Mohamed El-Erian of Allianz, writing in August to mark the tenth anniversary of the beginning of the global financial crisis, worried that advanced economies remain too beholden to a growth model based on liquidity and leverage, rather than on investment in public goods and human capital.
Desmond Lachman | The Hill
Something is wrong with our banking system. We all sense that, but Mervyn King knows it firsthand; his ten years at the helm of the Bank of England, including at the height of the financial crisis, revealed profound truths about the mechanisms of our capitalist society. In The End of Alchemy he offers us an essential work about the history and future of money and banking, the keys to modern finance.
The Industrial Revolution built the foundation of our modern capitalist age. Yet the flowering of technological innovations during that dynamic period relied on the widespread adoption of two much older ideas: the creation of paper money and the invention of banks that issued credit. We take these systems for granted today, yet at their core both ideas were revolutionary and almost magical. Common paper became as precious as gold, and risky long-term loans were transformed into safe short-term bank deposits. As King argues, this is financial alchemy―the creation of extraordinary financial powers that defy reality and common sense. Faith in these powers has led to huge benefits; the liquidity they create has fueled economic growth for two centuries now. However, they have also produced an unending string of economic disasters, from hyperinflations to banking collapses to the recent global recession and current stagnation.
How do we reconcile the potent strengths of these ideas with their inherent weaknesses? King draws on his unique experience to present fresh interpretations of these economic forces and to point the way forward for the global economy. His bold solutions cut through current overstuffed and needlessly complex legislation to provide a clear path to durable prosperity and the end of overreliance on the alchemy of our financial ancestors.
by Raghuram Rajan via Project Syndicate
[Subscription Required] In the absence of political solutions, central banks in the decade since the 2008 financial crisis have rolled out one unconventional monetary policy after another, with various justifications and varying effectiveness. Now that the period of monetary exceptionalism seems to be coming to an end, central bankers must soberly assess their own record.
by John B. Taylor via The National Bureau Of Economic Research
This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time.
interview with Raghuram Rajan via Chicago Policy Review
Hoover Institution fellow Raghuram Rajan discusses the role of incentives in the financial industry, economic policy recommendations, independence and autonomy of central banks, and his advice for young economists.
by Raghuram Rajan via Live Mint
Since 2008, central banks in industrial countries have deviated from ordinary monetary policymaking in a variety of ways. They’ve tried to persuade the public through “forward guidance” that interest rates would stay low for extended periods of time. And they’ve deployed various programmes such as long-term refinancing operations (LTROs), the securities markets programme (SMP) and quantitative easing (QE) in pursuit of various goals.