Blinder, Alan S.: How Central Should the Central Bank Be?

Journal of Economic Literature. 2010. Number One.

Sammanfattning:

Alan Blinder – professor vid Princeton och f d vice ordförande i Fed – undersöker I denna utmärkta artikel, i vad man andra centralbanksuppgifter än de traditionella såsom räntesättningen med fördel kan bli kopplade till landets penningpolitiska institution, centralbanken (ett ämne som för närvarande tas upp i många akademiska konferenser och centralbanksseminarier). Han ser dylika möjligheter, till exempel vid uppkomsten av potentiella finansiella bubblor – men inte avseende aktiebubblor utan i samband med s. k kreditbubblor. Blinder förordar också att icke nödvändiga centralbanksuppgifter ”utlokaliseras” till andra institutioner.

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Alan Blinder was a prominent professor at Princeton before he became the vice chairman of the Federal Reserve Board. After having left the Fed, he returned to academia and Princeton. Blinder is an influential monetary policy researcher. His work should be read by economists and others who want to discuss more than the next policy step by the central bank.

In his article “How Central Should the Central Bank Be?”, Blinder leans heavily on the economics of scope. He concludes that “the central bank should monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers…” I think that Blinder is right about the first point, about monitoring systemic risk. Regulating systemic risks, however, should not necessarily belong to central bank commitments. There are both pros and cons.

Blinder pays special attention to the question whether “asset-price bubbles should be an integrated part of monetary policy. Or should the Fed eschew second-guessing market valuations content itself with “mopping up” after bubbles burst (what Blinder calls the Greenspan/Bernanke approach)? Blinder offers a reasonable distinction between credit-fueled bubbles and equity-type bubbles. He argues that the “mop approach” still should be applicable to equity bubbles not fueled by credits. However, the central bank should “try to limit credit-based bubbles”. I do share Blinders opinion on this issue by 100 percent. More central bankers begin to share this view as well.

I feel happy about these pragmatic changes in the real and academic world – an approach that I have been pleading for during a whole decade. Only a few years ago, the Swedish financial newspaper Dagens Industri interviewed a number of economists about their view on monetary policy and asset prices. If I remember correctly, I was the only one who supported this nexus.

Our modern global economy calls for a much broader and better macrofinancial analys and integration of central banks’ objectives and commitments. I am waiting for the next interesting publication of Alan Blinder.

Introduction

China, the U.S. and Europe (European Union, EU) are the economic powerhouses of the world. Much is regularly written about the relations between the U.S. and China, focusing both on political and on economic ties between the two countries. Relations between EU and China are discussed less frequently in the daily and weekly media.

There are several reasons for this emphasis on the relations between the U.S. and China. First, the U.S. and China are two powerful independent countries with their own decision-making. Second, Congress appears to hold more openly discussed views on China than officials within EU. Third, U.S. officials have in the past years expressed their irritation about China’s undervaluation of the renminbi much more clearly and frequently than leading representatives of the EU have done. In particular the currency issue has frequently made headlines, partly because of China’s various strong reactions against foreign (American) verbal exchange rate interventions.

On the other hand, the Chinese see the European Union – we discuss Europe in this context as the EU – as an economic organization rather than a political one.1 This is an important distinction to keep in mind. Furthermore, the EU is regarded as a very complex organization, quite hard to deal with. The Chinese hardly understand why national interests dominate EU meetings in these very difficult times. In Asia there is instead a desire for more harmony in the region when international problems are on the rise, but also more respect for the largest economy (i.e. China) – contrary to what Germany is currently experiencing.

Limited tensions between China and the EU are usually caused by (smaller) trade frictions, sometimes also by varying interpretations of free trade and environmental improvements. But more interesting issues regarding China and the EU show up currently and will continue to do so in the (forthcoming) aftermath of the global and European crisis. This may concern both microeconomic and macroeconomic developments.

China manifests itself as a country that increasingly has to be watched by means of interdisciplinary research. Politics, sociology, the environment and even psychology should be included in a future economic analysis. Pure macroeconomic analysis cannot capture China’s economic future.

This should be said despite the methodological difficulties that exist in interdisciplinary economic modeling. The current economic crises in some EU countries tell us, for example, that reasonable forecasts on European growth and financial markets for at least some years ahead cannot be made without including the political ability of reducing large fiscal deficits. And getting back to China: What will the new Chinese political leadership go for when it comes into power only a few years from now? China’s economy is – as we well know – very closely linked to the political leadership of the country.

I also look at future corporate relations between China and Europe.

Read the full speech (doc)

Även om jag varit med ett tag i denna vidunderliga bransch, slutar man inte förundras. Vad som ter sig speciellt förvånansvärt är det i media och från främst anglosaxisk sida – och med viss inblandning av Frankrike – regelbundet återkommande kravet på Tyskland att kortsiktigt förstärka sina tillväxtpådrivande åtgärder – med fortsatt stigande budgetunderskott som pris. Sådana budskap vittnar antingen om okunskap eller populism. Att följa dylika rekommendationer skulle garanterat utlösa en ny eurokris eller förlänga den rådande. Något som ingen vill ha – såvida man inte sympatiserar med eurons undergång (vilket man på vissa håll uppenbarligen gör).

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1.Right now, economists have hard times when trying to understand all the overreactions that occurred on financial markets in the past few months and years. The latest example – Greece – is typical. The magic financial help package for the troubled Southern European countries is roughly 75 percent of their total debt – certainly enough money if things won’t go completely crazy and if banks go on acting roughly decent. However, this does not mean that the burdening EMU problems on the bond market (ECBs bond accumulation, for example) and the necessity of tightening fiscal policy are resolved. We cannot know whether the Greek government will be successful enough “in time” for getting back markets’ confidence. Does this imply that the exuberance of today’s financial markets will continue one year, two years or three years ahead, for such a long time ahead? No, this does not sound reasonable. Therefore, financial markets will calm down eventually – but with an ongoing risk of renewed worries and contagion.

2. After having worked for quite some time in the financial sector and in academia, I am not surprised anymore about specific economic trends, events, opinions and the interpretations they can get, i.e. certain reactions on financial markets (since I always apply psychology -behavioral finance – in my analysis). Despite this practical approach, certain developments and comments still seem to be strange and far away from economic textbooks and experience. Really striking are the claims by mainly Anglo-Saxon and sometimes French commentators that Germany should give more fiscal stimuli to its economy. Few people seem to know or to remember that the U.S. had a similar position of pressure in the early 1980s when things had gone quite wrong there and Germany should act by fiscal stimuli. Then, Germany fortunately resisted. And it seems to be the case this time, too. If not, I would get really concerned. Much more than I became worried about little Greece (even if the Greek crisis should not be played down too much, and definitely not the Spanish problem)!

3. Only recently, the German government has launched budget cuts of 80 billion euro until 2014 which has to be considered as tough but necessary to meet the relatively new domestic commitment of a roughly balanced budget by 2016. This package is hard against most groups in the German society, even against low-income earners and in certain respects against the corporate sector –  hitting banks, energy producers, parents, unemployed, travelers, etc. Thus, there is a lot of criticism. Lobby groups will now try to exclude their interest group from the forthcoming restrictions. This leads, of course, automatically to the question whether the whole fiscal improvement plan can be launched. Interestingly, there is also some pressure within Merkel’s CDU – its corporate organization “Wirtschaftsrat” included – suggesting a rise of the taxation of high-income earners, probably with the intention to avoid far-reaching social tensions or even conflicts. This social harmonizing approach is at the moment disliked by the other coalition partners, the conservative Bavarian sister party CSU and the liberals FDP. Again, one should not overlook that also Germany’s low-income earners can face challenging conditions in this huge austerity package which currently amounts to 80 billion euro out of 320 billion euro in current total central German expenditure.

4. Unfortunately, German fiscal consolidation cannot be soft since social expenditure is about half and interest payments are about one forth of total government expenditure (which indicates the explosive power that may come from higher interest rates). In addition, German potential output must be raised from currently 1 ½-1 ½% (my own forecast for GDP growth in 2010: 1 1/2% – 2%). This can only be achieved by measures that support long-term growth and not by short-term stimuli. Furthermore, the Germans find heavy government borrowing disgusting. This attitude seems to be considered by Merkel.

5. Let’s now assume that Germany for a couple of years will make Anglo-Saxon dreams come true and that Germany will finish tocare about government spending. Expansionary fiscal policy and – which was also demanded by foreign interests – higher nominal wages should become Germany’s “Leitmotiv” – a development that most probably also would be supported by France. What would happen?

6. Before answering this previous question, there is a new phenomenon to be mentioned that non-Germans do not know about or simply do not care about: the fact that Germany needs its fiscal balance more or less in equilibrium from 2016 onward. This new constitutional commitment urges for a tough fiscal consolidation course already now – and not in a couple of years or so.

7. If Germany neglected its fiscal obligation about a balanced budget, one can be sure that markets would punish such a failure dramatically. Long- term interest rates would move to higher levels Germany and – most probably in the whole eurozone as well. Short-term rates would probably also be affected negatively – which altogether would have a negative impact on total European growth. Short-term joy would turn into a bad mood in the medium term and perhaps in the longer run, too. The fact that persistent high budget deficits tend to have a negative impact on inflation (expectations) is certainly not a scientific revolution anymore.

8. At least as negative as the consequences mentioned in comment six on this page: Serious German deficits during a couple of years would undermine general fiscal discipline in the E(M)U area. Germany did this already once before in the beginning of this decade – which in reality turned out to be the death of the first – well-intended – stability pact for the protection of common macroeconomic discipline. In the early days of this century, Germany and France started to neglect the budget rules of the Stability Pact. This was nothing else than undermining the whole EMU system. Germany should not repeat this mistake as the biggest country in Euroland. Germany should do as much as possible for the health of the monetary union. If this “mandate” in the future will be taken seriously by Germany, it also would be easier in most cases to punish future sinners from other countries on the basis of a new stability pact.

9. Germany must do everything to maintain its benchmarking role in the EMU. There is very much psychology in this commitment. In my eyes, there are only two or perhaps three countries that really could wipe out the euro at some point in the future – Germany, France and perhaps Italy. Sure, there are many hedge funds and other financial players who could make a lot of money on a crash of the euro. But are there any reasonable people in continental Europe who would like to see such a development? Europe must become stronger and more unified to meet future challenges – not the other way around. Is there any European who thinks that EU countries and EU companies can benefit from a weakening Europe in competition with a continuously more powerful Asia (China; I would like to remind you of deLong’s and Cohen’s book from 2010, “The End of Influence”).

10. Chancellor Merkel faces some really challenges in the forthcoming month months or quarters – not only within the E(M)U but also domestically. Her coalition partner – the right-wing liberals (FDP) – present themselves rather as the big than the small partner in the German government. Merkel’s leadership will be an important precondition of Europe’s stabilization and firmer financial markets. This has to happen a with long-term oriented German fiscal consolidation policy – not by making German fundamentals more vulnerable.

Summary

1. From a general point of view we should all be happy that another Nordic country wants to join the European Union, hopefully as an active and positive member. Whether Sweden always has been a strong EU supporter can be questioned. Recently, former Finnish prime minister Paavo Lipponen even accused Sweden of not always having taken its EU mandate seriously enough.

2. There are different reasons for a country’s application for EU membership, including – peace and sympathy for a co-operating Europe – also in order to tackle tough global competition – the dominating role of the EU as a trading partner and the possibility of joining the euro later on – a domestic economic emergency situation (like in Sweden in the early 1990s) – a combination of different motives.

3. Former Polish president Aleksander Kwasniewski told me once that the first argument of peace between EU countries has been particularly important to him and most of his countrymen, since Poland in the past centuries has been a free country only for a few decades. The historical peace dimension has never been discussed very much in Sweden which is not quite justified – but understandable. In the case of distant Iceland, this possible neglect of European continental history certainly must be even more understandable.

4. In the case of Iceland, the application for EU membership happened to a great extent due to economic crisis reasons. This is not a bad reason per se. In emergency situations, it is usually easier to secure relatively high political and public support for such a big step. But things may happen quite rapidly. This calls for good transparency and information to the voters – but also to the more domestically oriented politicians.

5. Thus the issue of transparency should not be underestimated and should include information on the EU itself and both the advantages and the challenges for Iceland. There will be changes in legislation, institutions, the corporate sector, the banks, the labor markets, etc. Icelanders should be aware of these changes before joining the EU. However, Iceland’s previous EEA joining will make things easier in a number of areas.

6. Another big issue will be the (probable) future Icelandic position with regards to the EMU. Current difficulties for the euro should not deter them. Currencies go up and down, particularly reserve currencies. Sure, the European Union has to work out some major structural problems in a number of member countries. But even the US and the UK – the main current speculation centers against the euro – have their homemade problems which at some point will send currencies in another direction again, this time favoring the euro.

7. However, the current euro crisis again stresses a fact that is sometimes neglected: Economic stability begins at home. As the examples from the Baltic countries and Greece show, strong links to the euro and EMU membership cannot serve as a rescue anchor if a country suffers from major domestic economic imbalances.

8. In my opinion the analysis of the economic balance of a country applying for EU membership should not be limited to what is still called convergence criteria, i.e. total public debt, annual fiscal performance, inflation, the exchange rate before joining and long-term rates – but also the structural situation and the fundamental prospects of the current account. This is an issue that Iceland should think about in order to avoid joining the euro prematurely – even if many observers think that Iceland applied for EMU membership mainly with the objective to introduce the euro in the foreseeable future. Thus, preparing Iceland for the euro should include a long-term strategy for structurally improved exports and – if possible – also for some long-term reduction of imports.

9. This strategy has to include a number of important contributions from growth policy to the current account balance – or call it from the supply side if you want. Some of these factors that contribute to the creation of even more entrepreneurship and product development are a favorable general economic climate, improvements in education, innovation, well-functioning financial markets, good institutions, labor market immigration, etc. R&D as a share of GDP, for example, is just around 3 percent which certainly must be considered as moderate. And it should not be overlooked: According to article 109 j 1 of the Maastricht treaty, the current account balance matters when a county wants to join the EMU. Unfortunately, nobody ever cared about this detail, probably because there are no numerical targets for an acceptable current account deficit. However, this – academically understandable – lack does not make the issue of a sustained acceptable deficit in the current account less important.

10. Once Iceland has formally joined the E(M)U, North America has taken this big step as well (if we neglect the French Islands of St. Pierre and Miquelon off the coast of Canada which already have the euro). Surprised? Of course, this comment is related to Iceland, since the big island of Iceland geographically is located in both Europe and America.

The Greek crisis pointed out what I have been writing recently on this blog page:  There is an increasing need of finding the best leaders in our complex global economic world – which also should include political leaders. It’s really a scandal how strongly EU leaders in the past decade have ignored poor macroeconomic  fundamentals – not only in Southern Europe but also in the Baltic states. And soon the next EMU entry by Estonia will be discussed. The Greek example shows that EMU membership cannot serve as a comfortable rescue anchor in emergency times. And in the case of the Baltic states, these countries should at least wait and see how the current account balance and its financing will develop once their economies get back to normal GDP growth again. It is also high time for financial analysts and journalists to look more at smaller economies again, particularly when they start to reveal economic imbalances.

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1. Det nya, väldiga 750 miljarder euro kreditrampaketet för att rädda Grekland och för att förebygga fler allvarliga attacker mot euroområdet och euron kan ha de nödvändiga finansiella musklerna. Men vi vet ingenting om framtida belastningar av eurosystemet. Det absolut viktigaste är att hålla Italien – och helst också Spanien – utanför dessa valutaorkaner. Därför bör E(M)U-ansvariga redan nu också öka trycket på Italien – om än i tysthet. Här har vi det största teoretiska hotet mot eurons existens.

2. Det bör inte ifrågasättas att finansmarknaderna från tid till annan bör – eller rent av har en skyldighet att – utöva press på länder som inte sköter sina ekonomier. För Sveriges del till exempel var dylika påtryckningar från finansmarknaderna för cirka 20 år sedan – med facit i hand – mycket positiva, då dessa givit många önskvärda strukturella förändringar som vi idag får vara glada över.

3. I Greklands fall var dock finansmarknaderna alldeles för sena med sina varningar.  Dagens problem var lika kända vid Greklands inträde i EMU. Europas politiska ledare präglades dock redan då – generellt sett – av ekonomisk inkompetens. Ett (EU/EMU-) land bör inte styras av ledare som saknar förståelse för den globala ekonomin (vilket för övrigt också gäller ett icke EMU-land som Sverige). Små länder gör inget undantag.

4. En av de viktigaste slutsatserna från Greklandkrisen är att EMU inte ens kan fungera som förebyggande räddningsankare för de mindre EMU-länderna. Estland är redan på väg att försöka ta ett sådant stort steg och väntas snart ansöka om medlemskap. Men vad vet man idag om utvecklingen av Estlands bytesbalans, när ekonomin åter visar god tillväxt? Hur stora bytesbalansunderskott kommer då tillbaka – och hur kommer dessa att kunna finansieras?

5. Det är således EU-ledarnas skyldighet att bli mer selektiva vid kommande EMU-anslutningar. Det kan kräva även justeringar av det formella regelverket. Protest? So what? Ett tryggare EMU-medlemskap ligger också i kandidatländernas intresse.

6. Man kan givetvis undra, varför finansmarknaderna attackerat Grekland just under de gångna månaderna – och inte mycket tidigare. Det finns ett antal förklaringar till detta. Knappast någon analytiker eller journalist utanför Grekland eller Portugal brydde sig om dessa länder under det gångna årtiondet. När kunde man under det gångna tio åren läsa (vettiga) landrapporter om de mindre EU-länderna utanför de internationella organisationernas publiceringscirklar? Inte ens om (de icke problemdrabbade) Nederländerna rapporterades – med få undantag – i bankrapporter och tidningar. Detta trots att Nederländerna är EMU-områdets femte största ekonomi! Alltför mycket analys koncentrerades till de största EMU-länderna – precis som från ratinginstitutens sida. För övrigt kan jag inte förstå, varför många opinionsbildare ånyo tar ratinginstituten i försvar. Faktum är att ratinginstitutens makroekonomiska och makrofinansiella rapporter på minst 15 år inte fångat in en enda kommande makrokris vid en någorlunda vettig tidpunkt.

7. Det är också ett faktum att finansmarknader vanligen inte ”arbetar” med två stora problemområden samtidigt. ”Subprime”-krisen med alla åtföljande konsekvenser tog 30 månader av superfokusering i anspråk. Åtminstone under denna tid fanns ingen tid för ”bearbetningen” av andra finansiella obalanser.

8. Man kan dock åtminstone ställa frågan, varför Greklands problem fått så oerhört tillspetsade dimensioner precis när den globala finanskrisen äntligen hamnat i lugnare farvatten. Framför allt två faktorer kan ha spelat in – åtminstone om man är något konspirativt lagd. För det första: I början av året var det helt enkelt dags att hitta nya spekulationsobjekt för att tjäna fräscha pengar.

9. För det andra: Många samtal med mina  amerikanska kolleger ger uttryck för en icke dold skadeglädje. Dels för att man från början argumenterat mot eurons etablering, dels för att man upplevde ”förnedringen” av det amerikanska systemet under finanskrisens värsta dagar som mycket pinsam. Jag vill inte påstå att Grekland-krisen utlöstes i New York – det skedde de facto mycket tidigare i Aten – men naturligtvis kan Wall Street ha bidragit en hel del till accelerationen av Greklandkrisen. Visserligen saknar dessa förklaringsfaktorer vetenskaplig stringens. För den sakens skull kan de dock mycket väl innehålla en hel del sanning.

10. Sammanfattningsvis: Det är inte så komplicerat att komma fram till slutsatser om orsakerna till Grekland- och eurokrisen. Det är inte heller svårt att dra erforderliga slutsatser om de rätta förebyggande insatserna. Svårare är dock att höja många politikers ekonomiska kompetens och kanske också intresse. En sådan förändring måste dock till. Men var finns styrmedlen till en sådan strukturell förbättring?

Sammanfattning
Brad deLong – välkänd professor i ekonomisk historia vid Berkeley-universitet i San Francisco – analyserar i denna nyutkomna bok tillsammans med kollegan Stephen Cohen USA:s framtida roll i världsekonomin.  Kinas tilltagande globala inflytande diskuteras – vilket kommer att ske på bekostnad av USA:s. DeLong/Cohen förutser en växande statskapitalism och en tillbakagång av nyliberalismen.

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Many articles have been written in the past two years about the declining economic power of the American economy in the aftermath of the global financial and economic crisis. Of course, nobody can give an exact answer to this topic at this stage. But one should listen when experts like Cohen and – particularly -  DeLong raise their voices. This is why I read their book “The End of Influence” with great interest.

DeLong/Cohen use the uncomfortable American indebtedness and China’s enormous accumulation of currency reserves as the starting point for their analysis. “When you have the money – and you are a big, economically and culturally vital nation – you get more than just a higher standard of living for your citizens. You get power and influence…” On the other hand: “When the money drains out, you can maintain the edge of living standards of your citizens for a considerable time (as long as others are willing to hold your growing debt and pile interest payments on top). But you lose power…”

The two authors of the book forecast the revival of state capitalism and a declining influence of neoliberalism, particularly in the U.S. In the future, governments will intervene much actively to affect markets, according to the two professors.

DeLong and Cohen do not see a primary risk in foreign (Chinese) buying of American companies per se – but in the challenge “where the spillovers of the innovations go”. DeLong/Cohen fear that the spillovers – which historically stayed in the U.S. and which strongly contributed to regional growth – will go outside the U.S, thanks to foreign money.

The book does not predict the fall of the U.S. We are, however, told that others have the money. Consequently, the U.S. will lose power and influence – but it will remain a world power.

“The End of Influence” is a most interesting reading. However, it is based on the assumptions of sustained major fiscal problems in the U.S. and continuous economic stability in China. These assumptions are probably right for the forthcoming years. But what will happen 10-15 years from now? China has its (still hidden) structural imbalances as well – and the U.S. may at some point turn their own problems in the right direction again.

DeLong’s and Cohen’s book is not written very academically, which is good for trying to get a broader public to understand this ongoing, very severe problem in the world economy. They point to possible developments that really look uncomfortable. Not each and every one of their conclusions will come true.  But the warning signals should not be ignored.

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The global financial crisis had many reasons. Quite a number of them have been discussed in the press and in this blog. Many articles have been written about all the regulatory shortcomings, accumulation of liquidity, low interest rates, credit expansion, insufficient rating institutes, bonus, etc.

Too few contributions, however, have been focusing on competence and skills of financial leaders. My own feeling from meetings and all the conferences with financial leaders has been for quite some time that many financial executives before the eruption of the crisis have been relatively unskilled in their understanding of macrofinancial and macroeconomic trends that may affect their own institutions. Bonus incentives and short-term profit horizons may also have played  some role in the malign neglect of macrofundamentals. But I also argue strongly that the risks of overliquidity or high deficits in current account balances often  were not really understood – despite the fact that such factors really can mean major risks to financial institutions.

Consequently, we come to the important question: Why did these shortcomings happen? An explanation may come to some extent from a research paper that recently came by mail to me (Kräkel, Matthias: “Competitive Careers as a Way to Mediocracy”. 2009. BonnEcon Discussion Papers No 25).

The author of this theoretical paper argues that selection processes for top leaders often are won by less qualified candidates – despite certain skill deficits -because they make special efforts to get the job and their challenging “all or nothing” position. They are fighting for the job. These people cannot easily move to another option. The risk of falling down is obvious.

The most qualified candidates for the same job, on the other hand, know that they have interesting alternatives. They look many times at the potential new job in a more relaxed way – and may fail quite frequently. In research, this phenomenon is called “the victory of mediocracy”.

Sooner or later, many promoted – but fundamentally less qualified – leaders get overstrained which leads to wrong decisions and bad results. This could recently be watched during the financial crisis – but also in politics for a long time.

The main conclusion from this phenomenon must be to reduce mediocracy in the global financial sector and other leading positions. Economists don’t have the solutions how to increase the incentives for the most qualified leaders. But economists know that bad strategies and decisions by banks and other institutions can do substantial economic harm to a country or even the global economy. This should be an important lesson from the global financial and economic crisis.

Today, it’s the starting point for a new monthly contribution to my blog in which I briefly introduce my favorite reading of an economic paper or book during the past month. This time my choice was very easy. Nobel Prize winner George Akerlof enters  –  together with professor Rachel Kranton -  a new research area:  Identity economics (IE). Akerlof’s / Kranton’s (A/K’s) book with the same title has to be seen as a primer on the interesting field of identity economics. They started their co-operation some 15 years ago.

I like the recently published book because it may lead to a new, important approach in interdisciplinary research – an approach that I have been supporting for quite some years, particularly when it comes to psychology and sociology. Historically – as A/K single out – Adam Smith showed considerable interest for social issues and the creation of a good society. Since the end of the eighteenth century, however, economic research has become more and more model-oriented, using that incredible person called homo oeconomicus who is supposed to know everything, to receive all necessary information and to always come along with perfect individual decisions.

We know, however, that such an ideal world does not exist in reality. Gary Becker found out – very correctly – already more than 40 years ago  that social issues matter in economic developments. In 2002, economic psychology received large appreciation by giving the Nobel Prize to Daniel Kahneman and Vernon Smith.

A/K seem to be ready to give economics a new social dimension by modeling and analyzing how “our identities shape our work, wages, well-being”, etc. They put together identity, norms, and social categories into economics. A/K conclude that “people’s identity defines who they are”: Their social category and their identity determine their economic decisions.  This is the case because “different norms for behavior are associated with different social categories”. We have to understand these two factors in order to capture what IE is all about. Choosing identity may be the most important economic decision a person ever can make, according to Akerlof and Kranton. People’s choice of identity reveals their conception of who they want to be and who they are.

Gender and race issues fit particularly well into the IE approach, many times related to education and work – factors that in the long run also have an impact on economic growth. Thus, IE has a macroeconomic dimension as well. Other applied examples from IE are why certain incentives work and why not and why certain schools or cities succeed and why not.

A/K blend nicely their research approach with examples from real life. This really fascinating  book has a non-mathematical contents which should give quite a large readership. But it should be added that A/K deal with necessary technical modeling, too. More about this can be read in different economic reviews and papers.

In October next year, Jean-Claude Trichet will retire from his successful job as the president of the European Central Bank (ECB). Two current central bank governors are currently mentioned as the main candidates to succeed Trichet, the German Axel Weber and the Italian Mario Draghi.  There is no doubt about the need of a strong, stability-oriented new ECB leader. Insufficient fiscal policy in most EMU countries cannot be accompanied simultaneously by a weak monetary policy. Such a combination could do a lot of harm to the euro. In this context, Axel Weber, the stability-oriented, inflation-fighting inheritor of the permanently stability-oriented Bundesbank should be given (somewhat) more confidence by global financial markets than his competent academic colleague Mario Draghi. But Draghi has strong supporters in a number of EMU countries.

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1. Om cirka 18 månader är det dags for fransmannen Jean-Claude Trichet att lämna över ECB-rodret till sin efterträdare. Trichet har tveklöst gjort ett bra jobb. Många marknadsaktörer trodde inte riktigt på honom för sju år sedan. Men Trichet lyckades förvalta ECB i stil med en f d Bundesbank-president, under en längre tid tillsammans med sin chefsstrateg och f d Bundesbank-chefsstrategen Otmar Issing.

2. Följaktligen kommer kraven på ECB:s nya toppledning att vara stora. Snart är det meningen att Portugals nuvarande centralbankschef Vítor Constâncio tar över som vice chef i ECB, vilket retat det relativt inflytelserika Luxemburg alldeles enormt. Luxemburg ville se sin nuvarande centralbankschef, den erfarne och ideologiskt envist inflationsbekämpande Yves Miersch som ECB:s nya nummer två. Constâncio ersätter den teoretiskt och akademiskt kunnige Lucas Papademos, som för närvarande också basar över ECB:s forskning. En viktig detalj är således, var ECB:s duktiga forskningsavdelning kommer att hamna. Svaret på denna fråga har sannolikt med den framtida presidentutnämningen att göra.

3.  Helt klart torde vara att Weber och Draghi kommer att förbli huvudkandidaterna (även om till exempel Cyperns Orphanides också har en utomordentligt intressant bakgrund). För närvarande görs tolkningen att ”höken” Mierschs nederlag om viceposten banar väg för ”höken” Weber som president (även om jag själv inte gillar dessa epitet; en centralbank bör agera efter sitt uppdrag och ingenting annat). Helt avgjort är dock inte racet.

4.  Framför allt är inte avgjort, var Frankrike kommer att placeras i ECB:s ledning. Det kan knappast tänkas att Frankrike frivilligt kommer att avstå från en sådan maktposition. Lika lite är det troligt att Tyskland kan ha två representanter i ECB:s högsta ledning, det vill säga både Weber och nuvarande chefsekonomen Jürgen Stark. En tänkbar lösning av detta problem vore att Weber och Stark helt enkelt gjorde en rockad mellan Bundesbank och ECB.

5.  Just nu talas mycket om att IMF:s chefsekonom, den kände franske MIT-professorn Olivier Blanchard, skulle ta över rollen som chefsekonom-/strateg i den nya ECB-ledningen. Blanchard är visserligen en stor ekonom. På sistone framkallade han dock mycken irritation – även hos Axel Weber – med sitt IMF paper ”Rethinking Macroeconomic Policy” (tillsammans med kollegerna Dell’Arricia and Mauro) genom att ställa frågan om kostnaderna för en inflation något över det låga 2-procentmålet verkligen är högre än för den mer hårdhänta inflationsbekämpningen. (”Is it more difficult to anchor inflationary expectations at 4 percent than at 2 percent?”).  Å andra sidan finns fler franska ekonomer av hög klass som mycket väl skulle lämpa sig för chefsekonomjobbet i ECB.

6.  Kruxet är dock att franska ekonomer – trots mycket god generell ekonomisk kunskap – är behäftade med det historiska ryktet att de tar det något lugnare med låg inflation, stabil valuta och sunda statsfinanser, när tider är dåliga. Det är här risken finns om president Sarkozy skulle lyckas få en landsman på chefsstrateg-/chefsekonomposten.

7.  Ytterligare ett problem kan komma att uppstå genom att två kompetenta Bundesbankledare snart måste ersättas genom personer med politisk acceptans hos förbundsregeringen i Berlin och delstatsregeringarna i Schleswig-Holstein och Mecklenburg-Vorpommern. De nu föreslagna kandidaterna innebär en icke negligerbar kompetensutarmning, vilken hotar att bli ännu större om Weber växlade till ECB. En sådan möjlig försvagning av ECB-systemets viktigaste nationella centralbank skulle också kunna leda till en del farhågor och – i värsta fall också risker för euron.

8.  Det pågående tyska exemplet visar tydligt att politiker vid utnämningar alltför ofta tenderar att värdera rätt partibok högre än expertkompetens. Här finns också den mest påtagliga risken i ECB:s påbörjade viktiga utnämningsprocesser (i detta fall med starkt eftersträvad representation av vissa länder i ECB:s högsta ledning). Hittills har ECB:s regeringschefer matchat uppgiften att hitta en bra och samtidigt kompetent nationell mix av ECB-ledare med betyget ”mycket väl godkänt”. Lyckas man även denna gång?

9.  I detta sammanhang kan påpekas att det svenska utnämningssystemet för Riksbankens direktionsmedlemmar blivit mycket bättre under det gångna årtiondet, även om fördelningen mellan vetenskap, makro-, mikroekonomi och rena finansmarknadsexpertis inte alltid varit optimal.

10.  Sammantaget:  Det framstår som extremt viktigt att ECB under de kommande 7-8 åren kommer att ledas av två ytterst trovärdiga ledare med hög kompetens och trovärdighet. Dessa två krav ter sig speciellt viktiga med tanke på de enorma finanspolitiska utmaningarna som ett antal EMU-länder fortfarande har framför sig. Dessa snedvridna skuldförhållanden gör en trovärdig penningpolitik från ECB:s sida – måhända – ännu viktigare än hittills. EMU-länderna, euron och även resten av Europa har inte råd med en ny kris, framkallad av otillräcklig tilltro till ECB:s kommande toppledare.

Det råder ingen tvekan om att alltför många bankledares analytiska inkompetens och korta minne, felaktiga incitamentsstrukturer i bankerna, undermålig risk management och inte minst kortsiktiga vinstmaximeringsintressen i hög grad bidragit till den globala finansiella krisen. I motsats till många andra bedömare anser jag dock inte att bankerna genom lättvindig finansiering gjort sig skyldiga till den akuta Grekland-krisen.

Det är snarare E(M)U-politikerna som alltför okritiskt accepterade Greklands EMU-inträde år 2000 och Tysklands/Frankrikes tidigare ovilja att klara stabilitetspaktens budgetkrav – och givetvis den politiska och statistiska oredan i Hellas.

Som vi vet idag har den politiska nonchalansen gjort hela stabilitetspakten mer eller mindre tandlös.  Dessutom trodde alltför många politiker i ett antal mindre EMU-länder alltför länge att deras blygsamma andel i eurolands BNP skulle skydda dem från finansmarknadernas attacker vid eventuella större egna obalanser. Så tänkte man också i de baltiska länderna. Det sker ännu idag.

Grekland-krisen ger en mer än tydlig varning om att EMU-medlemskap inte automatiskt innebär ett ”evigt” skyddsnät för mindre EMU-länder med tunga strukturella obalanser – och givetvis inte för ett stort, potentiellt utsatt land som Spanien heller (fastighetskris och sparbanker i kläm). Det gamla ordspråket från finansmarknaden – ”stability begins at home”- gäller alltjämt. Denna erfarenhet borde framstå som maxim för en nödvändig effektivisering av stabilitetspakten.

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Many bank managers and executives showed serious proofs of lacking competence, greed, short memory, wrong incentives, illogical behavior, etc., during the global financial and economic crisis. Many of these serious accusations were highly motivated. But banks cannot be blamed for all kinds of insufficiency in monetary policy, supervision, rating, and for many consumers’, investors’ extreme irrational exuberance, and political mistakes.

Recently, banks also have been accused of having neglected the long-time financing risks in Greece, particularly some U.S. banks. This is a tough call. But I suggest that the banks should not be charged more than marginally with their impact on the Greek economic crisis. Instead, E(M)U politicians – with Germany and France in the frontline – should be mainly blamed for the ongoing problem in Greece and other Southern European EU countries. In the mid 1990s, German pressure to create and implement the so-called “Stability Pact” was the only right macroeconomic answer to EMU opponents and scientists who especially referred to Mundell’s skepticism about asymmetric shocks in monetary unions. Around a decade later – in 2004 – Germany and France missed the budgetary target for annual budget deficits (3 percent of GDP) for the third year in a row. According to the Stability Pact – which originally was initiated by the German minister of finance, Theo Waigel – annual budget deficits of E(M)U countries should not exceed 3 percent of GDP. After three years of violation of this target, quite substantial penalties should have followed.

However, the poor fiscal developments of Germany and France were not accompanied by penalties that are part of the Stability Pact. Thus, these two biggest EMU countries got special treatments, undermining conditions for future fiscal discipline in Euroland. If the penalty rules of the “Stability Pact” had been applied carefully to Germany and France, much more pressure could have been made in the following years on the imbalanced Southern European economies. Now, time has really come to achieve a more efficient stability pact, to demand more responsibility for macroeconomic stability from ignorant European politicians and – maybe – to create an EU stabilization/country rescue fund.

Furthermore, nobody can tell me that most of the Greek problems were unknown when Greece entered the euro in 2000 and during the first years of its EMU membership. Many economists – included myself – wrote about Greece’s “creative bookkeeping” of government finance already eight years ago. But why did important European institutions refrain from looking behind the Greek statistical shortcomings and cheating during the past five to eight years? Why was this insufficient pressure on Greece?

My answers to this question look like follows: First, there was this malign neglect of the Germans and French deficits which probably put the Greek issue down on the observation list. Second, there was a general initial mood of overconfidence about the new European monetary and currency system. Third, there was at this time a feeling for countries of “to small to fail” on both financial markets and in governments. For instance, when I around 2004 and 2005 many times pointed at the current account risks in the Baltic countries, a frequent reply was that “financial markets never will speculate against the small Baltic currencies”.

Four years later, the financial world and 7.4 million people in the Baltic states experienced dramatically that this theory was wrong. Similar comments aiming at “too small to fail” could also be noticed about Greece in the past few years – though not very frequently. By hiding their risk management behind the big Euroland curtain, too many bankers and economists applied the view of the ECB that the euro area must be seen as one homogeneous economic area. Of course, this is true of monetary policy of the ECB – but certainly not in a country risk perspective. However, one should not forget that the EMU was launched by its founders as a very safe institution (which it really is when politicians are doing their homework; for this reason the Greek failure is no good argument against the euro per se).

The most important conclusions: There are still individual country risks in the EMU area for small countries – but, of course, also for big countries like Spain (big  estate problems and very exposed savings  banks).  Since the euro in the beginning of this decade was a new phenomenon, it was not absolutely foreseeable that the imbalances of the small EMU member of Greece could be turned into a  negative global financial spiral – and certainly not for the banks’ strategists either.

However, the current  dark Greek experience should be another strong warning signal to the Baltic countries to avoid a premature joining of the euro. Just a few years from now would most probably be by far too early.