The crisis of inaction

A guest review by Bill Allen

 The crisis in Eric Helleiner’s title is not something that has happened, but something that hasn’t happened. The aftermath of a real crisis – something that has happened - can provide the opportunity for institutional change. Helleiner’s choice of title reflects his observation that there has been very little effective change in the panoply of international financial institutions since the financial crisis of 2007 – 08. Specifically, he claims that the G20 has achieved very little, that financial regulation has remained undesirably ‘market-friendly’, and that no effective international organisation for financial regulation has been set up.

 Helleiner is quite right about the G20, whose main boast – agreement on a doubling of IMF quotas – has not been ratified by the United States Congress. He could have gone a lot further. International institutions generally were not much use in the crisis. The IMF lent very little in 2008. The Chiang Mai Initiative, which had been set up in the late 1990s as a source of mutual liquidity support in East Asia, was not used at all in 2007 – 08. There is a reason for this. International financial institutions, despite having extremely talented staff and managers, are inherently slow in reacting to fast-moving situations and lack the ability to improvise. This reflects their governance structures, and the caution that democratically-accountable governments display when faced with any new invitation to put up money. Fear of moral hazard always trumps recognition of a new urgent need. There is no getting over this problem, and it will be a considerable surprise if the recently-announced BRICS financing facility turns out not to be purely ornamental.

Just as well, then, that the Federal Reserve was unilaterally ready, able and willing to provide emergency dollar liquidity in short order and in massive amounts when it was most needed in the autumn of 2008. Chairman Bernanke received democracy’s traditional reward for doing the right thing when he was attacked for lending money to foreigners by Congressmen who either could not or would not understand that the Fed’s actions were in the interests of the United States as well as those of other countries, and that the Fed had prevented what is now known as the Great Recession from turning into a repetition of the Great Depression.

Where does this leave the international monetary system? Helleiner notes that China is in favour of a system based more heavily on Special Drawing Rights, and bemoans the failure to create more SDRs. But getting agreement to increase the SDR issue is always going to be slow and difficult, no matter how urgent the need. And in any case, an SDR is merely a right bestowed on an IMF member country to get some real money (dollars, probably, or possibly euros) from another member country which is willing to take SDRs in exchange. As Richhild Moessner and I have shown, the expansion of the SDR issue runs the risk of undermining the liquidity of the IMF itself. The key issue is what counts as real money and who controls the supply of it.

Past experience shows that it is desirable for the international monetary system to be capable of expanding international liquidity quickly in a crisis. That means that international reserve currencies have to be managed by single countries, which are sufficiently enlightened to understand that what is in the global interest may also be in their national interest. On this criterion, the dollar is the only plausible reserve currency at present and in the foreseeable future. The euro and its managers have structural problems - no single government,constipated decision making, and a penchant for looking inwards rather than outwards: the European Central Bank was dangerously slow in extending swap lines when they were needed in 2008 – 09, and bizarrely confined its swap lines to EU member countries. The renminbi, often suggested as a possible challenger to the dollar, has the crippling handicap that there is no separation in China between the government and the judiciary. No responsible reserve manager could rely on the RMB as a large-scale repository of liquid assets. Helleiner also claims that Russia was ‘strongly committed to goal of ruble internationalization’ after the crisis (p 85), but if so, Russia did nothing about it, and incomprehensibly passed up the opportunity to win influence among former Soviet Union countries by offering dollar swaps from its large reserves during the crisis.

Unfortunately the outlook for the dollar as a reserve currency is not assured, despite the Fed’s masterly crisis management of 2008. There is the perennial problem of the budget deficit, and the new threat that the Congress will force the U.S. Treasury to default by refusing to increase the Federal debt limit. Without the dollar, the international monetary system would be thrown into chaos, and an undesired return to gold would be on the cards.

What of financial regulation? Helleiner wishes that financial regulation had become less ‘market-friendly’, but he seriously underestimates the amount of new bank regulation that has been introduced and does not seem to understand its effects. For one thing, he says virtually nothing about liquidity regulation, which has been introduced into the Basel regulatory apparatus. In practice, in the UK at least, liquidity regulation has forced banks to buyenormous amounts of government securities, and to curtail lending to private borrowers. It has subsidised government borrowing and taxed private borrowing, and arguably prolonged the recession unnecessarily.

More generally, Helleiner misses what I think is the key issue in bank regulation, namely theproblem of banks that are too big to fail. They were too big to fail in 2008 and they are still too big to fail. This fact has profound implications. Too-big-to-fail imposes contingent liabilities on governments. Naturally the governments want to minimise the liability; hence official regulation of finance. As Helleiner points out, regulators cannot always be expected to co-operate with their foreign counterparts. All of them are servants of their own states, and are obliged to act in the interests of their own state and in accordance with its laws. If those interests and laws don’t conflict with those of other states, then fine; if not, not. So governments want to ensure that their contingent risk is monitored by people they control: international co-operation is limited in scope. All this explains increased capital requirements, the introduction of maximum bank leverage ratios, and the new-found aversion to foreign bank branches and pressure for subsidiarisation of international banks, country by country.

If it could be arranged that financial companies were not too big to fail, then most official financial regulation would be unnecessary; private incentives would be better aligned with social welfare and corporate governance, lamentably feeble in many cases before the recent crisis, could be expected to be more effective. It is impossible to contemplate all parts of the financial landscape being arranged in such a way: for example, the clearing houses through which financial companies are now required to settle derivative and other transactions are inevitably going to be too big to fail. But is possible to contemplate a less concentrated banking and securities-dealing industry, both in the retail and wholesale fields. Paradoxically, heavier and more intrusive regulation protects big companies, because potential competitors cannot bear the heavy fixed costs that it imposes. We have got stuck in a concentratedfinancial system/heavy regulation world, but a dispersed financial system/lighter regulation world would be much better.

 Helleiner is concerned that the banking industry has too much lobbying power, and asserts that reforms have been watered down in consequence. He provides no evidence, merely referring to similar claims by others. He complains that ‘the G20 made little effort to develop international standards that might tackle the issue of the potential “capture” of regulatory process by private financial actors’ (p 126). The United States addressed this issue in 1991when ‘Prompt Corrective Action’ was enacted, removing regulators’ discretion in managing failing banks, but that did not prevent the recent crisis. How serious is the issue of regulatory capture now? In the years before the crisis, bankers, regulators and governments shared many of the same illusions about the durability of the boom. Bankers were respected, consulted, and knighted. Financial companies had a lot of lobbying power, since they paid a disproportionately large share of taxes, in Britain at least – tax receipts that were sorely missed when the financial companies stopped making profits. But now, in many countries, the main issue between banks and governments is the ‘deadly embrace’ in which governments depend on banks to finance their deficits while banks depend on governments to guarantee their deposits. The situation in those countries is a lot more complicated than Helleiner suggests. And, as already noted, some of the post-crisis regulation that has been imposed has, predictably, had unintended bad consequences; perhaps it would have been wise to pay a little more attention to the lobbying of the banking industry.

Helleiner laments the ‘soft law’ character of international regulatory institutions like the Basel Committee on Banking Supervision and the Financial Stability Board. He would prefer them to have powers like those of the World Trade Organisation, which has rules and settlesdisputes between its member countries. But such an arrangement in the field of financial regulation might not be conducive to financial stability. There are signs that these bodies have become fora in which the main issue at stake is not financial stability but the financial and political interests of national governments. How else can the absurdly generous treatment of government securities for both capital and liquidity purposes be explained, and the extremely lenient treatment of mortgages for the purpose of the Net Stable Funding Ratio? Arguably, the world would be a better place if Basel 1, 2 and 3 had never been invented, because it would have been clear to bankers that it was their responsibility to judge the adequacy of their capital, and not something that could be assessed formulaically by reference to a set of complicated rules arrived at as a compromise among national negotiators in Switzerland. The truth is that nobody has yet worked out how to do bank regulation properly, and it would not be a good idea to entrench present-day customs and practices in an international treaty.

‘More regulation’ may be a good slogan but there isn’t much substance behind it. Helleiner denies this, claiming that there are a lot of new ideas in ‘the new macroprudential regulatory philosophy’, which, he says, provide a ‘broad intellectual justification for many…regulatory initiatives…such as counter-cyclical buffers, tighter controls on liquidity and SIFIs, the extension of public oversight to new sectors, transaction taxes, and support for capital controls’ (p 127). Broad, indeed. By these standards, ‘the new macroprudential regulatory philosophy’ could provide intellectual justification for just about anything. Regulation of this kind would be like doing brain surgery with a penknife.

Many of the issues arising from the crisis are unresolved and contentious. Helleiner addresses a great many of them. He has a point of view, with which readers may agree or disagree, but he is well informed and his book is a serious contribution to the continuing discussion. It is well worth reading.

 Bill Allen is a former Bank of England director and is on the sdvisory board of the Cass Business School


What have we learned since the crisis?

I’ve been looking at some of the essays in What Have We Learned: Macroeconomic Policy After the Crisis. It’s edited by a chandelier of luminaries – George Akerlof, Olivier Blanchard, David Romer and Joseph Stiglitz. The contributors are equally distinguished, including Janet Yellen, Mervyn King, Stan Fischer, Andy Haldane, Helene Rey, Jean Tirole…. and more. The essays I’ve read – and my focus has been the ones about implications for macroeconomics itself rather than specific areas of macro policy – are very interesting.

Collectively, this book adds up to an acceptance by about the most impressive cast list of macroeconomists you can imagine, that actually macro does need a lot of rethinking. Blanchard writes: “The contours of future macroeconomic policy remain vague.” Structures of policy and thinking about the relations between monetary, fiscal and macroprudential policy, is still evolving. Stiglitz, more pugnacious as one might expect, writes: “Market economies on their own are not necessarily efficient, stable, self-correcting.” George Akerlof is kinder on the profession – he says that while macroeconomists failed to predict the crisis, there has been successful post-crisis management with “good economics and common sense.” But David Romer worries that macroeconomists are not in a position to prevent another crisis: “The relatively modest changes of the types discussed [in the book] – and that policymakers are putting into place in some cases – are helpful but unlikely to be enough to prevent future financial shocks from inflicting large economic harms.” He says the academic and policy communities have not given enough serious consideration to deeper ideas and reforms.

I’m on the Romer and Stiglitz side of the debate. Still, even if you’re at the radical end, the other essays, ranging over fiscal policy, financial regulation, exchange rate arrangements, capital account issues and monetary and macroprudential policy, look very interesting. Some chapters seem standout – for instance Claudio Borio on the financial cycle, the whole section on regulation. It’s a conference volume – looks like it was an outstanding conference.


The state and the energy market

Dieter Helm knows more than most people about the UK energy market. His website is packed with useful papers, and I really enjoyed his recent book The Carbon Crunch. He has another one due out next year, Natural Capital: Why It Matters – Prof Helm chairs the Natural Capital Committee.

This week I read through one of his older books, Energy, the State and the Market: British Energy Policy Since 1979, published in 2003, having only dipped into it previously. It’s an excellent, detailed account which intertwines economics, history and political analysis – as any rounded understanding of energy markets would require. Energy is so fundamental to the economy that it will always be a political issue, and private ownership simply changes the role of the state from producer to regulator.

Although obviously written long before the recent concern about prices and market structure, now being scrutinised by the Competition and Markets Authority, the book makes plain the inevitable trilemma: efficiency, affordability and sustainability. The political debate has got no closer to acknowledging the unavoidable trade-offs in the 10 years or so since the book was written.

There is, by the way, a good comment here on the University of Manchester Policy blog on the market reference by Martin Stanley, former Chief Exec of the Competition Commission.

The other thought prompted by reading the book it is how terrifically complicated the markets for gas and electricity are – and how constrained the future choices are by past investments and institutional structures. I thought I knew this already, as I’m a member of a stakeholder advisory panel for EDF Energy in the UK, but seeing all the detail set out in one place has really underlined it. It is striking in Helm’s account how frequently major, disruptive structural decisions have been taken on the basis of assumptions about oil prices and growth that have proven massively wrong. Not a very cheering read after news this week that the National Grid is seeking emergency supplies because it expects electricity shortages this winter.

Economics and women

Economics has a women problem. It’s obvious enough just looking at the talking econo-heads who appear on TV, but the data confirm the impression. Studies by the Women’s Committee of the Royal Economic Society have found that in academic research and employment, women are in a minority in economics departments, and the proportion declines the higher the level – women are under-represented as professors in particular. The latest report also finds a decline in the proportion of undergraduate economics students who are female (although numbers overall of economics students have been rising).

A new working paper (pdf) by Mirco Tonin and Jackline Wahba of the University of Southampton finds that the gender gap precedes university: despite the relatively high pay and the potential for an influential career offered by an economics degree, in the UK only 27% of students enrolling for economics degrees are female, compared to 57% of all students enrolling for university. (They use the UCAS data on acceptances for the 2008 round.) They find no evidence of universities discriminating against would-be female economists; the gap lies in the fact that girls are less likely to apply to do economics, even after controlling for individual characteristics, type of school and region. A large part, but not all, of the gap is due to the differences in girls’ A level choices at school, as they are less likely to have chosen maths and economics at 16.

The paper therefore urges better maths preparation for girls in high school, so that more of them choose to study it for longer. Some people, of course, would urge economics to become less mathematical, but I’m not one of them, although it should never be only about the mathematical models. In many ways, a more ‘real-world’ economics would need more proficiency – think, for example, about network theory, or the use of non-linear dynamic systems in macroeconomics.

The paper landed in my email in the wake of the arrival of a new book, Why Gender Matters in Economics, by Mukesh Eswaran. It’s fascinating.

There are three sections, covering: whether women and men behave differently in economic situations (more or less altruistic, risk averse etc) and their power within households when it comes to economic decisions; gender in markets, which covers the labour and credit markets and globalization; and finally a section on the institution of marriage looking at questions such as access to birth control and fertility rates. It’s a non-technical book, having grown out of an undergraduate course. It discusses these questions in the setting of both poor and rich countries. Of course, it does not summarize all the empirical literature on these questions, but it gives readers the analytical tools to think about them, and enough of a flavour of the state of evidence on the answers.

The book ends on a sombre note, reporting the evidence of a decline in the subjective well-being of women, either absolutely or relative to men, in recent data for developed and developing countries.

We certainly need more women economists for its own sake – there is likely to be distortion in the questions addressed by any subject which is only a quarter female, and an odd sociology. To give just one example, the absence of data on unpaid work in the home makes it hard to evaluate lots of policy proposals concerning (paid) labour force participation; the economists and statisticians who concluded unpaid domestic labour should be outside the GDP production boundary were men.

Beyond this, though, Tonin and Wahba are right to say that a career in economics is potentially influential. Economists wield great influence over public policy, including policies affecting the lives, economic power and ultimately the well-being of women. There is lost ground to make up. Girls, women, brush up on the maths a bit if you need to, but above all come and study economics!

Guest review of Lean In

This is a guest review by Ian Bright, @brighteconomist, of Lean In: Women, Work and the Will to Lead by Sheryl Sandberg

Behind every good book there is a mountain of research. It would be a mistake to dismiss this short book’s discussion of the problems women face in reaching senior management positions in business and public life simply because its story-telling approach is not to your liking. Its style was not to my taste but I read on regardless, drawn in by the footnotes that chronicle important research and details. The book’s strength is in this research, which naturally appeals to the economist in me.

There are 35 pages of small print footnotes accompanying 182 pages of text. These account for 19 per cent of the pages but add so much more of the content. I found myself continually flipping between the text and the notes. Anecdotes throughout are usually supported by academic research that indicates the problem is pervasive or that gives detail that would otherwise disturb the flow of the story being told.

Sandberg, currently Chief Operating Officer at Facebook, is one of the most senior and prominent women in global business. She holds a position of power and influence. It is appropriate that her stories provide the narrative for the text as they provide a way to shed light on the important issue of advancing women in the workplace and society. To her credit, she openly pays tribute to the contribution of Marianne Cooper, a sociologist at the Clayman Institute for Gender Research at Stanford University, as the book’s lead researcher.

The book covers various issues such as the ambition gap displayed by women, the tension that can exist between success and likeability that can affect women particularly, the role of fathers/partners/families in child rearing and the role of mentors. Many issues are approached with an anecdote from Sandberg’s or a friend’s experience, but a close reader will be drawn to the footnotes for details.

The book’s title comes from the advice to “lean in” to tables when at meeting rather than to sit back or stay at the side of the room and therefore not participate. The advice to others – both men and women – in positions of management and power appears to be to provide the environment to allow more women to contribute. Even simple things such as ensuring toilets are available for women as well as men at meeting venues can play a part.

When story-telling to highlight an important topic, there can be a fine line between trivialising and getting the main message across. For some, this line will be crossed at times and they may be thinking “too much information”. For example, I would never ask a woman of a newly-born child “Do you need to pump?” But Sandberg notes that her writing partner, Nell Scovell, “was insistent that we keep searching until we found the right way to talk about these complicated and emotional issues.” Sandberg and Scovell are right. The issue of advancing women in the workplace is complicated and emotional. If it takes a story from a powerful woman to make the issues more accessible, acceptable and understandable, so be it.

For economists, there is an interesting insight into the working relationship between Sandberg and Larry Summers. Sandberg was a research officer for Summers when he was Chief Economist at the World Bank. Sandberg did not know how to use Lotus 1-2-3 (an early version of Excel spreadsheets) to complete a task. Her colleagues appear to have been amazed at her lack of knowledge and apparent unsuitability for the job she had been given. Summers took a different tack. He taught her how to use the software.

Further, for the economics profession this book has great relevance. Women are under-represented in the profession. This is generally accepted and even highlighted by Nobel laureate Robert Shiller in a tweet of March 1 referencing an article by Claudia Goldin titled “Will more of our daughters grow up to be economists?” ( ).

Lean In won’t provide all the answers but it provides a way to think about this issue and how it can affect your working and family life.