The set of ideas that has dominated public policy for the last thirty years has been given a variety of names – neoliberalism[1], economic rationalism, the Washington Consensus and Thatcherism being the most prominent. Broadly speaking, this set of ideas combines support for free market (or freer market) economic policies with agnosticism[2] about both political liberalism and the relative merits of democracy and autocracy. In response to some demands for definition, I’ll point to mine here.

A striking feature of all of these terms is that they are currently used almost exclusively by opponents of the viewpoint being described, to the point where any use of such terms invariably provokes protests about unfair labelling (this is true even of the most neutral term I can find, “economic liberalism”). Even more striking is the fact that these terms were originally used in a broadly positive sense by supporters of the ideas concerned. I’ve done the story on economic rationalism, Don Arthur covers neoliberalism and you can check Wikipedia for the others.

Why is it that neoliberalism seems to be subject to a political version of the euphemism treadmill? A look at the history will help a bit.

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After a longer than usual weekend, it’s time for another message Board. Long weekends always make me think this is something we should have more of, and maybe an economic downturn is the right time to start thinking about more holidays instead of higher wages. Your thoughts on this, or any topic, are welcome. As usual, civilised discussion and no coarse language.

buy The Hit

That’s the title for my article in yesterday’s Fin, reposted over the fold

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My piece in today’s Fin is about the Geithner plan to bail out US banks. I’ll post the whole thing tomorrow (given that the Fin is pay-only, I wait until today’s issue is off the stands), but there’s one point I want to stress.

Most of the debate about alternative bailout plans has been framed around the equivalent pair of questions: liquidity crisis or solvency crisis? and book value or mark-to-market? The Geithner plan assumes that the true long-term value of ‘toxic’ [1] asset-based securities greatly exceeds their current market value, and that the banks are therefore solvent but illiquid. Critics like Krugman don’t buy this.

But the really big question, it seems to me, is what kind of financial system will emerge from the current crisis. Geithner, Summers and Bernanke clearly envisage something very like the pre-2008 system, with a few less players (all the better for Goldman Sachs!) and some tighter regulation to prevent unfortunate occurrences like those of the last year. The advocates of nationalisation implicitly accept that something very different is going to be needed; not permanent public ownership, but a much smaller, more conservative and less profitable financial sector, providing necessary services in the manner of other utility and infrastructure businesses. An obvious dividing point is financial innovation: advocates of Geithner style bailouts are much concerned to avoid discouraging financial innovation, while the critics see uncontrolled innovation as a large part of the problem.

fn1. A side issue I’ve been meaning to raise for a while concerns the salience of “toxics” in US culture generally. As an example, food safety seems to be regarded as a major environmental issue in the US, while in Australia it seems to me to be seen as a minor local government issue, with the archetypal instance being dirty restaurant kitchens suitable for hidden camera current affairs exposes. But it’s hard to tell if my perceptions on this are accurate.

• Pretty Woman the movie
  • Merlin and the War of the Dragons trailer

It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.Stay Tuned pspTipping the Velvet movie

I’ve long promised a post on Austrian economics. To organise my thoughts and minimise the risk of attacking a straw man, I’ve taken as my starting point this encylopedia article by Peter Boettke. Boettke sets out ten claims and derives some claimed conclusions. I’ve responded point by point, and then given my own summary.

As I’ve had trouble with various fringe adherents of Austrianism, I’m setting out some strict ground rules for discussion here. Comment should stick strictly to discussion of economics. Anyone making personal attacks of any kind will have their comments deleted and be barred from this thread. Avoid anything that might be seen as insulting other participants in the discussion

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A reader has pointed me to this fascinating site showing the impact of the Mont Pelerin Society on Iceland. According to the material prepared for its 2005 conference in Reykjavik, the Society’s intellectual influence directly guided those responsible for making Iceland what it is today.

This Bloomberg story gets the headline right., but the lead (or lede) wrong. The intro “Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president. ” is wrong – bonds have beaten stocks in quite a few years since then.

The finding in the chart is much more dramatic, to the point that “earth-shattering” is justifiable hyperbole. What it shows is that, over the entire period since 1979, a strategy of buying 30-bonds (trading so that the portfolio always holds the most recently issued bond) has outperformed the strategy of buying stocks and reinvesting the dividends.

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The idea that central banks can and should act independently of governments is, fairly clearly, inoperative for the duration of the crisis in many countries. The combination of massively increased liquidity provision and large-scale bank bailouts requires close co-ordination between central banks and national treasuries, though the form of this co-ordination is inevitably different in different countries.

But the failure of central bank independence goes much deeper than this. The underlying idea was that monetary policy should be left to independent experts, and should be the main tool for macroeconomic stabilisation. Governments were expected to avoid active fiscal policy, focusing primarily on maintaining budget balance (there were some differences in view as to whether governments should target annual balance, or balance over the course of the macroeconomic cycle). The shift to independent central banking was closely associated with the adoption (implicit or explicit) of inflation targets as the primary focus of monetary policy, and with interest rates as the primary tool.

Not much of this appears sustainable in the light of the crisis. Inflation targeting failed to prevent unsustainable asset price booms, and it now seems clear that these could not have been prevented without much more direct control over unsound financial innovations. That’s a task where interaction between governments and central banks appears unavoidable. On the one hand, expertise is crucial. On the other hand, as with war, financial innovation is to important, and too dangerous, to be left to finance experts.

The idea that monetary policy alone is sufficient for macroeconomic stability might have looked appealing during the Great Moderation, but does not stand up when examined over a longer period. To put it bluntly, central bank independence appears to work well except when it is most needed.

A more difficult question relates to the separation between monetary policy and prudential regulation. The need to take systematic risk into account suggests that monetary policy must be closely integrated with prudential policy. On the other hand, Australia, with a clear separation between monetary and prudential regulators has done better than countries where central banks are more closely involved. My feeling is that the correct separation is between strategic issues, such as monitoring of systemic risk and the regulation of financial innovations, which belongs with the central bank, and institution-level supervision, which belongs with a specialist agency.