Stiglitz' loose talk again

Brad De Long delong at econ.Berkeley.EDU
Wed Jul 1 21:49:16 PDT 1998

>Has anyone read the New Yorker profile of the former World Bank top
>economist, Larry Summers? (I twitch in apprehension of being labeled a
>yuppie who's a leftist for all the wrong reasons for even mentioning that
>rag. I state for the record that I am not a professional) The article was
>written by staff writer for economics and finance, John Cassidy

... who is not very good...

>In Cassidy's piece, Summers attacks
>conservatives who are against IMF bailouts - for the reason of "moral
>hazard" - by saying it's more dangerous to let financial systems collapse.
>He warns, "I don't think Asia is inherently more stable now than Europe in
>the nineteen twenties." I sincerely wonder where this places him in the
>debate on the causes of the Great Depression. Anyone?

Larry's a Keynesian. He thinks--I believe rightly--that if you try to eliminate "moral hazard" by making financial institutions that made bad investments eat all their losses then deflation will take hold, financial systems will collapse, investment will fall to zero, next to nothing will get investment going again, and you will have what made the Great Depression great.

Milton Friedman placed great stress on the *internal* financial crisis in the U.S. as a source of further deflation as people pulled their cash out of banks and placed it under mattresses. Charles Kindleberger and Barry Eichengreen have placed great stress on *external* financial crises in Europe--propagating from Austria to Germany to Britain and then, over time, to the gold bloc--as sources of deflation. These two sorts of explanation have always seemed to me to be complementary...

Brad DeLong

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