Bernanke, banks and bugs

The dreaded flu going around has struck me, so I’ve been paging through a book it’s easy to hold while lying in bed feeling wan. It’s The Federal Reserve and the Financial Crisis, some lectures given by Ben Bernanke at George Washington University last year.

The Federal Reserve and the Financial Crisis

I won’t pretend to be alert enough to have absorbed every nuance, but the Fed Chairman’s overall message is clear: of course we might have got some details wrong but we did exactly what it says on the Fed tin in acting as a lender of last resort to the financial system and calming the panic. What’s more, if you look over the long span of history (he being the author of Essays on the Great Depression), the loss of output subsequent to the crisis is clear but the US economy will sooner or later get back on its long term growth trend.

Essays on the Great Depression

No doubt it’s the combined effect of the bugs wreaking havoc on my well-being and the peculiarly horrible medicine I’ve been taking, but I’m much less sure the crisis is fixed. I’m not confident the same kind of crisis could not occur again tomorrow – the banks are still too big, too intertwined, too leveraged with – as Admati and Hellwig point out in their superb new book, The Bankers’ New Clothes – far too little equity capital. At any rate, I don’t want to rely entirely on the forces of history. I think the Fed has indeed done a decent job in the face of the imminent 2008 meltdown; but in making the comparison with the Fed’s historical role as lender of last resort, the lectures lack a sense of the really fundamental questions about the present financial system.

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

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Lessons of history

One of my correspondents, Brett Christophers of Uppsala University, just asked me which books I’d read on the history of finance that had helped me think about the financial present in a new way. (He has a superb book out early next year, Banking Across Boundaries, about the role of banks in the economy over time, and the links between financialisation and globalisation. It will be an essential read for anyone wanting to understand the deeper roots of the financial crisis.)

Banking Across Boundaries: Placing Finance in Capitalism (Antipode Book Series)

Anyway, here is the list that came to mind replying to Brett’s email this morning. Other suggestions will be welcome.

Liaquat Ahmed’s Lords of Finance – the monetary policy debates of the 1930s, and a page-turner (really!)

This Time is Different, Reinhardt and Rogoff.

I have high hopes for Jonathan Levy’s Freaks of Fortune, about risk-taking in 19th century American capitalism

Niall Ferguson’s The Cash Nexus: Money and Politics in Modern History alongside David Graeber’s Debt: The First 5000 Years – a contrast between a conservative historian and a progressive anthropologist

Benjamin Friedman, The Moral Consequences of Economic Growth – why growth enables democracy and liberty

Benjamin Roth The Great Depression: A Diary – a contemporary diary from the 1930s mid-west, and a vivid reminder of how long it will take to emerge from the present stagnation

Roger Backhouse and Bradley Bateman, Capitalist Revolutionary, the best modern revisiting of Keynes.

Masters of the Universe: Hayek, Friedman and the Birth of Neoliberal Politics by Daniel Stedman Jones, a political scientist traces the multi-decade project that enabled a particular ideological perspective to come to dominate public policy.

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Poetry, and economics

It has taken me some weeks to read Mary Poovey’s Genres of the Credit Economy: Mediating Value in 18th and 19th Century Britain. She is a Professor of English, so writing in a different academic language than the one I’m used to, and it’s quite a dense book of subtle argument and loads of detail about the evolution of finance in early capitalist Britain. Yet it has amply repaid the effort. Poovey’s argument is fascinating and, I think, persuasive.

The book traces the separation from the 18th century onward of three different genres of writing that were not all that distinct to start with. The era described in the book saw huge growth in the amount being written and published, and in literacy and the appetite for information among readers. It was the Information Age 1.0. (In fact, I learned from the book that Thomas Carlyle designated 1774-1784 the start of the ‘Paper Age.’)

One ‘genre’ considered here is the writing on financial instruments, including bank notes: what began as quite discursive text on bills of exchange about the creditor and debtor, and the hands through which the bills passed, and the specific promises and dates they contained gradually became standardised and more or less invisible (as fictional writing). By the late 19th century, the leap of faith that was needed to trust the fiat money of Bank of England notes and commercial bills only ever came into focus during financial crises.

The second genre is writing about political economy, or factual writing about money, and the third literary writing. Poovey demonstrates that in the early part of the period she looks at, writers did not hesitate to use fiction and fables to write about financial matters. Yet steadily both the abstract language of professional scholarly economics and the factual writing provided by the emerging class of financial journalists drove out literary and imaginative ways of understanding credit. In parallel, literary writers were at pains to demarcate their fictional writing from the taint of the marketplace – although increasing numbers of literary writers sought to sell their work, they were disdainful about commerce, including the non-literary fictions and publications that sold well to the emerging mass market of readers. Indeed, criticism of the market became the only acceptable way for the literary world to relate to the market.

From my perspective as an economist, the most interesting parts of the book concern the causes and consequences of the professionalisation of economics as a serious intellectual discipline. As Poovey writes:

“If economic writers had not pursued natural philosophical and then mathematical models to the exclusion of other ways of modelling value, if these writers had not been successful in popularizing a theoretical consensus about which economic questions mattered, and if they had not embraced marginal utility theory in a way that narrowed the discipline and ignored what their models could not explain, economics as a discipline might not have assumed the form it now takes. By the same token, …. if Literary writers had not cloaked their participation in the market economy …. then imaginative writing of all kinds might now seem to have something to  contribute to the discussions about value we need so desperately to restart. …. Writers developed genres that seemed to be different in kind and were arranged in an increasingly rigid hierarchy that divided their audiences in ever-more-differentiated segments too.”

It is interesting to note that she sets economics’ ambition to attain the status of the natural sciences far earlier than often claimed – in the marginal revolution and adoption of utilitarianism, rather than in the cybernetic era (as claimed for example by Philip Mirowski in Machine Dreams: Economics Becomes a Cyborg Science). I also found it illuminating to follow Poovey’s tracing of the increasing abstraction and adoption of jargon by early economics writers. Some, including J.S.Mill, acknowledged that this abstraction had limitations when it came to describing the reality of the economy, and suggested this would change as the infant science grew to maturity, and political economists learned more. As we know, however, the habit of abstraction has stuck.

The argument in this book has some similarities to Richard Bronk’s The Romantic Economist – he advocated bringing the techniques and habits of mind of literature to an understanding of the economy. I also found echoes of Deirdre McCloskey’s How To Be Human (Though An Economist), a marvellous dissection of the kinds of rhetoric used in economics. What Poovey adds, that ought to be thought-provoking for economists, is the realisation that our habitual way of thinking about the economic and financial world does not have a natural epistemological superiority over other ways of thinking about the subject, not even poetry.

Perhaps the problem is that the poets have abandoned the territory.

 Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain

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