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281. Three Narratives about the Financial Crisis

Author:
Peter J. Wallison
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The most important lesson we can learn from the financial crisis is what caused it. Even though the Dodd-Frank Act (DFA) has been signed into law, this is still an important question. If we do not attribute the crisis to the right cause, we could well stumble into another crisis in the future; and if the DFA was directed at the wrong cause, we should consider its repeal. There are several competing narratives. One of them will eventually be accepted, and will determine how the great financial crisis of 2008 is interpreted, and thus how it affects public policy in the future.
Topic:
Financial Crisis

282. Supply: A Tale of Two Bubbles

Author:
Mark A. Calabria
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
To the extent that monetary policy influences asset prices, it does so via the demand for assets, by changing the borrowing costs to purchase assets, or via supply, where movements in interest rates can make investment in assets look more or less attractive. Fiscal policy interventions can also contribute to bubbles by changing the cost of acquiring specific assets. Most discussions of asset bubbles, particularly those involving the role of monetary policy, focus on demandside factors. This article examines the role of supply-side factors in the recent booms in the U.S. housing market and dot-com stocks. The importance of supply constraints in each market is discussed. Policy implications are then presented.
Topic:
Monetary Policy
Political Geography:
United States

283. Incentive-Robust Financial Reform

Author:
Charles W. Calomiris
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Will Rogers, commenting on the Depression, famously quipped: “If stupidity got us into this mess, why can't it get us out?” Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S. government that account for the systemic fragility of our financial system, especially the government's subsidization of risk in housing finance and its ineffective approach to prudential banking regulation. To avoid continuing to make the same mistakes, it would be helpful to reflect on the history of crises and government policy over the past three decades.
Political Geography:
United States

284. Preventing Bubbles: Regulation versus Monetary Policy

Author:
David Malpass
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Over the years, there has been a lot to consider in the Federal Reserve's choices of monetary policy and their relationship to bubbles. My conclusion is that mistaken U.S. monetary policy, usually related to the Fed's indifference to the value of the dollar, has repeatedly caused harmful asset bubbles in the United States and abroad. Policy is again at risk with the Fed's imposition of near-zero interest rates and its decision to conduct large-scale asset purchases (termed “quantitative easing”). Regulatory policy has often been ineffective at identifying or addressing asset bubbles, especially those caused by Fed policy. The solution is a parallel track to improve monetary policy so that it provides a more stable dollar and fewer asset bubbles; and to strengthen regulatory policy so that it provides a more reliable base for growth-creating free markets.
Topic:
Monetary Policy
Political Geography:
United States

285. Honest Money

Author:
Jerry L. Jordan
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
This article addresses some of the recent proposals for the conduct of monetary policies in the post-bubble environment. Advocacy of higher inflation targets is analyzed, and the challenge of maintaining monetary discipline in the face of massive fiscal deficits and mounting government debts is presented. Proposals for reforms of monetary arrangements must be based on consensus regarding the objectives of such reforms. The article concludes with some suggestions for near- and intermediate-term changes to present arrangements, as well as ideas for longer-term reforms.
Topic:
Government and Reform
Political Geography:
Canada

286. Milton Friedman's 1971 Feasibility Paper

Author:
Leo Melamed
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The story is fairly well known. In 1971, as chairman of the Chicago Mercantile Exchange, I had an idea: a futures market in foreign currency. It may sound so obvious today, but at the time the idea was revolutionary. I was acutely aware that futures markets until then were primarily the province of agriculture and—as many claimed—might not be applicable to instruments of finance. Not being an economist, the idea was in need of validation. There was only one person in the world that could satisfy this requisite for me. We went to Milton Friedman. We met for breakfast at the Waldorf Astoria in New York. By then he was already a living legend and I was quite nervous. I asked the great man not to laugh and to tell me whether the idea was “off the wall.” Upon hearing him emphatically respond that the idea was “wonderful,” I had the temerity to ask that he put his answer in writing. He agreed to write a feasibility paper on “The Need for Futures Markets in Currencies,” for the modest stipend of $7,500. It turned out to be a helluva trade.
Topic:
Economics
Political Geography:
New York and Chicago

287. The Need for Futures Markets in Currencies

Author:
Milton Friedman
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Under the Bretton Woods system, the central banks of the world undertook to keep the exchange rates of their currencies in terms of the dollar within _1 percent of the par value as determined by the official values of gold registered with the International Monetary Fund. In practice, the central banks generally kept the margins even narrower: _1⁄2 of 1 percent or _3⁄4 of 1 percent. So long as they had confidence that these limits would be maintained indefinitely, persons engaged in foreign trade were subject to negligible risk from fluctuations in exchange rates. Even so, large traders with sharp pencils found it desirable to hedge any future transactions by buying foreign currencies forward to meet commitments coming due or selling foreign currencies forward to match scheduled receipts. These forward transactions were handled by the large commercial banks, often with the active participation of foreign central banks in the forward market.
Political Geography:
London

288. Friedman and Samuelson on the Business Cycle

Author:
J. Daniel Hammond
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Chicago School economists have come in for criticism since the financial crisis and so-called Great Recession began in 2007. Commentators have blamed recent problems on a laissez-faire faith in the efficacy of markets and simple rules for business-cycle policy—ideas associated with economics as taught and practiced at the University of Chicago. Events over the past four years, we are told, demonstrate the need for a restoration of Keynesian thinking about business cycles and activist government policies to keep markets from failing. However, there is another aspect of Chicago School economics that is commonly overlooked. This is the conviction that economists' understanding of the business cycle is meager in light of the knowledge necessary for activist countercyclical policy to be effective. From this comes the Chicago School concern that economists and policymakers not attempt to do something beyond their capability. Overreaching can make the problems worse.
Topic:
Economics and Financial Crisis
Political Geography:
Chicago

289. Peddling Protectionism: Smoot-Hawley and the Great Depression

Author:
Daniel Griswold
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Let me preface this review with a confession: As an advocate of free trade, I love to link the 1930 Smoot-Hawley tariff bill with the Great Depression at every opportunity. More than 80 years after its passage, the bill still evokes negative feelings about protectionism. After reading Douglas Irwin's Peddling Protectionism: Smoot- Hawley and the Great Depression, I can see I need to curb my enthusiasm. Irwin does not defend the bill, far from it. He concludes that it failed to achieve its objectives and that it did, in an incremental way, make the Great Depression worse. But in the careful language of the professional economist and historian that he is, Irwin documents in rich and often colorful detail that the most infamous trade bill in American history had less impact than either its advocates or its opponents understood at the time or understand today. Even so, the story of Smoot-Hawley offers valuable lessons for today as our politicians seek to craft U.S. trade policy in the 21st century. Irwin is superbly qualified to write the definitive history of what was officially the Trade Act of 1930. A professor of economics at Dartmouth College, he has authored Against the Tide: An Intellectual History of Free Trade (1996), and Free Trade under Fire (3rd ed., 2009).
Topic:
Economics
Political Geography:
United States

290. Robust Political Economy: Classical Liberalism and the Future of Public Policy

Author:
Richard L. Gordon
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Pennington undertakes a needed effort to provide a systematic, analytic critique of recent efforts to discredit what he terms “classical liberal economics.” His is effectively the standard but hard-to-sell proposition that prescient impartial counselors—Plato's philosopher kings—have failed to emerge from the development of modern knowledge. In particular, Pennington makes good use of Hayek's radical contrast between the competitive testing of concepts in a spontaneous market order and the construction of solutions by government monopolies. As Pennington's conclusions nicely summarize, skepticism of limited government is high and fostered by those who are seeking rents from intervention. Thus, ideas that committed libertarians see as obviously absurd need systematic debunking for a broader audience. Pennington, therefore, pretends that he is treating serious arguments and confronts them respectfully.
Topic:
Government and Political Economy
Political Geography:
United States