Eichengreen

Via Twenty-Cent Paradigms, three links from DeLong.

From The Next Financial Order by Barry Eichengreen:

A golden age of finance – when globalization spread capital promiscuously, markets evolved rapidly, businesses could raise money for all kinds of new and expanding projects, and ordinary people had unprecedented access to credit – has now ended, leaving behind a trail of pain and ruin. Many banks have failed; many more would collapse without government aid. Millions of people have lost their jobs; millions more have lost their life savings.

No surprise, then, that demand is rising for a new international financial architecture. But, while returning to the world of 30 years ago – re-imposing capital controls, re-regulating the banking system, and rolling back financial innovation – would curtail the risk of a new global financial contagion, it would also likely impede millions of people’s chances to rise out of poverty and improve their lives. So, how can the world create a financial system that is both stable and dynamic enough to sustain economic growth and opportunity?

Seems like there should be more to the story, but I didn't find it. So, I'll tell it.

> "A golden age of finance ... has now ended, leaving behind a trail
> of pain and ruin."

The problem was excessive reliance on credit. Or, in terms most people can more easily see: excessive debt. A "golden age" for finance.

> "...while returning to the world of 30 years ago ... would curtail the risk of
> a new global financial contagion, it would also likely impede millions of
> people’s chances to rise out of poverty and improve their lives."

I'm not sure that is even correct. In the U.S. at least, much of the growth of the past 30 years was the growth of finance. Paper wealth. As opposed to growth of production that can improve people's lives... What were those numbers?

Finance accounts for 8% of GDP, but 40% of the profits.

What was it Simon Johnson said?

I know of no evidence that says you are better off with a financial sector at 8% rather than, say, 4% of GDP.

Still, we need credit. and access to credit. Of course. Just not so much of it.

> "So, how can the world create a financial system that is both stable
> and dynamic enough to sustain economic growth and opportunity?"

Demand management, that's how.

We must continue to encourage people to make use of credit, as we do now. Making use of credit makes the economy grow. As we do now. Or maybe, a bit less.

But we must also encourage people to pay off debt, as a matter of policy. We can use this as a way to fight inflation.

The ordinary way of thinking about credit-use is, we need to make more available so people can borrow more. That leaves everybody with a lot of debt, of course, and nobody likes that. Plus, there is the inevitable crisis that results from debt accumulation.

The answer is so simple: Prevent debt accumulation. Make it policy to pay off debt. Take advantage of the fact that paying off debt removes money from circulation, and use it as a way to fight inflation.

Paying off debt puts money back into the banks and makes it available again for lending, thus solving the problem of needing to make more money available for people to borrow.

Paying off debt reduces the drag created by debt, and liberates growth.

Meanwhile, new uses of credit continue to stimulate the economy.

Did I leave anything out?