Conservative Interventionism J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER delong@econ.berkeley.edu July 26, 2009
Pause a Moment… At this stage in the worldwide fight against depression, it is time to stop and register just how conservative the policies that have been followed by the world’s central banks, treasuries, and government budget offices have been. In nearly all that they have done—government spending increases, tax cuts, banking recapitalizations, purchases of risky assets, open-market operations, and other money supply expansions—they have been following a road of policy that is nearly two hundred years old, and that dates back to the very early days of the Industrial Revolution, and thus back to the very first stirrings of the industrial business cycle.
Back to 1825 The place to start is with 1825, when Robert Bank Jenkinson, Second Earl of Liverpool and First Lord of the Treasury for His Majesty George IV Hanover, King of the United Kingdom of Great Britain and Ireland, ran to Cornelius Buller, Governor of the Bank of England, and begged the Governor to do something to boost financial asset prices and keep them from collapsing in panic. “We believe in a market economy,” Lord Liverpool’s reasoning goes, “but not when the prices a market economy produces lead to mass unemployment on the streets of London, Bristol,
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Liverpool, and Manchester because panicked investors want their money invested in safe cash rather than risky enterprises.” And the Bank of England acted: it went into the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply. It loaned on little collateral to shaky banks. It announced that its intention was to stabilize the market—and bear speculators beware. Ever since then, those times when governments have largely stepped back and let the financial markets work a panic out for themselves—1873 and 1929 in the United States come to mind—appear to have turned out badly. And those times when the government has stepped in or has backed and deputized a private investment bank to support the market—the aftermath of the 1893 and 1907 panics come to mind, when the U.S. government essentially gave the banking partnership of J.P. Morgan and company responsibility for being the country’s central bank, but also in the United States the Resolution Trust Corporation at the start of the 1990s, plus the U.S. Treasury's and IMF’s interventions in support of Mexico in 1995 and of the East Asian economies in 1997-98—things appear to have gone… less badly. At least, things appear to have gone sufficiently less badly that very few modern governments are willing to wash their hands and say the financial market should heal itself. That would be a radical step indeed.
Interventionism as Conservatism The Obama administration and the other central bankers and fiscal authorities of the globe are thus, in a sense, being very conservative indeed. They are all following a tradition of policy in financial emergencies dating back to 1825 and in some partial cases before, as they take a number of steps to support the financial markets—to try to boost demand for and the prices of risky financial assets in a whole number of
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ways ranging from deficit spending programs to boost the amount of government bonds outstanding and thus make private bonds in lower relative supply, to guaranteeing risky private debt and recapitalizing banks, to buying up auto companies. I understand what they are trying to do, and I am somewhat reluctant to second guess them: they are all doing their absolute best, and I know that if I were in any of their shoes I would be making bigger mistakes than they are—different mistakes, probably, but bigger ones for sure.
Some Questions on Institution Design Nevertheless, I do have some big questions: The U.S. government especially, but other governments have well, have during the crisis gotten themselves deeply, deeply involved in industrial and financial policy. They have done this without constructing technocratic institutions like the 1930s RFC—Reconstruction Finance Corporation—and the 1990s RTC—Resolution Trust Corporations—that played major roles in allowing earlier episodes of extraordinary government intervention into the guts of the industrial and financial structure of the economy to turn out relatively well, without succumbing to overwhelming degrees of corruption and rent seeking. The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action. And that is how—in the United States at least—founders like James Madison or even Alexander Hamilton envisioned that things would work. They were suspicious of executive power, and thought that the executive branches of governments should have rather less discretionary power than the various Georges of the House of Hanover. Yet, this crisis has not seen such financial institutions built up. So I wonder: Why in the United States didn’t the congress follow the RFC/RTC model in authorizing Bush and Obama industrial and financial policy? Why haven’t the technocratic institutions we have—like the IMF—been tasked with a broader role in this crisis? And what can we do
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to rebuild international financial management institutions on the fly to make them the best possible?
July 26, 2009: 874 words.
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