This time is no different

Carmen Reihhart and Ken Rogoff explain why we are likely to face a wave of fiscal crises in the wake of the banking crises. This stems from the research in their magisterial book. Their point is simple, but important:

In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.

What will complicate the response is not only the short-term political focus on employment, but also the fact that many emerging economies (which are not in such bad shape) still rely on the US as a market for goods. It is still not clear how the world will re-balance to smaller US external deficits.

While our institutions our better now -- better Central Banks and the IMF -- it is still not clear if governments will respond to this challenge. But beware Reinhart and Rogoff's warning:

Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different.

Geithner and his critics

Treasury Secretary Tim Geithner faced his critics in Congress yesterday and they were angry. There was bipartisan agreement in attacking the AIG bailout. It is a complicated issue, of course. But given the quality of these critics I cannot help feeling support for Geithner. Where was Congress then? Have they agreed on a mechanism to shut down large financial institutions? Do they remember how close we were to meltdown last year?

Elitists and Populists

I admit it. I really liked David Brooks' column today. His fundamental point is that elitists and populists really reflect the same type of thinkings:

These two attitudes — populism and elitism — seem different, but they’re really mirror images of one another. They both assume a country fundamentally divided. They both describe politics as a class struggle between the enlightened and the corrupt, the pure and the betrayers.

These attitudes appeal to people because they simplify, kind of like conspiracy theories. Life is more complex. But complexity is not viable political platform. Better to attack the villains.

Brooks description of the competing fantasies is very good:

Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.’s that they will hand power to people with Ph.D.’s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.’s that they will hand power to people with M.B.A.’s. Members of the ruling class love populism because they think it will help their section of the elite gain power.

This is close to an old theory of mine about the attraction of Marxism. I have always thought that adherents view themselves as planners in the socialist commonwealth. No member of the socialist vanguard envisions herself as a worker realizes her self worth through labor in a workers's state. The theory appeals to elite requirements, because what else would intellectuals do in a workers' paradise where there is no need to criticize society? Must have to run society.

This is a good idea

Douglas Diamond and Anil Kayshap have a good idea relating to the proposed tax on Wall Street.