Thursday, January 21, 2010

Australia and the next global financial crisis

From the Business Spectator:

As sure as I wake up like clockwork at 2.30am every morning to stomp aimlessly around the house, raid the fridge, and bash out a few semi-conscious emails, there is going to be another global financial crisis in our lifetimes. And while I am not the gambling type, I would confidently wager that Australia is going to find itself in very serious strife. Because the next upheaval will likely originate in that industrialising, high-growth, politically unstable, and insensitive-to-the-rule-of-law region of the world that fixates Westerners like an irresistible narcotic: Asia (and China, more pointedly). And just as the transmission device for the recent contagion was banks that had overreached their domestic savings and loans domains and sucked far too hard on the impossible-for-myopic-management to ignore US lolly pop, history will inevitably repeat itself with the difference being that we substitute China for the US and Australian banks for their foreign cousins.


Advocacy of these ideas, which would involve a lot of re-regulation, is not ordinarily associated with libertarians, neo-liberals, or those who subscribe to the so-called “Chicago school” that promulgates maximizing private market activity while paring back far less efficient public sector influences.

I was, therefore, surprised to come across a fairly forceful endorsement of the narrow banking model from Professor John Cochrane, who is one of the 'efficient markets' prophets and a doyen of the Chicago school. By way of interesting context, Cochrane, who is also a leading academic researcher, remains a firm believer in the two cornerstones of neo-classical economics that have come in for most criticism following the GFC: the related ‘rational expectations’ and ‘efficient markets’ hypotheses. Accordingly, Cochrane is a Republican-style champion of smaller government, extensive deregulation, and the belief that the public sector should get out of the way of private markets. Yet check out Cochrane’s views on how we should regulate banks in a post-GFC world, which are patently of the radical narrow-banking ilk (my emphasis added):

Posted via email from Garth's posterous

No comments: