in future issues of THE NEW YORK REVIEW OF BOOKS.
Saturday, April 26, 2008
Another Piece of the Current Moral-Hazard Puzzle?
The Credit Default Swap (CDS) has become one of the most (if not the most) widely traded financial derivative worldwide. However, its role in spreading the moral hazard problem from institutions with deposit insurance to institutions without is almost unrecognized, as far as I can tell.
Thursday, April 26, 2007
More on Stephen Foster (1809-91):
I want to thank David Bieto for bringing Stephen S. Foster and his REVOLUTION THE ONLY REMEMDY FOR SLAVERY (1855) to our attention in a previous post. Foster's attitude toward VIOLENT revolution was a bit more equivocal than David suggests, however. Among antebellum abolitionists, he is best known for his extreme "come-outerism," in which he would disrupt church services to protest slavery, sometimes suffering beatings and imprisonment as a result. Like William Lloyd Garrison, Foster was an opponent of the Constitution and an advocate of disunion, as well as a pacifist. Yet by the mid-1850s he was defending non-resistance on only strategic grounds for himself and argued to his fellow abolitionists that it was perfectly consistent to urge slaves and others to use deadly force in self-defense. He therefore endorsed Lysander Spooner's and John Brown's advocacy of slave revolts. But he was more absorbed in promoting Gerrit Smith's Radical Abolition Party as an alternative to the Republicans.
During the Civil War, Foster was the most prominent of fifteen abolitionists who signed the antiwar "Standing Protest of the New England Non-Resistant Abolitionists." He was married to the better-known Abby Kelley, a founder of the women's movement. Kelley was subsequently written out of feminist history by Susan B. Anthony and Elizabeth Cady Stanton because of her Garrisonian hostility to voting, which continued even after the Civil War ended, while the feminist movement generally became almost exclusively obsessed with women's suffrage.
More details on Stephen Foster can be found scattered in Dorothy Sterling, AHEAD OF HER TIME: ABBY KELLEY AND THE POLITICS OF ANTISLAVERY (New York: W. W. Norton, 1991); Lewis Perry, RADICAL ABOLITIONISM: ANARCHY AND THE GOVERNMENT OF GOD IN ANTISLAVERY THOUGHT (Ithaca: Cornell University Press, 1973); and Richard H. Sewell, BALLOTS FOR FREEDOM: ANTISLAVERY POLITICS IN THE UNITED STATES, 1837-1860 (New York: W. W. Norton, 1976).
Tuesday, April 24, 2007
Higgs "Festschrift"
The University of Chicago Press has just released a volume edited by Price Fishback and entitled GOVERNMENT AND THE AMERICAN ECONOMY: A NEW HISTORY. It is based on papers first presented at a conference honoring Robert Higgs held in early 2004. I did not attend but was later asked to provide a chapter on "The Civil War and Reconstruction." The resulting volume covers the government's role in the American economy from the colonial period through the present. Although not a typical festschrift, it is still a fitting tribute to Higgs. The other authors appearing in the collection represent a veritable who’s who of economic historians of the United States, some of them his students. In addition to Higgs himself and Fishback, the contributors include Stan Engerman, Gary Libecap, John Joseph Wallis, Sumner J. La Croix, Robert Margo, Robert McGuire, Richard Sylla, Lee Alston, Joseph Ferrie, Mark Guglielmo, E. C. Pasour, Jr., Randal Rucker, and Werner Troesken, with a foreword from Nobel Laureate Doug North. Like any collection, the chapters vary in quality, scope, and ideology. Those of Higgs (on "The World Wars") and myself are the most consistently libertarian, while that of Sylla (on the financial system) is probably the most sympathetic to State intervention. Yet most of them share a pro-market, pro-property rights orientation, and they all repay reading.
Blue Angels Crash Saturday in South Carolina
AN INSIGHTFUL COMMENT FROM MARC JOFFE:
On Saturday, April 21st, a Navy Blue Angel F/A-18 Hornet jet crashed into a residential neighborhood during an air show near Beaufort, SC killing the pilot. The crash injured eight people and damaged eight structures on the ground. If a similiar incident were to occur when the Blue Angels next fly over downtown San Francisco this October, hundreds of spectators and bystanders could be hurt or killed.
Including Saturday's crash, 24 Blue Angels Navy flight squadron pilots have been killed during air shows or training since the group was formed in 1946. Clearly, the most recent crash is not an isolated incident, and the risk of a calamity in San Francisco is a real one.
According to the Blue Angels web site, an F/A 18 Hornet cost $28 million back in 1997. That amount could've financed one year of health care for over 11,000 uninsured children under San Francisco's new universal insurance plan. The Blue Angel shows also waste tons of fossil fuels and pointlessly add greenhouse gasses to the atmosphere.
Isn't it time that San Francisco, a city dominated by anti-war sentiment, put an end to these spectacles? As stated on the their web site, the mission of the Blue Angels is to enhance Navy recruiting. At a time when thousands of America's young people are dying in American military adventures, why would we want to encourage our local sons and daughters to risk their lives in overseas conflicts that have failed to contribute to our security?
During the Cold War, Soviet leaders paraded their newest armanents through Red Square each May Day as a public spectacle. With the Soviet Union now a distant memory, isn't it time for us to put an end to our own public displays of killing power?
Thursday, April 5, 2007
A Rothbardian Take on the French and Indian War:
For those interested in early American history or military history, I strongly recommend Fred Anderson's THE WAR THAT MADE AMERICA: A SHORT HISTORY OF THE FRENCH AND INDIAN WAR (New York: Viking Penguin, 2005). Not merely is it a captivating read, but its overall interpretation of the French and Indian War is amazingly similar to Murray Rothbard's in volume 2 of his CONCEIVED IN LIBERTY: "SALUTARY NEGLECT"; THE AMERICAN COLONIES IN THE FIRST HALF OF THE 18TH CENTURY (New Rochelle, NY: Arlington House, 1975), despite the fact that Anderson probably never heard of Rothbard.
Anderson previously wrote a much longer book on the same subject, CRUCIBLE OF WAR: THE SEVEN YEAR'S WAR AND THE FATE OF EMPIRE IN BRITISH NORTH AMERICA, 1754-1766 (New York: Alfred A. Knopf, 2000). One of the few comprehensive studies of that conflict since the classic, multi-volume works of Francis Parkman and Lawrence Henry Gipson, it became the basis for a PBS series on "The War that Made America," which in turn was converted into the newer, shorter book. Yet of the two books, THE WAR THAT MADE AMERICA is of much greater interest to libertarians, not only because it is more succinct, but also because it goes deeper into the war's background, becomes less caught up in military minutia, and does a better job of keeping the Indians in proper focus throughout the later stages of the war.
Rather than treating the conflict as primarily between the British and French empires, THE WAR THAT MADE AMERICA places the Indians center stage right from the outset. And it does so without viewing them all collectively as victims. Indeed, they become sophisticated and diverse players in Anderson's account. Like Rothbard, he singles out the Iroquois for their brutal imperialism against other Indian groups, and he even goes further in implicating the Iroquois' Covenant Chain alliance with the British for the war's outbreak. Also like Rothbard, Anderson is sympathetic to Pennsylvania's pacifism in earlier conflicts, explaining how it contributed to the colony becoming one of the most prosperous in British North America--until the policy was undermined by, among other factors, the conniving of Benjamin Franklin. Anderson's account coincides with Rothbard in making clear that the British were all along a major aggressive threat to the French in North America rather than vice versa, as alleged in so many Anglo-centric accounts. Anderson likewise emphasizes attempted land engrossment by men such as Franklin and George Washington. Finally, like Rothbard, Anderson demonstrates how costly to the British were the ultra war policies of William Pitt the Elder after his rise to power.
Anderson's discussion of the war's conduct, although obviously far more detailed than Rothbard's, has intriguing parallels with Rothbard's treatment of the later Revolutionary War in a subsequent volume of CONCEIVED IN LIBERTY. Rothbard followed the then "new" military history in stressing the critical but often neglected role of the American militia during the Revolution. Anderson does the same for the military role of the Indians, who in previous accounts tend to be treated as superfluous auxiliaries of little genuine value. Anderson illustrates how the Indians gathered intelligence, affected logistics, and provided other vital services that could spell the difference between battlefield victory or defeat. He furthermore chronicles a strategic debate among the French that was echoed in the debate about military strategy that American revolutionaries would later carry on. Whereas New France's Governor-General Vaudreuil favored LA GUERRE SAUVAGE, an irregular strategy that relied heavily on Indian allies and Canadian militia, the marquis de Montcalm preferred imposing the strictures of conventional European warfare with nearly exclusive reliance on regulars. Anderson suggests that Montcalm's winning of this strategic debate was a major cause of France's ultimate military defeat in the war.
To top if off, Anderson's WAR THAT MADE AMERICA is exceedingly well written, and an excellent introduction for anyone unfamiliar with the period.
Thursday, March 22, 2007
Politics and Banking
I have only recently stumbled on an outstanding work of scholarship published in 2001 that commands the attention of all those interested in either American financial history or money and banking. Entitled POLITICS AND BANKING: IDEAS, PUBLIC POLICY, AND THE CREATION OF FINANCIAL INSTITUTIONS (Baltimore: Johns Hopkins University Press, 2001), the book is written by Susan Hoffmann, a former city planner who got a Ph.D. in political science at the University of Wisconsin-Madison and who is hostile to deregulation. Yet immersing herself in primary sources, she has written an ideological history of American banking regulation that is one of the most insightful treatments of the subject I have encountered.
For instance, despite (or because of?) scant familiarity with the recent secondary historical literature, Hoffmann gets the Jacksonians with their commitment to hard money exactly right, putting her book alongside Major L. Wilson's classic THE PRESIDENCY OF MARTIN VAN BUREN (Lawrence: University Press of Kansas, 1984) as among the few that refrains from distorting the Jacksonians by trying to shoe-horn them into modern ideological categories. She is similarly sensitive to the political differences between the structures of the First and Second Banks of the United States. Having had occasion to read the charters myself, I also had noted that the First Bank was more private and less political, having no government-appointed directors, whereas the president appointed five of the twenty-five directors of the Second Bank. Although some older secondary accounts were aware of this difference, more recent accounts seem generally to overlook it. Indeed, one Federal Reserve historical pamphlet falls into the careless error of treating the two charters as absolutely identical except for the size of the institutions.
Hoffmann also introduces her book with a nice survey of what she considers to be the five "public philosophies," all variants of liberalism, that have battled over banking regulation in American history: classic liberalism, neoliberalism, populism, progressivism, and utilitarianism. She suggests a provocative distinction between the classic liberalism of Jefferson and Adam Smith versus the neoliberalism of modern defenders of the free market. Classic liberals viewed the corporation as an unnatural creature of the State that violated the private/public boundary, but neoliberals have embraced the corporation as "arising naturally in the private sphere." Indeed, she contends that a primary cause of divergence among the five versions of American liberalism is their reaction to the rise of the corporation. She carries the story forward through modern financial deregulation, and libertarians will not find all her arguments congenial. But I cannot recommend this book too highly.
Tuesday, March 20, 2007
Belated Recommendation
In addition to my own article, the latest ECON JOURNAL WATCH—4 (Jan 2007): 3-45—has an excellent article by Christopher J. Coyne and Steve Davies, “Empire: Public Goods and Bads,” that I've only recently gotten around to reading. Sadly but unsurprisingly, some academic economists have now jumped on the pro-imperialism bandwagon being trumpeted most conspicuously by historians Niall Ferguson and Victor Davis Hanson. Coyne, an economist, and Davies, a historian, offer a withering and extended critique of this new literature. They particularly single out a paper by Kris James Mitchener and Marc Weidenmier published in the 2005 JOURNAL OF ECONOMIC HISTORY and arguing that President Theodore Roosevelt’s interventions into Latin America provided the public good of increasing stability in bond markets. The Coyne and Davies’s critique is not only compelling and important, but it also demonstrates the powerful potential of libertarian economists and historians combining their efforts. The link is: http://www.econjournalwatch.org.
Friday, February 2, 2007
The Inflation Tax
The latest issue of ECON JOURNAL WATCH contains my article: "Death and Taxes, Including Inflation: The Public versus Economists." Here is the link
Wednesday, August 9, 2006
New Book on World War II
Here is a link about what looks to be a fascinating new book:
The Wages of Destruction: The Making and Breaking of the Nazi Economy by Adam Tooze.
Wednesday, July 5, 2006
I Make the New York Times
Check out yesterday's (4 July 2006) NEW YORK TIMES. On page A17 is a column by John Tierney, "Disunited States of America," which at the end favorably and extensively mentions me, my book, Emancipating Slaves, Enslaving Free Men, and San Jose State University.
P.S. In my excitement, I neglected to report that Tierney's column also mentions Liberty & Power's own John Majewski of UC, Santa Barbara.
Saturday, March 18, 2006
Anti-FBI Sting, "Citizen" Break-in in 1971
The following story from the Los Angeles Times should be of interest to Liberty and Power readers:
The Citizens' Commission to Investigate the FBI, as the group called itself, forced its way in at night with a crowbar while much of the country was watching the Muhammad Ali-Joe Frazier fight. When agents arrived for work the next morning, they found the file cabinets virtually emptied.
Within a few weeks, the documents began to show up — mailed anonymously in manila envelopes with no return address — in the newsrooms of major American newspapers. When the Washington Post received copies, Atty. Gen. John N. Mitchell asked Executive Editor Ben Bradlee not to publish them because disclosure, he said, could "endanger the lives" of people involved in investigations on behalf of the United States.
THIRTY-FIVE YEARS ago today, a group of anonymous activists broke into the small, two-man office of the Federal Bureau of Investigation in Media, Pa., and stole more than 1,000 FBI documents that revealed years of systematic wiretapping, infiltration and media manipulation designed to suppress dissent.
Read the rest here
Thursday, September 1, 2005
Thomas Woods and His Critics: A Review Essay
Thomas E. Woods, Jr., THE POLITICALLY INCORRECT GUIDE TO AMERICAN HISTORY. Washington: Regnery, 2004. xvi + 270 pp.
Reviewed by Jeffrey Rogers Hummel, Department of Economics, San Jose State University.[*]
Forthcoming in the JOURNAL OF LIBERTARIAN STUDIES.
Thomas E. Woods, Jr.’s, POLITICALLY INCORRECT GUIDE TO AMERICAN HISTORY not only became a NEW YORK TIMES bestseller but also raised an amazing amount of furor, to a certain extent among the left leaning, who are the book’s bête noire and would be expected to take offense, but especially in conservative and libertarian circles, among the book’s presumed friends. Woods’s survey of U.S. history from the colonial period through President Clinton has been condemned so far by REASON magazine contributing editor Cathy Young, both in the BOSTON GLOBE and on the pages REASON, by John B. Kienker in the CLAREMONT REVIEW OF BOOKS, by Max Boot in the WEEKLY STANDARD, and in assorted blogs, most notably by historians Ronald Radosh and David Greenberg, and by law professors Eric Muller and Glenn Reynolds.[1]
Tuesday, July 19, 2005
Unocal and the London Bombing
The New Yorker is the last place one would expect to find hard-core, free market rhetoric. But several months back (May 2, 2005), it carried an article by James Surowiecki, on the relative UNimportance of oil to the U.S. economy, that sounded like David Henderson could have written it.
And now in the current issue (July 11 & 18, 2005), Surowiecki has written the best defense of allowing the Chinese to buy Unocal that I have seen. Check it out on p. 40.
Check out the following Neva Chonin column, entitled "London Calling," from the pink pages (entertainment section) of this past Sunday's San Francisco Chronicle.
Its comparison of U.S. and British responses to terrorism contains a lot of truth.
I recently finished Ric Hardman, Fifteen Flags (New York: Little, Brown, 1968), a novel about the U.S. military intervention in Siberia during the Russian Revolution. Although not a great novel, it is a good one that chillingly captures the impossible situation into which President Woodrow Wilson thrust American troops from 1918 to 1920. Well worth a read.
Government debt is one of the modern State's foundations. It not only
allows the State to exploit financial markets, extracting resources, but
it also ties in closely with national defense. Governments usually depend
on borrowing to wage war, with those that are better at doing so wielding
far more power.
Government debt is a vulnerability of the modern State as well. Government
fiscal crises helped provoke both the American and French Revolution in
the past, for just two prominent examples, and the looming fiscal burden
of social insurance in all the western democracies has today become
apparent to nearly all.
Current holdings of government debt are too widely disbursed, however, to
define a class or even net tax beneficiaries. Of course, strictly
speaking, to the extent that you own Treasury securities, your returns
come from taxation. But a large segment of the U.S. population does so
indirectly through such modern financial innovations as money market
mutual funds, and then only as part of much larger portfolio that includes
many other assets, some of which also benefit from taxation yet many of
which are hurt by it.
Consider some numbers: The gross debt of the U.S. Treasury in mid-2003
stood at over $6.5 trillion. But about $3 trillion of that was held by the
social security and medicare trust funds, thus representing one government
program (temporarily) running a surplus that was transferred into other
government programs. The Federal Reserve held about $650 billion and
foreign investors and central banks more than one-third of the remainder.
That left about $2 trillion spread among depository institutions, mutual
funds, insurance companies, state and local governments, pension funds,
trust funds, corporate and noncorporate businesses, and private investors.
Nor have the returns on government debt been all that exorbitant. Indeed,
prior to the reduction of inflation in the 1980s, holders of long-term
Treasuries earned negative real rates of return, turning them into net
losers with respect to those holdings. For the U.S. government, this
"revenue" from the inflationary erosion of the real value of the debt far
exceeded by a large margin the direct seigniorage from printing money. The
fact that individual and institutional holders of government debt finally
caught on, putting an inflationary premium on government debt, is one of
the main ways financial markets disciplined the U.S. government into
reducing inflation.
None of this belies the tremendous importance of debt as a mechanism
through which the State plunders the economy. One of my favorite bumper
stickers reads: "Invest in Your Own Destruction, Buy Government Bonds."
The one consistent libertarian position with respect to these securities
that can be financed only with future taxes, in my opinion, is immediate
and total repudiation (just as the abolitionists advocated immediate and
uncompensated emancipation of all slaves).
Friday, January 7, 2005
A Good Novel About Wilson's Siberian Fiasco
Wednesday, November 3, 2004
Thoughts on Government Debt
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