Buiter on the credit crunch

Buiter analyse le credit crunch et ses possibles conséquences sur l'économie "réelle", dans une optique raisonnablement optimiste mais qui contient ce joyau de citation (c'est la première fois que je vois cette idée, que je partage entièrement, exprimée de manière aussi brillamment claire et concise)

(...) From the point of view of the efficient allocation of resources in the medium and long term, the relative (probably even absolute in the short run) contraction in the size of the financial sectors of the advanced industrial countries is a desirable development, as for a number of years now, the private returns in the financial sector have exceeded the social returns by an ever-growing margin. Too much scarce analytical and entrepreneurial talent has been attracted into activities that, while privately profitable and lucrative, were socially zero-sum at best. In the short run, this cutting down to size of ‘Wall Street’ and ‘the City’ will inevitably have some negative side effects for Main Street also. However, the entire financial sector in the UK accounts for only about 7.5 percent of GDP, and the banking sector for no more than five percent of GDP. A sectoral depression will be painful, but of limited macroeconomic significance. In the medium and long term, moreover, a more balanced sectoral allocation of the best and the brightest will be beneficial.

Dean Baker on free trade

Ce post résume assez bien les vues de Dean Baker sur le libre échange. Ses conclusions en termes de "policy" sont discutables, mais son analyse a un certain charme polémique (en particulier la citation sur la corruption, qui est délicieuse)

Brooks Pushes Nonsense on Trade
David Brooks' column is full of nonsense on trade this morning. The point is to propagandize on behalf of current trade policy, which is taking a beating in popular opinion as of late. Brooks includes a wide range of factors which are somehow supposed to imply that the current trade policy is good.
Just to to take a couple of my favorites, Brooks points out from 1991 to 2007 the trade deficit grew to $818 billion from $31 billion. "Yet, .... during that time the U.S. created 28 million jobs and the unemployment rate dipped to 4.6 percent from 6.8 percent."
Let's see, according to my calculator, the sun came up 5,840 times during this period. Therefore, by Brooks logic, trade must facilitate astronomical processes. For those familiar with economic theory, the expected impact of trade would be on wages, not the number of jobs. And most workers have seen very small wage gains over this 16 year period as the bulk of the benefits of productivity growth have gone to highly-paid workers.
(...)
Brooks also extols the fact that the people in this country have lots of kids -- that's great if you like global warming, otherwise it doesn't seem like such a great thing. Perhaps the best line is that the United States "benefits from low levels of corruption." This is probably because actions like having a CEO wreck a company, and then get a hundred million dollar severance package, are perfectly legal.
But the most serious inaccuracy in the Brooks piece is the claim that "once there was a bipartisan consensus behind free trade." This is not true. The bipartisan consensus was behind trade policies that put less educated workers in competition with low-paid workers in the developing world. There has never been support for measures that would put our investment bankers, our lawyers, our doctors and our columnists in direct competition with workers in the developing world. (Perhaps Brooks does not know that if I opened a newspaper, and staffed it with foreign reporters and columnists who I quite explicitly paid one-half the wage of their comparably qualified U.S. counterparts, I would be arrested.)
The public has turned against trade policies that were designed to lower the wages of middle class workers and have had this effect. Brooks is among the small group of people who have benefited from these trade policies. Now he is unhappy, that's the story.
--Dean Baker
Posted by Dean Baker on November 27, 2007 5:29 AM Permalink

a risk-loving industry guaranteed as a public utility

Un pétillant article de martin wolf dit tout haut ce que tout le monde devrait penser tout bas : les banques ne sont qu'une forme de parasitisme dont les rendements constamment élévés ne se justifient que par l'exploitation (sans contrepartie) d'une garantie implicite du gouvernement ("pile je gagne face tu l'as dans le ...") .

J'aurais personnellement ajouté un problème fondamental de concurrence au tableau (après tout, l'existence sur longue période de profits hors norme au sein d'une industrie donnée est théoriquement la marque d'un fonctionnement imparfait de la concurrence - cf Big Pharma), mais voir le principal chroniqueur économique du FT prendre ce genre de position après plusieurs années de chants tonitruants à la gloire de la dérégulation financière et de la financiarisation de l'économie est déjà assez gratifiant comme cela...

Way to go, Martin

(...) So what we have is a risk-loving industry guaranteed as a public utility. One result has been insufficient capital. That permits splendid returns in good times. But the capital may well prove inadequate in bad ones. The loss of capital could well lead to a tightening of credit in the years ahead.
If so, the structure and regulation of banking might have to be reconsidered, again. One possibility would be higher capital requirements. This would lower peak returns and so reduce the chances of subsequent negative returns. Mr Smithers and Prof Wood suggest a 40 per cent increase in capital for the UK. Other possibilities are measures to make regulation easier: narrow banking is an old favourite, although hard to make work. Henry Kaufman, a highly experienced observer of credit markets, suggests intense scrutiny of banks deemed “too big to fail”.
What seems increasingly clear is that the combination of generous government guarantees with rampant profit-making in inadequately capitalised institutions is an accident waiting to happen – again and again and again. Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies. Since we cannot accept the latter, I suspect we will be forced to move towards the former. Little can be done now. But when the recovery begins, we must impose higher capital requirements.

* ‘Do Banks Have Adequate Capital?’, Report 298, November 7 2007, http://www.smithers.co.uk/ (subscribers only);** Elroy Dimson and others, ‘Triumph of the Optimists’, Princeton University Press, 2002
martin.wolf@ft.com
Copyright The Financial Times Limited 2007