Efficiency and fragile speculative financial markets: against the Tobin tax and for a creditable market maker - Special Invited Issue: Money, Trust, Speculation and Social Justice - Part 3: Trust and Speculation

American Journal of Economics and Sociology, The, Oct, 1998 by Paul Davidson

More amazing to me than even the Rivlin dogma is that, at the same Levy Conference muckraking author and Brookings Institution visiting scholar, Martin Meyer attacks the lender of last resort function of all central banks. Meyer's solution to international financial instability episodes, such as the Asian contagion, is reported to be "better accounting practices, increased transparency, and increased market discipline . . . . But the best hedge against crises is for central banks to end their unconditional support of the banking system and separate the banking system from the monetary system" (Levy Institute Report, 1998, p. 4). If this reported statement is taken at face value, it appears Meyer would welcome return to the nineteenth century wildcat banking era when there was virtually no regulation of banks. In today's high-tech world we might even get a "wildcat banking" system where the only location of many banks would be in cyberspace. If Minsky heard the Rivlin and Meyer solutions at this conference in his honor, I think he would have spun in his grave.

I was not at this Levy Conference, and, therefore, I am relying on brief sketches of the Rivlin-Meyer positions that may not do justice to their full position. Nevertheless, their conclusions about transparency, oversight, and market discipline as the primary ingredients necessary to solve all our international financial market problems is the moral equivalent of being for motherhood and peace. No self-righteous person can be against motherhood, and by implication neither can one be against the provision of more costless information, that is, transparency or for that matter orderly discipline (at least as opposed to disorder).

Keynes once noted that "practical men. . . are usually the slaves of some defunct economists. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back" (1936, p. 383). Of course this was written long before we had the instant communications revolution via the Internet and e-mail and the political injection of academic scribblers into high places at the Federal Reserve, the U.S. Treasury, and even the World Bank. Today academic scribblers are often either power brokers themselves or the chief advisors on the staff of power brokers. Consequently, academic scribbling gets turned into an eight-second sound-byte code word for television coverage.

The sound-byte word "transparency," for example, is a canonization of the misleading and potentially devastating New Keynesian economic position that markets would be efficient in the short-run except for the "fact" that reliable information about the future exists today but is costly to obtain. In other words, "asymmetric information" driven-behavior is a prime cause of current financial market crises that have devastating real impacts. In my recent lecture to a plenary session of the Royal Economic Society (RES), I developed why I believe this asymmetric information thesis is false theme - and I revisit it here.