Raghuram Rajan has recently argued that American politics has made use of easy credit as a substitute for the welfare state. I haven’t read the actual paper to know if he is cited, but Monica Prasad evidently agrees with him in attempting to explain why America’s banking system is so heavily regulated but not robust to deregulation. The crash has created something of a populist moment on left & right, so it is interesting to hear a scholar point the finger back at us yahoos and (as I discuss in a comment) jibes with what I’ve read about the unusually fractured nature of our banking system.
On an unrelated note, a psychiatrist decades ago discovered a cure for the mental illness of hippiedom. On another unrelated note, Statsquatch has had some new posts after a period of inactivity.
December 28, 2010 at 9:26 pm
On an unrelated note, a psychiatrist decades ago discovered a cure for the mental illness of hippiedom.
Perhaps the left can provide their own John Ray to dismantle this guy:
http://jonjayray.tripod.com/collbf.html
December 28, 2010 at 10:32 pm
For all I know he may be dead. What I find perplexing is that this post doesn’t appear on the front-page, but is listed in the sidebar.
December 29, 2010 at 9:58 am
Had hoped for something on full-reserve banking…
December 29, 2010 at 7:26 pm
We the People like being given goodies with nary a thought to the consequences. Rothbardianism is actually not too popular.
December 29, 2010 at 10:34 am
[...] there a possible cure for hippiedom? Faster [...]
December 29, 2010 at 3:56 pm
I am not sure why there should be any speculation about what sort of banking system agrarian populists would design, since we already have excellent historical information on that point. The banking system of the United States between Andrew Jackson’s successful effort to destroy the Second Bank of the United States, and the passage of the National Bank Acts of 1863 and 1865 is the implicit product of Jacksonian democracy, which was certainly populist and agrarian in character.
John Taylor of Caroline, author of “Arator,” might also profitably be read on this point. Strictures on banking, and on the national (central) bank are found throughout this book. Taylor was certainly an agrarian, and a populist at least in the same Virginian tradition that produced Jefferson and Randolph, in that he feared that the centralizing designs of the Hamiltonian party would lead to politicized allocation of credit, consolidation, monopoly, special privilege, jobbery, patronage, and theft by taxation – all of which fears have proven prophetic.
January 2, 2011 at 2:31 pm
A further thought about the point Rajan made – do we consider entities like Fannie Mae and Freddie Mac part of the banking system properly so called, or as social welfare agencies?Also, do we consider bank regulations like the Community Reinvestment Act and the Home Mortgage Disclosure Act in the same light as bank regulations designed to protect the safety and soundness of bank deposits, or are they in reality social welfare legislation in disguise?
There is ample evidence, particularly in the legislativecareer of Barney Frank, for the view that the GSEs are social welfare agencies in disguise – e.g., Frank’s famous statement in opposition to a tightening of their credit standards, to the effect that “we should roll the dice” on subsidized housing. Congressional mandates that the GSEs increase their holdings of subprime loans, and regulators who, during “compliance” exams, discourage lending policies that take borrowers’ character into consideration, also point to the same conclusion.
It is important to distinguish between the ‘populism’ of the Tea Party and historic American populism of the late 19th century, e.g., as represented by William Jennings Bryan, or of the early 20th century, as represented by Robert LaFollette, Floyd B. Olson, or Huey Long. The Tea Party is a populism of the right, and of those who are perhaps slightly better off than average – small business owners, for example, are disproportionately represented in it. They do not want an inflation of the currency (which Bryan’s free coinage of silver would have created) or wealth redistribution (as favored by the Wisconsin Progressives, the Minnesota Farmer-Labor party, or Long’s “Every Man a King” scheme). Rather they want less government meddling, lower taxes, and no more redistribution of their modest wealth. Probably the most recent phenomenon comparable to the Tea Party is the 1950s Poujadiste movement in France.
But it also hearkens back to the early agrarian populism of Jefferson and his contemporaries. This we find illustrated in the letter written by John Taylor of Caroline to W.C. Nicholas on Sept. 5, 1801, describing the course Jefferson would take as president: “A rigid economy will enable the administration to repeal some of the most obnoxious tax laws, and this will acquire a confidence which will enable them to do either right or wearing.”
Jefferson’s biographer Dumas Malone writes of his subject:
“The plantation society in which he grew up was still bearing the burdens of past prodigality and excessive recourse to credit, and he himself was caught in the toils of debt from which he could not escape. He did not want the country as awhile to repeat the experience. …Writing one of his sons-in-law a few months after the inauguration, he said: ‘We are hunting out and abolishing multitudes of useless offices, striking off jobs, etc. Never were such scenes of favoritism, dissipation of treasure, and disregard of legal appropriations seen.’ He had undoubtedly observed far greater extravagance and favoritism in France, and the example he was most anxious to avoid was provided by European governments…”
It is hard to read this without recalling Mark Twain’s observation that history does not repeat itself, but it rhymes. Now, as then, the example our latter-day Jeffersonians are most anxious to avoid is that provided by European governments. Whereas in Europe, the dependent class is rioting in the streets over such things as increases in the retirement age or university tuition, here we have the orderly, middle-class Tea Party rallying to demand a rigid economy, the repeal of obnoxious tax laws, and the curtailment of favoritism (whether to big businesses in need of bail-outs, or to the welfare-dependent lumpenproletariat).
What most exercised the agrarian populists of Jefferson’s and Jackson’s day about banking was the potential that politicized allocation of credit offered for the redistribution of wealth to the politically-favored. In their day, of course, the Hamiltonian party had not discovered the technique of helping the elite ride to power on the strength of a subsidized underclass, nor has they refined the technique of selective taxation to reward their supporters and harm their foes. What we have in the present-day big-government establishment is a combination of the LaFollette/Olson/Long policy aims with Hamiltonian means. But the Jeffersonian objections apply regardless.
If the present right-wing populism/Poujadisme were to have its druthers, its banking system would not beg unlike that supported by Jackson. We’d have many small banks, none of them too big to fail. Fannie and Freddie would be eliminated. The Fed could probably not be abolished, but it could be restricted to maintaining a stable monetary value under something like the Bretton Woods system. The dual mandate imposed by Humphrey-Hawkins would be repealed. CRA, HMDA, and other laws designed to use the banking system as a tool of social engineering would be repealed. Banks would concentrate on lending to respectable middle class borrowers and small businesses, while the lumpenproles would be told to “root, hog, or die.” As a community bank owner, I’d find such a resolution quite easy to live with..
January 2, 2011 at 6:09 pm
I heard somewhere that Barney Frank claimed he wasn’t in favor of encouraging homeownership among the poor and thought they were better suited for renting.
January 2, 2011 at 6:32 pm
That was after the collapse of the housing market. Barney has been singing a different tune recently. Unfortunately, littera scripta manet, and his support for indirect subsidy of low income housing through Fannie and Freddie is amply documented in the Congressional Record. However much Barney might wish otherwise, it is not as susceptible to revision as the Great Soviet Encyclopedia.