Tags: Mandelbaum | bank | bubble | US

Hopkins Scholar Confused on Financial Crisis

By    |   Thursday, 24 Apr 2014 08:20 AM

In yet another example of a great scholar scuffling in his search for understanding of an important policy issue, Michael Mandelbaum, director of the American Foreign Policy program at Johns Hopkins University, spoke to C-SPAN's Steve Scully about his book The Road to Global Prosperity.

The big-picture question should be how the likes of Mandelbaum, Peter Schuck and scholarly members of the Federal Open Market Committee can fail to comprehend how far this country and the world are from lasting prosperity, that much of this is due to bad policy, often on the part of institutions they have worked for or supported, and some of it is due to laws of economics that establish a business cycle that even the smartest economists have been unable to manage during the long run, but instead have horribly mismanaged.

The author provided a service to the reader by succinctly stating at the outset the major premise of the book: Economic activity does not occur in a vacuum. It requires a stable political framework, one that protects against disruptive intrusion from the outside . . . and assures that economic life can proceed dependably.

Scully observed that this makes sense, but is not always the reality. Mandelbaum responded by lamenting that since unfortunately there is no world government, the United States has to provide the needed stability to the world. (Evidently Mandelbaum is unaware that the main source of global financial stability, certainly for the 2008 episode of the ongoing financial crisis and arguably for several decades, has been the United States, its reckless bankers, feckless regulators and inept, conflicted politicians.

For a viewer already reeling, further irony came from a clip of Hank Paulson, former CEO of Goldman Sachs, speaking at the Center for Strategic and International Studies. Paulson stated sternly that while China has accomplished a lot, its economic model has run out of steam. It isn't sustainable. Mandelbaum agreed and added that in order to change its economic model, China would have to become more democratic.

In 2006, when Paulson was named Treasury Secretary, I predicted privately that Goldman would turn out to be insolvent and would receive a massive bailout administered by Paulson himself as Treasury Secretary. So now Paulson is saying that China has to change its economic model and become more democratic.

Another instructive passage was Mandelbaum's observation regarding the phenomenon of financial bubbles: "Bubbles can inflict massive damage because of their connection to banks . . . [banks] not only help inflate bubbles, in important respects, they resemble them."

It is frustrating that Mandelbaum understands the risk banks inherently pose to the financial system and the economy, but then he lapsed into the banker trope that banks shouldn't be expected to have the capital industrial firms require, because they operate under a fractional reserve system.

He acknowledged the destructive potential of bank runs, but argued that because banks are the Achilles heel of the financial system, they need to be protected. He holds that in order to enjoy the fruits of the free market system, the nation has to accept periodic shocks and hope that somehow the authorities will do a better job of containing these crises in the future than they have in the past.

This unfortunate view calls to mind a slogan popularized by Benjamin Ola Akande, dean of the Webster University Business School, in a 2009 letter to President Obama: "Hope is not a Strategy." The nation needs better leadership than fatalistic capitulation to the scoundrels who dominate the too big to fail and the so-called regulators who enable their antisocial behavior.

(Archived video can be found here.)

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Robert-Feinberg
In yet another example of a great scholar scuffling in his search for understanding of an important policy issue, Michael Mandelbaum, director of the American Foreign Policy program at Johns Hopkins University, spoke to C-SPAN's Steve Scully about his book The Road to Global Prosperity.
Mandelbaum, bank, bubble, US
605
2014-20-24
Thursday, 24 Apr 2014 08:20 AM
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