Saturday, November 29, 2008

What to do

Here's Paul Krugman, writing for the New York Review of Books, on what to do to avert the next financial crisis:

...anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks. Since the 1930s commercial banks have been required to have adequate capital, hold reserves of liquid assets that can be quickly converted into cash, and limit the types of investments they make, all in return for federal guarantees when things go wrong. Now that we've seen a wide range of non-bank institutions create what amounts to a banking crisis, comparable regulation has to be extended to a much larger part of the system.

Interestingly, he is also advocating long-term restriction in the movement of international capital flows, saying that the lesson learned during the Asian crisis (i.e. shoring up foreign exchange reserves) is not enough.


Arthur James said...

Afficionados of Paul Krugman's writings will recognise that this magnificent piece not only restates his belief in the importance of Keynes's economic insights, and of the need for fiscal stimulus today, but does here what he often does not - that is, emphasize the importance of a global, or at least international, approach to the current crisis.

He talks here of "the world" needing "a rescue operation", of what "policymakers around the world need to do", of the need for "a global rescue for developing countries", and of what must surely be an international response to the dangers he identifies in "financial globalization".

This, as some bloggers of Krugman's columns have tried to point out, is exactly the sort of cooperative international approach that Krugman's intellectual hero, John Maynard Keynes, took in his own time. This is evident in works on Keynes such as, for example, Markwell's John Maynard Keynes and International Relations.

Part of why it is important for Krugman to stress this international approach is that the United States today (or at least after 20 January 2009) needs to provide leadership in this cooperative international approach to the economic crisis - just as, Markwell points out, Keynes desperately wanted it to do at various times from 1919 to his own death in 1946.

The case must be made persuasively today for such US leadership - and Krugman can help to make it.

Ronnel Lim said...

I think America has no choice but to push for an international solution, if only for the fact that there's only US$ 350 billion left in the US treasury's financial rescue fund. US simply has not enough cash to go at this problem unilaterally.