Arnold Kling's Unchecked and Unbalanced is a novel and insightful take on both the financial crisis and broader trends in the provision of government services. Its central point is best summarized by its subtitle, “How the discrepancy between knowledge and power caused the financial crisis and threatens democracy.” This is a brief, very readable book for two distinct audiences, those interested in further understanding the financial crisis and those interested in improving the accountability and efficiency of services provided by government.
In the early 1980s, I was working as the research administrator at the World Bank, while the Third World was engulfed by a debt crisis. The current global financial crisis has eerie similarities, but different outcomes. Why?
It has become commonplace in the current crisis to refer to the Federal Reserve as the economy's lender of last resort (LLR). Typical is the observation of Glenn Hubbard, Hal Scott, and John Thornton (2009) that "Over many decades and especially in this financial crisis, the Fed has used its balance sheet to be a classical lender of last resort."
It is popular around the world to blame the financial crisis on the United States. But before we identify this as the usual anti- Americanism, we should perhaps look more seriously at our country's housing policies. Unfortunately, there is a strong argument that the financial crisis is indeed the fault of the United States—an artifact of the housing policies that this country has followed since the early 1990s. These policies produced an unprecedented number of subprime and other nonprime mortgages (known as Alt-A), and when the housing bubble topped out in late 2006 and early 2007, these loans began to default at unprecedented rates. In my view, the severe losses associated with these defaults caused weakness of Bear Stearns and AIG—resulting in their rescue—the failure of Lehman Brothers, the severe recession we are experiencing in the United States today, and ultimately the financial crisis itself.
Charles Rowley and Nathanael Smith have put together a brief, yet extensive, study comparing America's Great Depression and the recent financial crisis. Their focus is on both the economics and the politics behind these events. With both, they demonstrate how each was a failure of government, not of the market. The book concludes with several recommendations for addressing our nation's current economic and fiscal situation. The most original contribution of their work is in bringing a Public Choice framework to evaluating the financial crisis.
I begin by describing the factors that contributed to the financial market crisis of 2008. I end by proposing policies that could have prevented the baleful effects that produced the crisis.
Topic:
Democratization, Economics, International Trade and Finance, Markets, Privatization, and Financial Crisis
I am going to make several unrelated points, and then I am going to discuss how we got into this financial crisis and some needed changes to reduce the risk of future crises.
Topic:
Democratization, Economics, International Trade and Finance, Markets, Privatization, and Financial Crisis
The current financial crisis undoubtedly will inspire a great deal of research in the years ahead, and it may take some time before anything like a professional consensus emerges on causes and consequences. After all, it took several decades to document the causes of the Great Depression, and recent research continues to provide new perspectives. Nonetheless, I believe the central questions that are likely to occupy researchers are plainly in view, and some tentative lessons have emerged already. And in any event, legislators are not likely to await the fruits of future scholarship.
Topic:
Democratization, Economics, International Trade and Finance, Markets, Privatization, and Financial Crisis
The U.S. and China are two of the dominant economies in the world today and the nature of their relationship has far-reaching implications for the smooth functioning of the global trade and financial systems. These two economies are becoming increasingly integrated with each other through the flows of goods, financial capital, and people. These rising linkages of course now stretch far beyond just trade and finance, to a variety of geopolitical and global security issues. Getting this relationship right is therefore of considerable importance.