Thursday, April 12, 2012

No Different This Time

"The role of the state, necessarily,
Is to tinker with cycles contrarily,
Like a glorious gadget,"
Said Sir Walter Bagehot,
"Both fiscally and monetarily."

Sir Walter Bagehot (1826 - 1877), the English businessman who became the most influential editor of The Economist, was one of the earliest exponents of the state's use of its monetary, banking and fiscal tools to counteract economic contraction. According to Berkeley economist Brad DeLong, it's no different this time. Channeling Bagehot, Prof. DeLong reminds us that the government can act against market failure in three key ways:

  • It can buy relatively risky and illiquid bonds in exchange for its own safe and liquid liabilities: that is called expansionary monetary policy. 
  •  It can take risk onto its balance sheet by guaranteeing the liabilities of private banks: that is called expansionary banking policy. 
  •  It can make investments in bridges, in the human capital of twelve-year-olds, and in social welfare and pay for them by issuing its own relatively safe and liquid debt: that is called expansionary fiscal policy.
As an aside, could Sir Walter possibly take the prize for the most non-phonetic name of a major economist?

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