Mark Thoma provides the links to four presentations at the recent IMF conference by distinguished economists who offered their ideas about what has been learned from the Great Recession, and what should be done about it. I have provided a brief summary of the presentations.
George Akerlof summarized his view of the presentations at the conference by stating that it was like a group of people observing a cat stuck up in tree. Everyone has a different idea about how to get the cat down from the tree. He argued that the combination of monetary policy policy and fiscal policy in the US was just about the right thing that should have been done to get the cat down from the tree. It was much better than the response in the US to the Great Depression. Economists using standard macro models of the economy did a poor job of predicting the Great Recession by the profession seems to have learned how to fix a broken financial system and to use monetary and fiscal policy to prevent a greater disaster.
Joe Stiglitz was more critical of the profession and the response to the crisis. He argued that financial crises are very common and that finance is not considered to be part of the real economy in our macro models. The models assume that the market economy is stable and self correcting. Shocks to the economy are regarded as external to the real economy. Much of the instability in the economy comes from the liberalization of the financial system which must be regarded as part of the real economy. The economy is prone to instability and it is not self correcting. The goals of any economy should include growth, stability and a more equal distribution of the output. That can't happen without fixing the problems in the financial system. Our banks are to intertwined to fail. The failure of one bank creates problems for all of the systemically important banks. He argued that capital requirements should be much higher and that this would not increase the cost of capital as the banks have argued. He was also critical of the belief that central bankers could effectively manage the economy by the use of short term interest rates. Our crises require the use of multiple tools to fit each situation and that monetary and fiscal policy needs to be better coordinated. Interest rates have been kept close to zero by the central banks but fiscal policy has been contractionary.
David Romer began his remarks by stating that the title of the conference was misleading. The title: Rethinking Macro Policy: First Steps and Early Lessons, is too timid. The conference was intellectually stimulating but it did little to address preventing the next financial and macro crisis that is bound to happen. He described six financial crises that have occurred in the US over the last 30 years. It is foolish to assume that we can have a stable economy with such a volatile financial system that is central to way modern economies function. He concluded that we need a radical redesign of our financial systems. Central bankers do not have enough tools to prevent the next disaster. He also suggested that it would be good idea to have an independent fiscal authority. That authority would stimulate the economy during recession and build surpluses during good times. Politicians have a tendency to use or oppose fiscal policy for primarily political purposes.
Olivier Blanchard, the Chief economist of the IMF, who hosted the conference, provided his summary of the issues and solutions discussed at the conference. He listed many of the issues and some of the solutions that were proposed. His presentation was cautious about many of the solutions that were discussed. He saw strengths and weaknesses in most of solutions and he concluded that the IMF has been left with a clear research agenda. Perhaps that is why David Romer argued that the conference was intellectually stimulating but that it offered little hope that the next crisis would be prevented. Economists will get more funding for research that will do little to address the important changes that are required.
No comments:
Post a Comment