Academic Voices: The way forward

With some delay I came across the wonderful initiative of Paul Davidson and Henry C.K. Liu to send an open letter to the address of the world leaders attending the White House Summit on Financial Markets and the World Economy last November.
I must say that I was delighted with this initiative since it is in line with my plea for a more assertive an loud voice of academics in world issues at times of crisis when many politicians, regulators and managers are proved hopelessly inadequate for their role.

The full text of the Open Letter of Paul Davidson and Henry C.K. Liu

This Open Letter appeared in AToL on November 7, 2008. For the list of supporters to the letter go to the web page of H. Liu

Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World EconomyDear World Leaders:

The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide. For more than three decades mainstream neoliberal economists have preached, and regulators have accepted, the myth of the efficiency of unregulated markets, ignoring the critical lesson provided by John Maynard Keynes’s analysis of interconnection of financial markets and the international payments system.

Those who do not learn the lessons of history are bound to repeat its tragedy. Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the “Roaring Twenties”. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with “innovative” debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale.

The US sub-prime mortgage problem that started in 2007 has developed predictably to a morass that has caused the abrupt failure of interconnected financial markets and threatened the viability of financial institutions worldwide as contagion spread at electronic speed via an antiquated, dysfunctional international payments system.

To arrest the global financial meltdown, much can be learned from Keynes’s vision of how the international payments system should work to permit each country to promote a national full employment policy without having to fear balance of payments problems or to allow financial incidents in other countries to infect the domestic banking and non-bank financial systems.

Another Great Depression can be avoided if world leaders would reconsider John Maynard Keynes’s analytical system that contributed to the golden age of the first quarter century after World War II. The undersigned and others have long advocated a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at Bretton Woods in 1944.

This new international financial architecture will aim to create (1) a new global monetary regime that operates without currency hegemony, (2) global trade relationships that support rather than retard domestic development and (3) a global economic environment that promotes incentives for each nation to promote full employment and rising wages for its labor force.

Sincerely,

Paul Davidson
Editor, Journal of Post Keynesian Economics
Visiting Scholar Schwartz Center for Economic Policy Analysis, The New School, New York

Henry C.K. Liu
Visiting Professor of Global Development, Department of Economics,
University of Missouri-Kansas City

Academic Concerns II

In my post of 27 September I discussed the initiative of the American scholars / economists to send a letter to Congress arguing against the proposed bill for the bank bailout. The story appears in an interview to CNN titled “Bankruptcy, not bailout, is the right answer” presenting the motives of one of the signatories for signing the letter. He said the following about the credit meltdown:
“….Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared. This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle…”
I fully agree with the analysis and I respect the colleague's reasoning of not supporting the Bill. However I can’t help wondering again, as in my previous post, why no protest was heard from anyone all these years when the “wholesale abandonment of reasonable lending practices” (I think this is rather mildly put) was actually unfolding. This rather unorthodox process was feeding the insatiable appetite of the American consumer for subprime lending building up enormous debts that “ the government implicitly promised …it would make good…” (using taxpayer money of course).

Why no one raised the red flag when subprime lenders transformed their debt into shaky financial products? An obvious answer is the fact that those bonds were AAA rated by overenthusiastic Rating Agencies. These structured financial by-products were taken out of the accounts of promoting banks which sold them – making a hefty profit – to a great number of institutions and individuals around the globe.

But the party came to an end as soon as the promoting banks and investment houses were forced to “eat their own food” when investors declined to supply their cash in exchange to such “structured” products. This led the world financial system to the results we see around us these days.

While many Americans are allergic to everything sounding “socialist” I would argue that socialist tactics of the Administration lay behind the problem: an overvalued(?) house for everyone, even if most people couldn’t afford it; a situation that did not raise any opposition, unlike the “socialist” tactics to bailout the bankrupt banks. Given the sentiment against anything “socialist” one would expect some kind of action much earlier. Why this did not happen I am not sure. Any explanation is welcome.

Academic concerns

The initiative of the Graduate School of Business of the University of Chicago to send to the Congress a letter signed by about 200 academics / economists expressing their opposition to the $700 billion government bailout plan to rescue Wall Street bankers is a noteworthy step as a sign that the academic community becomes vocal in an important social and economic issue. The traditional but mainly the online media have given already a lot of publicity to the epistle; Republican lawmakers and others opposing the bill are using it as an argument against the move of the administration to solve the crisis. I am afraid though that in the end the academics' petition will not help much since other heavyweights like Warren Buffett took position in support of the bailout.

Whether one agrees or disagrees with the letter - signed by some high caliber colleagues from different prestigious schools – I would suggest that such initiatives should not be isolated incidents. What for example is such a petition was drafted in cases that governments lie to their people, misbehave, violate legal and ethical standards or turn a blind eye to situations like the one that caused the present crisis. For sure some of the esteemed colleagues were aware of the sub prime mortgage scandal that caused the property and credit crunch. What if they had raised the red flag earlier by sending a similar petition warning about the consequences of this practice to the Congress or the US government and take care for some publicity. This would have made the present intervention much more worthy, consequent and maybe more effective.