Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Preventing debt crises like feeding a 3 year old

Posted by Dave Bath on 2008-04-22


It’s worth expanding my earlier post on another point from VoXEU’s "Eight hundred years of financial folly" (2008-04-19, Carmen Reinhart).

Reinhart points out how financial liberalization and capital inflows precede (and therefore possibly cause) debt crises, and presents some data in this graph.

This doesn’t surprise me, and suggests that rather than let capital run between countries and companies as if it had attention deficit disorder, countries should act together to slow capital down.

If capital was forced to focus attention on making wiser, longer-term decisions, resources would be allocated better, both for investors in the long term, and (if you believe in the "Invisible Hand" of capitalist theory), society as a whole.

It’s time to treat capitalists a bit like petulant three year olds.

Now, a little parable about my daughter when she was young:

I believe that kids should have at least some freedoms, and one of these is not to be force-fed things they particularly hate.  However, proper nutrition is impossible if the kid has the freedom to change their mind from minute to minute, or day to day.

My compromise was as follows:

I don’t care what you don’t want to eat, but you can nominate one thing you hate, or at most one green vegie and one other thing, cannot change your mind for at least a month, and you have to give me at least a day’s notice of any change."

While I hated peas as a kid, it wasn’t surprising that my daughter ordered brussel sprouts off the menu straight away.  Who cares as long as there are other greens she’ll have to eat?  Every now and then there’d be a month of no mushrooms (but to be nice, I wouldn’t push brussel sprouts anyway).

The result?  I could prepare meals with confidence that I wouldn’t get into a fight about "don’t like this, don’t like that" for a plate of food, that I could be guaranteed that a plate of food wouldn’t "accidentally" hit the carpet and make a horrible mess that would take a lot of effort to clean up.

If, rather than allow capital to be moved between companies and countries at the speed of light (or at least the speed of an electron in a fat wire, which ain’t that much slower), regulators said "put your money where you like, but it has to stay there for at least x months/years".

The result?  A bit more care by investors, and a lot less risk of a horrible mess that will take a lot of effort (and money) to clean up.

There are a couple of logistical problems with this, however:

  • Stock exchanges will spit the dummy because the drop in transactions would drop their revenue.  Perhaps we shut them up by forcing onto regulated exchanges a whole lot of unregulated underover-the-counter derivatives that have contributed to the current crisis.
     
  • There would have to be co-ordinated international efforts to dismantle some elements of financial treaties our politicians have been conned into.
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3 Responses to “Preventing debt crises like feeding a 3 year old”

  1. Kilroy said

    Interesting analogy. Investors really do “accidentally” throw their plates on the floor.

    Another reason that capital chases between markets is to manipulate tax incentives for itself. Governments are conditioned to create tax corporate incentives to attract economic activity hoping that other types taxes will make up the difference. Often the impact of the economic activity often costs the local jurisdiction much more than the incentives, and the invisible hand is off pleasuring itself somewhere else before all the risks come home to roost.

    First you bribe the child to do the right thing and the child turns around and murders you when they come of age as it were.

  2. Dave Bath said

    I was just catching up on the Business section of The Economist from last week. Macquarie Bank achieves stability by making it hard for people to move their money out – the investor has to find someone to buy their investment rather than just redeem it. Makes for much more stable liquidity!

  3. […]  Dave Bath suggests it’s time for governments to start treating financiers like three-year-olds. […]

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