English Version

Some of the most recent blog entries will be translated into English. They will be included here.

ONE HUNDRED YEARS OF THE FEDERAL RESERVE: A COMMENT ON A RETURN TO JEKYLL ISLAND

Carlos Marichal (El Colegio de México), 13 April 2014.

It would appear worthwhile to comment on the fact that 2014 is the centenary of the Federal Reserve, and that it is therefore of interest to comment on historical works which explain where this powerful institution came from and why. It is true that the law that authorized the establishment of the central bank of the United States was ratified in 1913, but in practice the Federal Reserve did not begin to be operative until a year later. Furthermore, it is important to draw attention to the fact that the blueprint of the Fed was drawn up in a singular and very secret meeting held in late 1910 on Jekyll Island. It was there that a very small group of Washington politicians and New York bankers drew up the provisional architecture for the future central bank. The six persons involved were Nelson Aldrich, Republican Senator for Rhode Island, his secretary Arthur Shelton, A Piatt Andrew a Treasury official and three bankers, Henry Davison (Morgan), Frank Vanderlip (National City) and Paul Warburg. Under guise of an innocent week supposedly devoted to duck hunting, these six men there formulated the essential guidelines for the future establishment of the Federal Reserve.

In order to commemorate this event, Michael D. Bordo of Rutgers University and William Roberds of the Atlanta Federal Reserve convoked a distinguished group of financial historians to present papers in a colloquium in the old and now classic hotel on Jekyll Island during November 2010. The results have been published in the book edited by Bordo and Roberds, titled The Origins, History and Future of the Federal Reserve, and published byCambridge University Press in 2013.[i] Especially notable is the fact that the conveners managed to get various governors of the Federal Reserve to participate in the meeting, including Ben Bernanke, Alan Greenspan and Paul Volker, although the latter did so by skype. In addition, also present were Gerald Corrigan, former head of the New York Fed, as well as seven presidents of regional Federal Reserve banks. The participants were attracted by the possibility of social and intellectual exchange, but also by the possibility of comparing financial crises, then and now.

All of this takes us back to an essential historical question related to origins. There is a consensus that the most important result of the 1907 crisis was to show that the United States needed to establish a central bank to be able to deal with future bank and financial turbulence. In Europe, at that time, there were already several central banks acting as such and they had demonstrated some efficiency in managing monetary policy and confronting bank panics. But in the Americas no such institutions existed, neither in Canada nor the United States nor in the whole of Latin America.

            This situation raises important issues for understanding finance in the first period of globalization. First of all: why were there no central banks in the Americas before 1914? It is the case that in some Latin American countries a large national bank (sometimes private, sometimes public) performed some of the functions of a central bank but certainly not all. What is more surprising is that there was no central bank in the United States and that, in fact, it had a banking system that was at once huge and dynamic but also the most fragmented and unstable in the world. Doubtless this contributed to the many bank panics (1873, 1884, 1893 and 1907) in this period of classic capitalism. But it was also based on the idea of ‘laissez – faire’ consistent with the idea of limited government intervention and limited regulation of banks. This was directly linked to two dogmas common to the period.

            In the first place, before 1914, the liberal theory of public finance did not generally sanction governments to intervene counter-cyclically in difficult economic situations, although this was not necessarily the case in times of war. Given fiscal restrictions, the government often reduced public expenditure in situations of financial crisis. In the second place, the most advanced theory of central banks – that of the Bank of England – held the view that it should limit itself to liberally discounting letters of credit from private banks at times of crisis to limit the impact of credit restrictions by markets. But such action did not contemplate an increase in the money supply given the restrictions imposed by the gold standard. On the contrary, often in times of crisis, the flight of gold would cause a reduction in monetary circulation and this was considered inevitable and necessary for later recovery.

            However, as can be seen from the historical review of the various crises in this period of early globalization, on specific occasions there were indeed central bank and Treasury interventions. While these, in general, were limited enough in financial crises, as has been discussed, the interventions were effective. We refer not only to the greater liberality of credit but to the many opportunities by which some governments in the late nineteenth century and first decade of the twentieth century (for example the United States and Italy) deposited certificates from their respective Treasuries into the accounts of commercial banks to stabilize banking markets. It is also important to recall cases when there were coordinated interventions by central banks to stabilize financial markets, as in the case of the Barings episode in 1890.

            However there were limitations to such interventions, mainly imposed by fidelity to the gold standard. In the financially most advanced countries, in Western Europe and the United States, the finance ministers and central bank directors trusted in gold as an automatic and stable adjustment mechanism implying that it was feasible to wait for various successive stages for the crisis to be resolved. Recession tended to produce gold flight from the country but also a fall in import purchase capacity, which would eventually produce an improved trade balance. So too, the fall in the price of domestic goods would strengthen exports and this would help produce a trade surplus and so, as a result, new external deliveries of gold. Once the latter trend gained strength, the banks could increase money supply and expand credit which would contribute to the general economic recovery.

            Nonetheless, the repeated bank and financial crises of the United States in particular caused increasing concern about the impact on the national banking systems and also their effect on the international monetary system. What is clear from a review of the 1907 panic is that the political authorities in Washington D.C. quickly began a review and reform of the United States’ complicated banking system. The challenge was immense. Not only was the banking structure the broadest (and most atomized) in the world – with the impressive number of 18,000 distinct banks in 1914 – but there was no government banking entity. The growing number of problems facing this highly decentralized system generated more and more demands for greater regulation, supervision and control over monetary policy and banks. As a result, the U.S. Congress authorized a commission, made up of specialists, to evaluate how to go about new banking legislation and to improve the regulation of the financial system. However, the detailed reports on banking systems of the world contracted by the National Monetary Commission and published between 1908 and 1912, did not establish the basis for the creation of the Federal Reserve Bank. It was in fact the plan hammered out at Jekyll Island in 1910 and equally important the Congressional debates in 1912which would lay the foundations for the law approved in 1913. Paradoxically, at the very moment the Board was being organized, a grave monetary and financial crisis broke, following the news of the outbreak of the Great War in Europe in August 1914. But the new central bank survived and assured the United States would remain on the gold standard despite global cataclysm. [ii]

            In the aforementioned work edited by Bordo and Roberds, there are seven essays by distinguished financial historians. It is worthwhile reading these chapters as they are truly state-of-the-art pieces. For instance, the essay by Eugene White on bank supervision before 1914 demonstrates how the lightly regulated banking system of the United States actually functioned relatively well despite frequent bank panics. On the other hand, as Bordo and David Wheelock demonstrate in their study of the Federal Reserve between 1914 and 1933, regulatory considerations and norms did not prove to be of much use in avoiding the greatest financial disaster of the twentieth century, the crash of 1929 and subsequent Great Depression. The essay by Marc Flandreau and Stefano Ugolini demonstrates a new and detailed study of the Overend-Gurney Panic of 1866, that key lessons were learnt by the Bank of England, proven by the fact that the British banking system did not suffer any new panics for almost a century, that is until the 1970s.

            The question remains open whether the new measures taken after 2008 to re-regulate banks and financial markets in many countries round the world will be similarly successful. What will happen after the establishment of the new and grand European financial supervisory agency in Frankfurt next year? How will the Federal Reserve deal with new asset booms and bubbles in the future? All of these are issues hotly debated today and worthwhile following but a look back at history can also offer much food for thought and also considerable healthy skepticism about the ability of avoiding financial crises.

[i] Michael D. Bordo and William Roberds, eds., The Origins, History and Future of the Federal Reserve, A Return to Jekyll Island, Cambridge University Press in 2013.

[ii]William L. Silber, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origin’s of America’s Monetary Supremacy, Princeton, Princeton University Press, 2007.

 

The Long Decline of Argentina’s and Venezuela’s Economies

Norbert Gaillard (Independent consultant),  11 March 2014.

The current political and economic crises in Argentina and Venezuela have a peculiar resonance for most historians. Although the gross domestic product (GDP) per capita of these two countries was about one third that of the United States in 2011, that ratio has little meaning unless we look at its past evolution (Chart 1).

Nota: La comparación trazado se basa en dólares internacionales de 1990 (unidades de Geary - Khamis de paridad de poder adquisitivo). Fuente : Cálculos del autor basados en datos de Angus Maddison y The Conference Board Total Economy Database.

Chart 1:Argentina’s and Venezuela’s per capita GDP as a percentage of its US counterpart. Note: The plotted comparison is based on 1990 international dollars (units of Geary–Khamis purchasing power parity). Source: Author’s computations based on Angus Maddison data and The Conference Board Total Economy Database .

The chart shows that the “relative wealth” of Argentina and Venezuela reached an 85-year low in the mid-2000s. The subsequent slight rebound may be jeopardized by increasing distrust among investors. It is noteworthy that their falling relative GDP per capita dates back to the early 1960s. During the period 1974-1981, neither country benefitted from US or European capital inflows. The decline of Argentina’s and Venezuela’s per capita GDP actually accelerated during the “lost decade”.

The reasons this economic dislocation in both countries have long been known: political and social instability (Crist 1941, Kaufmann et al. 2010), inability to prevent capital outflows (Masson and Theberge 1967, Sachs 1985, IMF 2012), and lack of monetary credibility (Eichengreen and Hausmann 2005). Yet these chronic weaknesses are also common to several other Central and Latin American countries (e.g., Bolivia, Honduras, and Paraguay). In the cases of Argentina and Venezuela, we might well suppose that their “populist” and anti-capitalist stance in recent years has placed a significant burden on their economies, transforming these two countries into “counter-models” of development.

References

Crist, Raymond E. (1941), “The Bases of Social Instability in Venezuela”, American Journal of Economics and Sociology, Vol.1, No.1.

Eichengreen, Barry and Hausmann, Ricardo (2005), Other People’s Money, Chicago University Press, Chicago.

International Monetary Fund [IMF] (2012), “Liberalizing Capital Flows and Managing Outflows – Background Paper”, prepared by the Monetary and Capital Markets Department; the Strategy, Policy, and Review Department; and the Research Department; in consultation with the Legal Department and other Departments, 12 March.

Kaufmann, Daniel, Kraay, Aart, and Mastruzzi, Massimo (2010), “The Worldwide Governance Indicators – Methodology and Analytical Issues”, World Bank Policy Research Working Paper No.5430.

Masson, Francis and Theberge, James (1967), “Necesidades de capital externo y desarrollo economico: el caso de Argentina”, El Trimestre Económico, Vol.34, No.136 (4).

Sachs, Jeffrey (1985), “External Debt and Macroeconomic Performance in Latin America and East Asia”, Brookings Papers on Economic Activity, Vol.1985, No.2.

Twin Deficits, Currency Depreciation, and US Monetary Policy: What’s New for Emerging Countries?

Norbert Gaillard[1] (Independent consultant),  4 November 2013.

– Invited blog entry-

Emerging countries remain highly susceptible to US monetary policy. Nevertheless, their vulnerability is less today than it was 35 years ago.

Between 1 April 2013 and 1 September 2013, the Indian rupee lost more than 18% of its value. There are two main reasons for this sharp depreciation.

First, India must to cope with persistent current account deficits and fiscal deficits, which exceeded (respectively) 5% and 7% of GDP in 2012. It is worth noting that these ratios are the highest among major emerging economies.

Second, in April and May 2013, the imminent prospect of the US Federal Reserve “tapering” quantitative easing program triggered capital outflows from India (and other emerging markets). Why? Because such a shift in monetary policy is likely to increase US interest rates, which in turn will lead investors to sell the assets of risky emerging markets in order to purchase the assets of industrialized countries.

In July 2013, the Indian government announced several measures to stop the depreciation of the rupee and reduce the current account deficit. These measures included prohibition against banks using the Indian rupee to trade on their own account in futures and options markets; restrictions on residents seeking to send money abroad to buy property; an increase in the duties on the import of gold, silver, and platinum; and further liberalization of the telecommunication and insurance sectors.

It is difficult to assess whether these measures achieved their intended goal because the Federal Reserve, through its Federal Open Market Committee (FOMC), postponed the tapering of its bond-buying program in September. After all this, the Indian currency appreciated by 7.5% between 1 September and 1 November 2013.

We cannot reasonably draw any conclusions from the current financial difficulties experienced by India – and, more globally, by several major emerging economies (e.g., Brazil, South Africa, and Turkey) – without first examining the debt crisis episode of the early 1980s.

First, it is clear that emerging countries remain highly susceptible to US monetary policy. Shortly after Paul Volcker was appointed chairman of the board of governors for the Federal Reserve System in 1979, an uncompromising monetarist policy was launched. It led to a rise in US interest rates and then to an appreciation of the US dollar vis-à-vis the currencies of emerging countries, which burdened their debt service and weakened their credit position.

Second, the vulnerability of emerging countries is less today than it was 35 years ago. Countries with twin deficits are no longer viewed as suffering from international “original sin” (Eichengreen et al. 2005). In 2012, the ratio of foreign currency (FC) general government debt and FC-indexed debt to total general government debt in Brazil, India, South Africa, and Turkey was low: about 5%, 6%, 9%, and 27%, respectively. Moreover, the foreign exchange reserves of these countries are substantial and amount to: $362, $257, $41, and $98 billion, respectively (Moody’s Investors Service 2013).

Third, although the concerns expressed about India’s current account deficit are justified, it seems too much to claim that the risk of default has increased. As shown by Edwards (1984), the current account deficit is a poor predictor of sovereign default. In 1981, Mexico and Venezuela recorded respective ratios of current account balance to GDP of –5.4% and +5.7%. Yet by 1983, both countries were in default.

India is currently rated at the bottom of the investment-grade category (BBB– by Standard & Poor’s); see Figure 1. The country will likely be downgraded to speculative-grade status, but the risk of default is extremely low in the short term – even for a “virtual” BB-rated sovereign issuer (Gaillard 2011).

Figure 1: S&P Foreign Currency Rating Assigned to India, 1 October 1990-1 October 2013

Figure 1: S&P Foreign Currency Rating Assigned to India, 1 October 1990-1 October 2013

References

Edwards, Sebastian (1984), “LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80, American Economic Review, vol.74, no.4.

Eichengreen, Barry, Hausmann, Ricardo, and Panizza, Ugo (2005), “The Pain of Original Sin”, in Eichengreen, Barry and Hausmann, Ricardo (Eds.), Other People’s Money, Chicago University Press, Chicago.

Gaillard, Norbert (2011), A Century of Sovereign Ratings, Springer, New York.

Moody’s Investors Service (2013), Moody’s Statistical Handbook: Country Credit, May.


[1] Norbert Gaillard is a French economist and independent consultant. He is graduated from Sciences Po Paris and Princeton University. His PhD dissertation, completed in 2008, dealt with sovereign rating methodologies. He has served as consultant to the International Finance Corporation, the World Bank, the State of Sonora (Mexico), the OECD, and the European Parliament. He has also served as a visiting professor at the Graduate Institute (Geneva) and as a Euromoney Country Risk expert. He has written several research articles and book chapters on public debt and credit rating agencies. He has published two books: Les Agences de Notation (La Découverte, Paris, 2010) and A Century of Sovereign Ratings (Springer, New York, 2011).

The US Senate´s explanation of the financial crisis of 2007/2008 and other interesting documents… 

It is important to underline the importance of reviewing and carefully analyzing the official documents and investigations that poured forth quite early after the outbreak of the financial debacle and have continued to do so down to the present.

Carlos Marichal (El Colegio de México), 23 August 2013.

In a previous blog in Pasado y Presente, I wrote a brief review of The Financial Crisis Inquiry Report of the US Congress (2011) as a postmortem report of the financial collapse of 2007/2008. But this is certainly not the only official enquiry on the debacle in the United States. Of similar importance is the Senate detailed report on the causes of the crisis, also published in 2011 and titled Wall Street and the Financial Crash: Anatomy of a Financial Collapse. This document was the result of an investigation carried out by the Permanent Subcommitee on Investigations,  which from November, 2008 “initiated a wide-ranging inquiry, issuing subpoenas, conducting over 150 interviews and suppositions, and consulting with dozens of government, academic and private sector experts.” The Subcommitte affirmed that it had accumulated and reviewed “tens of millions of pages of documents”. The committee was headed senator Carl Levin, Democrat, and senator Tom Coburn, Republican, and included 23 lawyers and clerks that carried out the bulk of the research and hearings, as well as drafting the drafts of the final six hundred page report. [1]

After the preliminary research work was concluded, the Subcommittee held four hearings to examine “four root causes of the financial crisis.” At that time it released tens of thousands of pages of evidence, and proceeded to explore in depth the operations of several of the largest banks and institutions involved in the crash. First came the case of the huge banking firm known as Washington Mutual, which became the largest bank failure in US history, and was later absorbed by J.P.Morgan. Then came a review of the role of two of the largest credit rating agencies, Moody´s and Standard & Poor in the financial markets before the crisis.   Finally, extensive hearings and in-depth studies were carried out on the enormous number of irregularities in the market conduct of two powerful banks, Goldman Sachs and Deutsche Bank, in fomenting the speculation in derivatives and so-called synthetic financial instruments which increased risk in all financial markets, but particularly those in the United States in the years 2003-2008.

As in the case of the Congressional investigation, the Senate placed considerable emphasis on the peculiar and dangerous dynamics of the mortgage markets, in particular, the enormous increase of high-risk instruments, the so-called subprime mortgages, from 2003 onwards.  But the Senate subcommittee was most interested in analyzing the microeconomics of the largest financial institutions in the process of creation and massive sale of investment packages containing a complex composition of securities and derivatives. The acronyms of these products reflect that they represented a new generation of securities: these included financial vehicles whose acronyms were varied, such as cdo, arm, abs/cdo, avm, abx cmbs, rei, cds, and siv, created in the last two decades.[2]  As the investigations demonstrated, understanding these instruments requires great expertise in the most sophisticated and arcane of modern banking and finance, and it certainly exceeded the knowledge of the individual investor. This created huge problems of information asymmetry between sellers and buyers. The Senate report transcribed parts of many interviews which demonstrated irregularities and risks involved in these transactions, and concluded by recommending specific regulations of the new financial instruments. It also raised major questions about the issue of banks which are “too big to fail”, and therefore involve government rescues in times of crisis. The Senate inquiry clearly demonstrated the dangers inherent to contemporary financial markets as influenced by huge and very difficult to regulate banking giants, which are also not all transparent in their transactions.

Of course, the official enquiries have no monopoly on interpretations and documentation of the crisis, as can be seen in the innumerable books and articles that have been published by journalists, economists and financial experts on the greatest financial crash since the Great Depression, a subject on which probably many more will be written in the future. Nonetheless, as economic historians it is important underline the importance of reviewing and carefully analyzing the official documents and investigations that poured forth quite early after the outbreak of the financial debacle and have continued to do so down to the present. Also of great importance are the Valukas Report which contains the records of the court case on Lehman Brothers (some 1,2000 pages, placed online in June 2010),  or the two thousand pages of Dodd/Frank law Wall Street and consumer Protection Act,  signed into law in July 2010, which was accompanied by a huge amount of documentation that is of historical interest.

Apart from the official enquiries carried out in Great Britain and in the United States, it is worthwhile emphasizing that a large number of  institutions and countries have promoted enquiries, including, for example, the reports on the financial crisis by committees of the National Assembly of France and by the French ministry of Finance which can be found online. Similarly, it is important to analyze the documents of the Dutch Temporary (Parliamentary) Committee on the Inquiry of Financial System, also known as the ‘De Wit Committee’ after its chairman, set up by the Dutch Parliament’s House of Representatives, which in June 2010 presented its report on the first part of its investigation into the crisis in the Dutch financial system.

Furthermore, as already suggested, the central banks of many countries have published many reports and studies of the crisis. So have multilateral financial organizations such as the International Monetary Fund (IMF), the World Bank, and the Bank of International Settlements, and most of these can be consulted online. On the other hand, there are as yet few critical studies of some of the most important and revealing of these studies, including perhaps most significantly the independent evaluation of the IMF, which provides a truly critical and in-depth analysis of the errors committed by this institution in the years preceding the global financial collapse. The contrast with the World Bank evaluation, which is extremely superficial, is striking.

It is also important to keep in mind the official research on the social consequences of the financial collapse, as is demonstrated, for example, by the detailed investigations of the International Labor Office on the drastic impact of the crisis on employment worldwide, which can be reviewed in its annual report of the year 2011. In summary, as historians it would appear to be well worthwhile to carry out a broad effort to identify the most important official reports on the financial crash of 2008 and on the Great Recession. Because the crisis is now History, or is it not?


[1] U.S. Senate, Permanente Subcommittee on Investigations, Wall Street and the Financial Crash: Anatomy of a Financial Collapse, New York, Cosimo Reports, 2011.

[2] A detailed guide written at the time was the book by  Satyajit Das, Credit Derivatives, CDO’s and Structured Credit Products, New York, Wiley Finance, 2005

Postmortem:  The Financial Crisis Inquiry Report of the US Congress (2011) as a Historical Document

Carlos Marichal (El Colegio de México), 3rd April 2013.

An important document not only because of what it may tells us about the causes of the crisis, but also because it speaks to the political response to this type of financial catastrophe.

The Financial Crisis Inquiry Report is one of the most significant official documents on the financial crisis that exploded in the United States in September 2008 and quickly muted into a global financial and economic crash. It is important not only because of what it may tells us about the causes of the crisis, but also because it speaks to the political response to this type of financial catastrophe. The United States Congress set up the Financial Crisis Inquiry Commission as a result of ratification of the Fraud Enforcement and Recovery Act on May 20, 2009, a bare six months after the fall of the house of Lehman Brothers and its worldwide ramifications. During the year 2010 the commission reviewed millions of pages of documents collected as a result of 19 public hearings held all over the United States and during which over 700 witnesses were interviewed and questioned, including bankers, investment managers, businessmen, government officials, financial regulators and academic figures. The final report was presented on January 27, 2011 as the “The Financial Crisis Inquiry Commission Report” and later published a few months later as a book which can also be consulted as an ebook on line. **

 

Due to its many similarities in purpose and functions, this 2010 US Congressional commission has been compared to the Pecora Commission, set up in the 1930s, which was charged with investigating the causes of the crash of October 1929 and the subsequent economic collapse known as the Great Depression. It may also be of interest to note that in Senate hearings published in 1931, US politicians made a special point of looking into the negotiation of Latin American loans to explore the way that New York bankers had negotiated loans in the 1920s, finding them responsible for taking enormous risk and for corrupting South American government officials with bribes.  The cases were so outlandish that they served as among the best testimonies to both explain and condemn the bankers for the crash of 1929, whereas it was somewhat more difficult to find the same degree of misdoing in the more humdrum transactions of domestic finance.

 But if you were to look even further back, there are antecedents to be found in several financial crises that had major political impacts. One of the earlier investigative commissions was that set up by the British Parliament following the international financial crisis of 1873, when British politicians also looked into the explanations for a panic which had global consequences, causing the collapse of many firms in London as well as debt crises in quite a large number of countries. Among the first nations affected were Santo Domingo, Honduras and Paraguay, which suspended payments on their debts. Again the politicians found incredible fraud and speculative behavior conducted by the most aggressive of London and Paris investment banks in these loan deals, although as Flandreau and Flores have recently demonstrated, this was typical of the smaller and less prestigious houses, which tended to go for quick killings rather than protecting either their debtor clients or their investor clients to whom them they sold the bonds.

In 2010, however, it was not possible for the US Congressional committee to focus on foreign government loans as being responsible for even part of the financial crash. The report clearly focuses on the huge mortgage bubble in the United States and its gradual collapse in 2007 and early 2008 which eventually led to a huge short-circuit in financial markets.  The commission was formed by ten members, six Democrats and four Republicans, reflecting the relative strength of these political parties at that time. The report reflected to a considerable degree the economic point of view of each group of constituent members on the causes of the crisis. The final report aimed its artillery against investment banks, private financial mortgage firms and rating agencies. The Democrats on the Commission including its president, Phill Angelides, and commission members, Brooksley Born, Byron Georgiou, Bob Graham, Heather Murren and John W. Thompson, voted in favor of the general conclusions.  On the other hand, the four Republicans, vicepresident Bill Thomas and his fellow commissioners, Keith Hennessey, Douglas Holtz-Eakin and Peter J. Wallison were not in agreement and did not recommend publication.

The Democrats and their research assistants argued basically that the crisis was largely the result of the widespread belief among financiers and investors as well as central bankers, regulators, that markets could self regulate, a view that led many private actors to take very risky positions in financial markets, including extraordinarily high levels of leverage and lack of transparency, at the same time as official regulators displayed a notable lack of vision and of supervisory vigor.  The dangers of a debacle were muted by the extensive use of risk coverage in the form of derivatives and of an incredible number of complex financial instruments created to assure firms and individual investors that they would not lose their shirts. The banks selling the mortgages and derivatives, as well as their clients, apparently believed the tale of inevitable and guaranteed gain.  In addition, credit agencies played a major part in impelling the huge wave of financial speculation by providing top ratings for the majority of the risky financial instruments sold.   The report also emphasized the excess liquidity provided by the Federal Reserve, the official policies in favor of home construction, including the role of government mortgage agencies. But it also argued that the latter policies were not the real cause of the crisis, which was basically caused by the actions of many domestic private actors in a financial free-for-all that was fraught with enormous and risky speculation, and eventually led to the crash.

Three Republicans on the commission presented a dissenting opinion which was also published in the volume under review. They disagreed with the Democrats, arguing that the US financial markets were not to blame and that the financial actors and institutions which promoted the mortgage boom were also not responsible. Rather the huge credit bubble had been generated largely through the international transfer of excess capital to the United States by China as well as the recycling of petrodollars by the Arab states, which caused a lowering of interest rates, and virtually pushed the money into the mortgage business, including subprimes. The subsequent mortgage bubble had destabilized banks and other financial institutions and set off the crisis.   Finally, one fourth and more radically conservative Republican, Peter Wallison, who also was on the Commission and clearly appears as a partisan of the Tea Party, also presented his conclusions.  He argued that he also did not favor publishing the report because the entire fault of the crisis lay at the feet of the government and more particularly of the federal agencies, Fannie Mae and Fannie Mac, which had led private actors astray, by pushing them to take excess risk in the mortgage business.

In summary the Democrats blamed financial deregulation and lack of supervision of the behavior of private financial actors and markets as the major causes of the collapse, while the Republicans held that regulation and supervision were not key causes but rather financial globalization. Of course, these positions are not the only interpretations, as can be seen in the innumerable books and articles that have been published on the greatest financial crash since the Great Depression, on which probably many more will be written in the future. We are currently still at the stage of discerning which shall be considered the most important causes of the implosion of United States investment banks as well as major British commercial banks and the downfall of many financial firms in Europe in late 2008.

The debate is raucous and there are a great many interpretations that will have to be tested. But as economic historians it is also worthwhile to carefully review and analyze the official documents and investigations that poured forth quite early after the outbreak of the financial debacle and have continued to do so down to the present. Perhaps the Great Recession is almost over, except in Europe, which will be continue to be afflicted for many years, but certainly its enormous consequences worldwide merit the attention not only of economists but of social scientists and historians to explain a major turning point in modern history.  And it is worthwhile to begin by taking a close look at the official reports of the causes of the crisis in the United States, which- after all- was where the cataclysm was spawned, with shock waves that spread throughout the world like a financial tsunami.

**Apart from the ebook version of The Financial Crisis Inquiry Report which can be found on internet in the US Congress site, most documents and interviews can be downloaded on the site of the Faculty of Law at Stanford University.

 Another site with documents from the Congress is this.

Zombie economic history

Juliette Levy (UC Riverside), 12 March 2013.

Zombies are fashionable again. From the success of the movie Zombieland in 2009, to the AMC television series The Walking Dead that started in 2010, and the collection of Zombie-themed novels (my favorite: “Pride, Prejudice and Zombies: Dawn of the Dreadfuls”, by Seth Grahame-Smith) to an oral history of humanity’s fight against a zombie infestation (World War Z by Max Brooks), and lastly, Warm Bodies, a film about a zombie love story (really!). All these have elevated the undead to new levels of fame and enjoyment.

Zombies have also come to Economics, in the work of John Quiggin. His book “Zombie Economics: how dead ideas still walk among u s” and most of its chapters originated on his blog johnquiggin.com and at crookedtimber.org, where he is a frequent contributor. Quiggin is Australian, but to call him an Australian economist would be to underestimate the breadth of his reach. The book is a roaring good read, and food for thought. Quiggin has been called “the Krugman of the antipodes” and his preference in the science of economics to champion realism over rigor, equity over efficiency and humility over hubris (p. 244) won’t surprise any readers of Krugman.  Quiggin’s goal after all is not to write a history of zombies, but to shed light on the kind of wrongheaded economic ideas that simply refuse to die – especially among the Republican and right-wing of the American political spectrum (such as the belief in the efficiency of all markets, the blind faith in privatization as the solution to governmental ineptitude and austerity as the best response to an economic crisis).

The book is as much a political tract as it is a review of the history of popular economics – whereby ‘popular economics’ I mean economic precepts used widely among the press and politicians. This book does not target economics scholars, among whom the dissensions or agreements will run along different and perhaps more obtuse narrative lines – it is targeted at the informed reader of the financial pages, the student of economics as a reality rather than a doctoral field, and at a lay-people who have over the last couple of years wondered how ideas that are so patently bad (like cutting benefits during a recession) can gain so much traction among people who should know better.

I would like to call on my collaborators on this blog, and any of our readers, to identify and discuss similarly wrong-headed ideas about economics among historians and economic historians.  Deidre McCloskey recently did this in a most magisterial fashion in her review of Francesco Boldizzoni’s attack on American economic history and historians. The review identifies many of the zombies in economic history (and a few more monsters for good measure).

There are many crawling undead corpses like these in history books that attempt to explain, analyze or contextualize economic transformations. And that’s the thing about zombies, they move among us and are very difficult to kill.

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