Tag: Kenneth Rogoff

Essay 95: Education and “Then and Now” Thinking

Ben Shalom Bernanke was Chairman of the Board of Governors of the Federal Reserve System from February 1, 2006, to January 31, 2014.

In many interviews in financial and economic periodicals, he blurts out the fact that his guide in the years surrounding the Great Recession of 2008, in his decisions by the advice of Walter Bagehot of the Economist of London whose main book is called Lombard Street [Project Gutenberg ebook] from 1873:

Lombard Street is known for its analysis of the Bank of England’s response to the Overend-Gurney crisis. Bagehot’s advice (sometimes referred to as “Bagehot’s dictum”) for the lender of last resort during a credit crunch may be summarized by  as follows:

  • Lend freely.
  • At a high rate of interest.
  • On good banking securities.

(Nonetheless, other economists emphasize that many of these ideas were spelled out earlier by Henry Thornton’s book The Paper Credit of Great Britain [archived PDF].)

Bagehot’s dictum has been summarized by as follows: “To avert panic, central banks should lend early and freely (i.e., without limit), to solvent firms, against good collateral, and at ‘high rates’.”

In Bagehot’s own words (Lombard Street [Project Gutenberg ebook], Chapter 7, paragraphs 57–58), lending by the central bank in order to stop a banking panic should follow two rules:

First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer… No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business… The great majority, the majority to be protected, are the ‘sound’ people, the people who have good security to offer. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

We have to ask ourselves: how is it possible that advice from 1873 (i.e., Bagehot’s Lombard Street [Project Gutenberg ebook] crisis-management for that time) can be applicable in 2008?

Does this confirm the off-handed comment in This Time is Different by Ken Rogoff of Harvard that there must be true-but-opaque deep rhythms in history including financial history? Otherwise advice would be useless due to the passage of time and useful patterns would not be discernible.

In fact, Lawrence Summers at Treasury “deluged” Mexico and Latin America with loans to avert an earlier banking crisis following Bagehot’s advice. The logic is that investors must sense that Mexico, etc. will be bailed out at all costs. The idea is to avert a “downward spiral of confidence” by means of visible massive interventions.

Education should always ponder these “then and now” puzzles as part of a beneficial “argument without end.”

Essay 57: The Issue of Deep Rhythms in History: Second Look

We have already seen, in the previous essay, that world violence against the vulnerable is a deep and constant theme or rhythm in world history, one that is “dutifully” avoided. (This avoidance may be called another rhythm all its own.)

In the realm of finance (Kenneth Rogoff’s book This Time is Different is about financial rhythms and cycles), we also sense deep echoes and rhythms:

Consider this entry on the medieval Florentine banking houses the Bardi and Peruzzi:  “These Florentine families gave their names to two great banking houses of the 14th century, commanding assets far greater than those of the later and more famous Medici bank.  They advanced loans to European monarchs, most notably Edward I, who used the money to finance his campaigns in the Hundred Years’ War.  He and his successors reneged on his debts in 1345, which led to bankruptcy for the Bardi and Peruzzi forms and sent shock waves through the European economy.

The Medici rules Florence from 1434-1494, long after these Europe-wide shocks.  Bond finance (governments borrowing from their own people as well as outsiders) to finance wars emerged out of insecurity on all sides of war finance and culminated in the brilliance of the Rothschilds (as Prof. Niall Ferguson’s contemporary two-volume history of this family shows).

Thus, wars and war finance have many centuries of gestation and provenance and defaults and shock waves were well known in the European economy of the fourteenth century long before the Medici and their famous patronage of the arts and their prominence in Papal politics.

One might argue that these are rhythms and echoes that have to do with deep structures like militarily organized violence (wars) and political organizations from kingdoms through states.

If you combine these two essays (56/57) you get a money-and-violence super-rhythm which goes on today.

Consider the Larousse entry on the Frescobaldi family:

“One of several banking families in 14th-15th century Florence with European-wide interests. 

“Their clients included Edward II of England, whose wars with Scotland they financed in exchange for customs revenues.

“The royal default on debts led to a crisis for the Frescobaldi bank in 1311.”

(Larousse Dictionary of World History, ed. Bruce Lenman, Houghton Mifflin, 1995, page 343)

This also shows you war-and-finance had a major destabilizing role in Europe long before our modern period and constitutes a potential rhythm or proto-rhythm.

Essay 56: Are There Deep Rhythms in History?

Kenneth Rogoff of Harvard wrote a very intriguing book in recent years with the title, This Time Is Different with the implication that fundamental discontinuities (i.e., this time is different) are questionable, if one looks deeply enough.  In the introduction of the book, the author raises the questions of “deep rhythms in history” without answering his own question.  Here’s a potential organizing principle: the world is always a system of violence directed at the weak. Take this entry from the Larousse Dictionary of World History:

Arawaks

The original inhabitants of the Bahamas (Lucayos) and the Greater Antilles (Taínos) who practiced a subsistence agriculture based on seafood, game, maize and cassava using Neolithic technology.  They live mainly in coastal settlements of large villages with caneyes (family houses) and bohios (chiefs’ houses) and had a hierarchical politico-religious structure based on a hereditary ruler, the cacique, who possessed a ceremonial stool (dulho).  A priestly caste-controlled worship of gods of place and nature (zemis) and ceremonies which led to heaven (coyaba). 

They were exterminated as a people by the Spaniards after 1519.

The words maize, tobacco, potato, hammock, canoe and hurricane all derive from the Arawak language.

If we think of the Rohingas of Myanmar, the Yazidis, the Tutsis in Rwanda, and the Darfur people in Sudan, of recent decades, we see a deep rhythm in history: the destruction of the unprotected.  Notice that the first Jewish ghetto in Europe (Venice) was established in 1516 around the time that the Arawak murders begin on a systematic basis.

This never-really-discussed basic rhythm of group violence has been glorified (e.g., The Iliad of Homer, the Aeneid of Virgil, the Old Testament, Scandinavian sagas, Japanese “war tales” such as the Heike Monogatari, etc.)

The omission in all education of this world-violence theme gives students a false sense of “how the world got to now.”