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Monetary Policy/ Financial Regulation Policy Studies

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• A Market-Based Regulatory Policy to Avoid Financial Crises

  By Luigi Zingales, Cato Institute
  
  Cato Journal, 09/02/2010
  

  When it comes to “saving capitalism,” dealing with the “too big to fail” doctrine is a top priority. This doctrine has increasingly become the government policy on this issue, and it is probably the most dangerous policy for capitalism we can imagine. It undermines capitalism in many ways: not only does it make the system less stable, but it also undermines the moral basis of capitalism. If you have a sector or a set of institutions where losses are socialized but where gains are privatized, then you destroy the economic and moral supremacy of capitalism. Either we deal with the perverse incentives created by this doctrine or we undermine the long-term sustainability of capitalism. So it is really important to think what we can do against this too-big-to-fail policy.

  
  
  

• A Constant Unit of Account

  By Richard W. Rahn, Cato Institute
  
  Cato Journal, 09/02/2010
  

  Over the past several decades, I have been a professional economist, government advisor, financial regulator, and have also engaged in international business. After this variety of experience, I am now more than ever convinced that Hayek was absolutely correct in how the government monopoly of the issuance of money leads to a never-ending cycle of economic crises.

  
  
  

• Down with Stability

  By James Grant, Cato Institute
  
  Cato Journal, 09/02/2010
  

  You will remember the Great Moderation. In the blissful 20 years only recently ended, you thought you could see forever. Under the stewardship of the likes of Alan Greenspan and Jack Welch, inflation was low, recessions were mild, and corporate earnings growth was predictable. General Electric, the great American blue chip, met or exceeded per-share profit estimates every quarter for 10 consecutive years. It was an astonishing display of stability. Indeed, as the SEC subsequently found, it was literally unbelievable. Management had cooked the books. Neither confirming nor denying the truth of that shocking allegation, GE spent $50 million of the stockholders’ money to make it go away.It’s a contentious speaker who sets out begging to disagree with the theme of the program on which he is honored to appear. But really, “Restoring Global Financial Stability”? Stability, so-called, was the false god of the bubble years. Instability is the way of the world. Honest turmoil is my topic for today. I’m all for it.

  
  
  

• The IMF and Its Barbarous Relic

  By Judy Shelton, Cato Institute
  
  Cato Journal, 09/02/2010
  

  The International Monetary Fund has a wonderful heritage, a priceless legacy. It was created for the loftiest of economic purposes—to provide a stable monetary foundation to facilitate free trade and international capital flows—and to provide hope to a world beset by vicious and destructive war. Its architects, Harry Dexter White and John Maynard Keynes, surmounted personality clashes and political strains to carry out the mission that garnered their mutual respect: to establish optimal conditions for achieving world prosperity and world peace. The emphasis, from the beginning, was to set up an international monetary system. For White, the chief goal was to stabilize exchange rates to obtain the maximum productive benefits of foreign trade and investment; for Keynes, it was important to keep capital resources circulating rather than allow them to sit idle.

  
  
  

• The Futility of Central Banking

  By George A. Selgin, Cato Institute
  
  Cato Journal, 09/01/2010
  

  It has been more than three decades since Arthur Burns (1979) gave his famous Per Jacobsson lecture on “The Anguish of Central Banking.” In it he declared that: the persistent inflation that plagues the industrial democracies will not be vanquished—or even substantially curbed— until new currents of political thought create a political environment in which the difficult adjustments required to end inflation can be undertaken. Coming from a recently retired Fed chairman, this was a remarkable statement. It amounted to an admission that the Fed was quite incapable of performing its most fundamental task, and that the problem was, not any lack of material means on the Fed’s part, but simply the will to do what needed doing given political incentives then at play.

  
  
  

• The Rule of Law or the Rule of Central Bankers?

  By Lawrence H. White, Cato Institute
  
  Cato Journal, 09/01/2010
  

  Economists often prescribe that countries seeking economic development should embrace the principle of the rule of law. I want to suggest that we listen to our own advice and apply it to our monetary and financial system. The principle of the rule of law could usefully guide us in resolving the extraordinary situation we have been in for the past two years or so, and even more importantly help us to avoid future crises.The approach of Federal Reserve and Treasury officials during this crisis, unfortunately, has been to consider every possible remedy but applying the rule of law.

  
  
  

• Alternatives to the Fed?

  By Bennett T. McCallum, Cato Institute
  
  Cato Journal, 09/01/2010
  

  There are two problems associated with a governmentally operated gold standard. The first is that stabilizing the price of gold is not a good substitute for stabilizing a broadly defined price level index. The second is that there are political forces continually at work that tend, whatever the index, to undermine maintenance of the standard. With respect to the first problem, it seems clear that adoption of a much broader index for stabilization is entirely feasible and desirable. For the second the problem is more difficult. It would seem that competing private suppliers of money would not have the same type of temptation to devalue the standard (i.e., inflate) as does a national monetary authority, but a temptation of a different type clearly exists for private suppliers. Some form of regulation might therefore be required, in which case the regulator might be faced with the same temptation to inflate as with a standard monetary authority. The best that can be done, probably, is to adopt institutions that are less subject to temptation than others and that promise to provide stability of a broad price index.

  
  
  

• Privatizing Money

  By Leland B. Yeager, Cato Institute
  
  Cato Journal, 09/01/2010
  

  The dollar’s continuing role as the world’s key currency has come into doubt. What might replace the dollar if it collapses or becomes unmanageable? Let’s hope it doesn’t, but we should be ready with ideas just in case. Even if our current system survives, contemplating radical alternatives can provide a new perspective on it and on possible improvements. Just as conjectural or “what-if?” history can improve our understanding of the actual course of events, so “whatif?” monetary systems may help us better understand, by contrast, what we now have. How would a system function without a dominant issuer whose banknotes and deposits defined the unit of account?

  
  
  

• The Free-Marketeers Strike Back

  By Guy Sorman, Manhattan Institute
  
  City Journal, 08/19/2010
  

  As in the 1930s and 1970s, so today: crises are a serious problem, but misguided economic policy makes them worse. After the 1930s, only war production could overcome the negative economic consequences of the New Deal. After the stagflation of the 1970s, it took the bold leadership of Margaret Thatcher and Ronald Reagan to reorient the West toward free markets and prosperity. How long will it take this time before governments understand that overreacting to the crisis and imposing disproved Keynesian remedies will dampen and delay economic recovery? The answer depends on the ability of free-market economists and commentators to communicate their narrative of the crisis. We sadly lack someone like Milton Friedman, who could effortlessly convey complex theories to a large audience. Enough talented economists are on hand, however, to build the platform that we need for a free-market revival.

  
  
  

• The Inefficiency of Clearing Mandates

  By Craig Pirrong, Cato Institute
  
  Policy Analysis, 08/02/2010
  

  In the aftermath of the financial crisis, attention has turned to reducing systemic risk in the derivatives markets. Much of this attention has focused on counterparty risk in the over-the-counter market, where trades are bilaterally executed between dealers and derivative purchasers. One proposal for addressing such counterparty risk is to mandate the trading of derivatives over a centralized clearinghouse. This paper lays out the advantages and risks to a mandated clearing requirement, showing how, in some instances, such a mandate can actually increase systemic risk and result in more financial bailouts.

  
  
  
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