Matthew C. Klein writes: One of the oddest things about the aftermath of the financial crisis is the extent to which things haven\u2019t changed.<\/p>\n
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Yes, there are plenty of new rules, and stress tests, and of course there are more fines for wrongdoing, but the basic structure of the financial system doesn\u2019t look much different from before it blew up. There is still plenty of money to be made (and lost) issuing short-term \u201csafe\u201d debt to buy long-term, illiquid, risky assets. Lenders still exacerbate the cycle by increasing their leverage when asset prices rise only to cut back on lending when the economy sours. And everyone knows that taxpayers are still on the hook when things go bad, which acts as a massive subsidy for the financial industry.<\/p>\n
As if all that weren\u2019t bad enough, the current system makes it far too hard for central bankers to accomplish their mission of stabilising the economy. Right now, changes in nominal spending power are largely due to decisions made at banks and other financial firms. The level of short-term interest rates affects their behaviour, as do asset purchases, but monetary policy is only one force among many that determines total nominal spending. Modestly raising the cost of short-term funds isn\u2019t enough to stop excessive credit growth, just as aggressive bond-buying has proven insufficient to restore the pre-crisis trend of nominal spending.<\/p>\n
The continuity can\u2019t be explained by the lack of better ideas. In fact, the basic alternative to the status quo \u2014 moving the power to create money from private financial firms to the state \u2014 was suggested in detail in the 1930s by a group of economists led by Irving Fisher. Subsequent proponents have included Milton Friedman, James Tobin, researchers at the International Monetary Fund, John Cochrane, and Martin Wolf. (And me.)\u00a0 Iceland’s Experiment with a Soverign Money System<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" Matthew C. Klein writes: One of the oddest things about the aftermath of the financial crisis is the extent to which things haven\u2019t changed. Yes, there are plenty of new rules, and stress tests, and of course there are … Continue reading