By James Kwak
Have you heard this story before?
The first assets deemed safe were coins made of precious metals. As a technology, coins had many problems: they could be clipped or, debased by the sovereign. They had to be assayed and weighed to determine their value in the best of times; whole currencies would collapse in the worst, when the “fraudulent arts” gained the upper hand. Coins were bulky, too, and vulnerable to theft. But they worked: they were always liquid, their edges could be milled to prevent clipping; and, for long periods of time, coins served as fairly reliable stores of value.
As trade expanded, problems with coins gradually led to the creation of paper money – privately-produced circulating debt in all its early forms: moneys of account; bank notes and bills; goldsmith notes; and merchants’ bills of exchange, all of them convertible on short notice into coins.
That’s David Warsh, paraphrasing Gary Gorton, who’s really just recounting conventional wisdom, handed down from economist to economist since time immemorial.
Except it leaves out the most interesting part of the story.
I’ve been reading Christine Desan’s book Making Money, on the history of money in late medieval and early modern Europe. It’s a fascinating story, full of both meticulous historical detail and compelling conceptual arguments about the relationship between forms of currency, political authority, and the creation of the modern state. Continue reading “Mysteries of Money”
By James Kwak
Mike Konczal wrote an excellent article for Democracy about the problems with a voluntary safety net and the superiority of government social insurance. The article draws on serious historical research (by other people) to prove two main points: first, there never was a Golden Age of purely voluntary charity; second, and more important, what charitable support mechanisms existed were not up to the challenges of the Second Industrial Revolution of the late nineteenth century and completely collapsed with the onset of the Great Depression.
This shouldn’t come as a surprise. There are basic economic reasons why public social insurance is superior to voluntary charity. The goal here is to protect people against risk: of unemployment, of health emergency, of outliving one’s savings, and so on. For a risk-mitigation scheme to work, there are a few things that are necessary. One is that people actually be covered. This is something you can never have with a private system (unless it’s regulated to the point of being essentially public), since charities get to pick and choose whom they want to help. As Konczal says of private agencies before the Depression,
“They were also concerned they’d lose their ability to stigmatize—or to protect—various populations; by playing a role in determining who wasn’t deserving of assistance, they could shield those they felt worthy of their support.”
Continue reading “There’s No Substitute for the Government”
By James Kwak
Not surprisingly, there is a great deal of interesting research being done in the area of financial institutions, systemic risk, and regulatory reform. Last week I had the pleasure of attending a workshop for junior law professors held by the Insurance Law Center of the UConn Law School, where I am a professor. The workshop featured a long list of provocative and weighty papers at various stages of completion. Here I just want to point out a few that are fully drafted and available on SSRN.
Robert Weber presented what should be the canonical paper on stress testing as applied to financial institutions, which has been going on for a while but became front-page news in 2009, during the financial crisis. He traces the history of stress testing back to its engineering roots in Renaissance Italy with, perhaps unsurprisingly, Leonardo da Vinci. Weber is critical of box-checking stress testing, but argues that stress testing can be useful as a way of encouraging or inducing bank executives and risk managers to more closely investigate their assumptions and beliefs and ultimately create a “morality of quantitative skepticism.”
Gallons of ink have been spilled over the Orderly Resolution Authority established in Title II of the Dodd-Frank Act, generally over whether and how it would be used in a crisis. In 13 Bankers, Simon and I expressed skepticism that it would be used, for practical and political reasons. Joshua Mitts’s paper takes the novel approach of looking at how OLA affects managerial incentives in the pre-crisis period, arguing that it encourages bank executives to design their firms in such a way as to maximize the chance of a taxpayer bailout. This would lead them to increase their exposure to other large financial institutions and to increase the correlation of their asset portfolios with those of other large firms.
Mehrsa Baradaran takes a historical view in her paper, which is about the social contract between banks and society as expressed through banking regulation. She begins with the Hamilton-Jefferson debates over banks (which is also where we began 13 Bankers) and covers the history of banking regulation (or non-regulation) up to the 1930s, which represented the most thorough codification of the social contract: the government needs banks, but banks also need the government. The past few decades, however, have seen an erosion of this social contract, giving banks the benefits of government sponsorship and support without the obligations necessary to ensure that they serve societal ends. Baradaran argues that banking regulation should incorporate a robust public benefit test to ensure that banks are in fact helping households, the economy, and society at large.
There are other interesting papers that are sure to come out of this workshop. One small side benefit of the financial crisis has certainly been the increased attention to the financial sector and the risks it presents to the rest of us.
By James Kwak
I’ve been reading a lot of books lately, some of which I’ve mentioned here: The Submerged State by Suzanne Mettler, Invisible Hands by Kim Phillips-Fein, The Wealth and Poverty of Nations (finally) by David Landes, Exorbitant Privilege by Barry Eichengreen, and a pile of books on the national debt and deficit politics. (Despite moonlighting as a blogger, I find books more satisfying than the constant stream of newspapers, magazines, and blogs.) But my favorite book I’ve read in a while is Railroaded: The Transcontinentals and the Making of Modern America, by the historian Richard White.*
For some people, most notably Rick Perry but also much of the conservative base, the late nineteenth century was the golden age: of the gold standard, no income tax, senators elected by state legislatures, and, most importantly, little to no government “regulation” of business. White shows what that world was really like.
Continue reading “State of Nature”
By James Kwak
Simon and I wrote an article for the November issue of Vanity Fair about—well, about a lot of things. It’s about the eighteenth-century rivalry between Great Britain and France, the lessons of the American Revolutionary War, the Hamilton-Jefferson debates (again), and the War of 1812. It’s also about present-day fiscal policy and budgetary politics. The main question we take up is what the Founding Fathers (from the Constitutional Convention through their involvement in the War of 1812) thought about a strong central government, the national debt, and the taxes necessary to pay for them, and what that means for today. All that in less than 3,000 words, so there isn’t a lot of room for all the details.
You can read the article online here.
By James Kwak
It has become a truism that modern American conservatism is revolutionary in the sense that it seeks to overturn the established order rather than to preserve it. “Reagan Revolution,” “Tea Party”—the very names for the movement announce that is about more than defending the status quo. In the conservative worldview, America (or “Washington,” or the “mainstream media,” or some other powerful stratum) is dominated by a liberal-intellectual-academic-bureaucratic-socialist-internationalist (pick two or more) elite that must be overthrown. So in at least a mythical sense, conservatism is about restoration, which is something very different from “conserving” what exists today.
When did this happen? According to one view of the world, to which I have been partial in the past, there was once an ideology called conservatism that really was conservative in the narrow sense: that is, it counseled maintaining existing institutions on the grounds that radical change was dangerous. The Rights of Man and the Citizen may be great, but soon enough you have the Committee of Public Safety and the guillotine. On this reading of history, conservatism became radical sometime after World War Two, when it gave up accommodation with the New Deal in favor of rolling the whole thing back, ideally all the way through the Sixteenth Amendment.
In The Reactionary Mind,* however, Corey Robin has a different take: conservatism, all the way back to Edmund Burke, has always been about counterrevolution, motivated by the success of left-wing radicals and consciously copying their tactics in an attempt to seize power back from them. Conservative thinkers were always conscious of the nature of modern politics, which required mobilization of the masses long before Nixon’s silent majority or contemporary Tea Party populism. The challenge is “to make privilege popular, to transform a tottering old regime into a dynamic, ideologically coherent movement of the masses” (p. 43). And the way to do that is to strengthen and defend privilege and hierarchy within all the sub-units of society (master over slave, husband over wife, employer over worker).
Continue reading “Edmund Burke and American Conservatism”
By James Kwak
Today’s Atlantic column is about one of my favorite topics: the French Revolution. Actually, it’s mainly about tax expenditures and how traditional Republicans should want to eliminate them. Unfortunately, there are no traditional Republicans left, and Grover Norquist’s anti-tax pledge makes clear that you can’t eliminate tax expenditures unless you use all the revenue to lower tax rates below where George W. Bush put them.
By James Kwak
For Christmas, Simon gave me a copy of Why the West Rules — For Now, by Ian Morris. I thought it was an amusing but flawed book and put it back on my shelf, but yesterday a friend told me that everyone was talking about the book and I should say what I thought about it. So here goes. (And bear in mind that I do have a Ph.D. in history — though no one has a Ph.D. in all of the history that Morris covers.)
First of all, it’s a fun read. It isn’t particularly engaging, and the narrative is pretty weak (not the author’s fault — it’s just that the history of all of human civilization just doesn’t make for a great story), but it’s filled with interesting historical facts and fills in all those gaps in your knowledge of ancient history. My knowledge of ancient history was mainly gaps, so it was news to me that Western civilization began not in Mesopotamia, as I was taught thirty years ago, but in the “Hilly Flanks” — an arc that runs mainly through Western Syria, Southeastern Turkey, and the Iraq-Iran border.
Continue reading “My Christmas Present”
By James Kwak
As a holiday gift to myself, I’ve actually been reading a real book, on paper — The Worldly Philosophers, by Robert Heilbroner. The book itself was not a gift to myself; I have my sister’s old copy, which is the 1980 edition. The book is a traditional intellectual history of some of the main figures in economics. As the original was written in 1953, it focuses less on the mathematical line of economics, from Walras and Marshall through Arrow-Debreu to the present, and more on what used to be called political economy: Smith, Ricardo, Mill, Marx, Keynes, etc. It’s not a way to learn economics, but a way to learn something about the historical conditions that helped give rise to some important economic ideas.
But some passages seem oddly relevant today. Discussing the conventional economic wisdom of the early nineteenth century (pp. 121-22):
“They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. . . . It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.”
Continue reading “The More Things Change …”
This guest post on the relationship of business and government comes to us from Lawrence B. Glickman, chair of the History Department at the University of South Carolina; the author, most recently, of Buying Power: A History of Consumer Activism in America; and an occasional contributor to this blog.
One of the most telling statements of our political era, made ten years ago this week by Dick Cheney during his Vice Presidential debate with Joe Lieberman on October 5, 2000, was actually a misstatement that went largely unnoticed. And therein lies an important lesson about the place of government in our political culture.
In response to the Democratic nominee Lieberman’s jibe that Cheney had profited handsomely from the job he had recently departed as CEO of the Haliburton Corporation, the Republican nominee replied, ”I can tell you, Joe, the government had absolutely nothing to do with it.” Amid the laughter and applause of the audience, Leiberman chuckled good-naturedly and joked about joining the private sector himself.
Following the debate, media analysts focused on what the New York Times called Cheneys avuncular self-confidence but, like his opponent, they largely passed over the fact that his statement was a whopping lie. Despite his denial and his antigovernment rhetoric, the company Cheney ran depended on billions of dollars of government contracts and loan guarantees. It would not be an exaggeration to say that government was Haliburton’s primary source of support.
Continue reading “The Government Does Have Something To Do with It”
This guest post was contributed by Lawrence B. Glickman, who teaches history at the University of South Carolina. He put the fight for the Consumer Financial Protection Agency in historical perspective in his previous post on this blog.
A recent ad taken out by the “The Center for Consumer Freedom” marks the latest assault by business lobbyists and conservatives on the idea of consumer protection. This organization’s motto — Promoting Personal Freedom and Protecting Consumer Choice — defines consumer freedom as “the right of adults and parents to choose how they live their lives, what they eat and drink, how they manage their finances, and how they enjoy themselves.”
Continue reading “What Is Consumer Freedom?”
First, the pictures. Paul Swartz of the Council on Foreign Relations has a new version of his charts on the current recession in historical perspective, which I first linked to in June. The overall impression? We are still considerably worse off today than in other postwar recessions at this point (21 months in), although some indicators appear to be bottoming out.
Now the words. Edward Harrison of Credit Writedowns has a guest post at naked capitalism presenting the arguments for a robust recovery and for no recovery at all. He cites Joseph Stiglitz for the proposition that statistical GDP growth isn’t everything, and extends the point to argue that you can have “low-quality” GDP growth if that growth is financed by debt without corresponding investment. When you happen to control the world’s reserve currency you can do this for quite some time, and there’s no saying we can’t do it for a while longer. So one possibility Harrison foresees is a reasonable growth fueled by cheap money, yet no change to some of our underlying economic problems, including a financial sector with a put option from the federal government.
By James Kwak
For your Labor Day reading enjoyment, we bring you this guest post by Lawrence B. Glickman, who teaches history at the University of South Carolina and is the author of Buying Power: A History of Consumer Activism in America.
“We’re proposing a new and powerful agency charged with just one job: looking out for ordinary consumers,” said the president on June 17th. The centerpiece of his proposed overhaul of the nation’s financial system, the Consumer Financial Protection Agency (CFPA), is designed to end what the president called “failure of…government to provide adequate oversight” by monitoring banking transactions, including mortgages, credit cards and checking and savings accounts. It did not take long for the predictable critics to denounce the agency with predictable rhetoric. “It’s bad for the consumers,” said Steve Bartlett, president of the Financial Services Roundtable, a lobbying group for banks. The institution will add “yet another regulatory layer” while advancing “the agenda of activist special interests,” according to the U.S. Chamber of Commerce. The new agency represents “an unprecedented grant of power to mandate business practices” claims the American Bankers Association.
This is the language of conservative populism, a mainstay of the Republican party from Ronald Reagan to Newt Gingrich to Karl Rove. Conservative populism, wrote Jonathan Chait in the New Republic last year, “dismisses any inference that the rich and the non-rich might have opposing interests” and defines elites in cultural rather than economic terms as “intellectuals and other snobs who fancy themselves better than average Americans.” Several decades of repetition have made this rhetoric familiar: federal efforts to help ordinary people–consumers–will inevitably hurt them; government is the problem rather than the solution; bureaucracy is “bumbling” (to use the words of a Crain’s New York Business poll about the proposed Agency); federal agencies designed to serve the public good actually serve narrow special interests. It has been, in no small measure, through the ready deployment of this language that the Republicans have positioned themselves as simultaneously the party of big business and working Americans while denouncing Democrats as representing both intrusive government and elitism. This meme has been devastating for liberals since any expansion of government services can be dismissed with a quip–Bureaucrat!, Red Tape!, Nanny State!– rather than an argument. Recently, for example, Senator Lindsay Graham said that the American people would never tolerate the public choice option in health insurance because “you’ve got a bureaucrat standing in between the patient and the doctor.” For similar reasons, Senator Kit Bond dismissed the CFPA proposal as a “bad idea.”
Continue reading “Consumer Protection Redux: The Lessons of History”
Timothy Garton Ash is a prominent modern European historian, who became famous writing about the collapse of Communism and the transformation of Eastern Europe in the 1990s. It was something many people thought they would never live to see.
A friend asked me what I thought of Ash’s article a couple of months ago in The Guardian, where he asked what will come of modern capitalism in the wake of the financial and economic crisis.
An extreme “neoliberal” version of the free-market economy, characterised not just by far-reaching deregulation and privatisation but also by a Gordon Gekko greed-is-good ethos – and fully realised in practice only in some areas of Anglo-Saxon and post-communist economies – seems likely to find itself [left in ruins or at least very substantially transformed]. But how about a modernised, reformed version of what postwar German thinkers called the “social market economy”?
Ash goes even farther than what you might call the Continental European social-democratic model, and envisions a world with a better balance between production and consumption, between national and international governance, and between exploitation and protection of the environment.
Continue reading “What Will Change?”