Money, Banking and Finance 03

 

We revisit an insightful observation of J. S. Mill:

Take, again, such a familiar case as that of a good system of taxation and finance. This would generally be classed as belonging to the province of Order. Yet what can be more conducive to Progress? A financial system which promotes the one, conduces, by the very same excellences, to the other. Economy, for example, equally preserves the existing stock of national wealth, and favors the creation of more. –Words on a good taxation system to follow- (Considerations on Representative Government, 1861, Ch. II)   

 

Roughly saying, incidentally, Order is to stability of the systems of taxation and finance what Progress is to growth of the economy. Several pages later, Mill additionally clarifies that Order and Progress are of “a difference merely in degree” as opposed to “these two functions of a government” (“upon men” vs “upon things”) being different in kind.

             Again, the degree does not define a science. In the first place, scientific “theories are approximations,” according to Eugene Fama, a typical “Chicago boy” (yet geo-famed)

             At any rate, “equilibrium,” one of the most popular words in macroeconomics, is an extremely hazardous term to an organism until “all dead.” Such a hazard is the truth in real, serious, honest, frank and literal. As such, we when exogenous to Cambridge never say to an organism, “RIP” as if at the time to say goodbye for good.

     

Owing to Larry Summers. Here is what the former Secretary of the Treasury Larry Summers has to say two centuries and a half after John Stuart Mill:

As Keynes famously observed during those rare times of deep financial and economic crisis, when the “invisible hand” Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function. (“A Vision for Innovation, Growth and Quality Jobs”; the Note is fully reprinted in Gregory Mankiw, Principles of Economics, 2012, pp.32-33).

https://obamawhitehouse.archives.gov/blog/ 2009/09/21/a-vision-innovation-growth-and-quality-jobs.

 

Somewhat possibly, that is because he is Secretary in charge of money, banking and finance (on the Wall Street of New York), not industries and trade on the main streets (all across the US). Wayside, the rest of us might reasonably doubt that he has in mind a Cambridge Lord (with fame) vs an Edinburgh Boy (without fame).

 

To Ben Bernanke. The former Fed chairman Ben Bernanke has the following to say in the beginning of the Nobel Prize-winning article:

During i930-1933 the U.S, financial system experienced conditions that were among the most difficult and chaotic in its history. Waves of bank failures culminated the shutdown of the banking system (and a number of other intermediaries and markets in March 1933. (“Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 1983)

 

At the reception of the Prize, Bernanke reconfirms:

Well, I think it's very important to have strong financial regulation that makes sure that the financial institutions are safe and sound, meaning they have very good capital that they have safe portfolios, that they are not taking excessive risks and so on. And you should have a macroprudential approach, meaning that you should be looking not just at individual institutions, but thinking about the entire system and how problems in one part of the system can affect other parts. (“Banking, credit, and economic fluctuations,” 2022)

 

When unsure back to classics. The rest of us are more confused than guided by the two GOAT of financiers. Famously, anyway, one of the two is one nephew of two Nobel laurates.

             Is finance economy? Does “the invisible hand Adam Smith talked about” govern or “regulate” either the “banking system” or “financial institutions.” Instead, is it not the visible hand the two GOATs talk about that is supposed to legally “regulate” the so-popularly called “financial markets”; which when in Cambridge are so vulnerable as if in a “beauty contest” to “animal spirits”?

             Probably, “so many” geo-celebs might well revisit classical economists save Thomas Malthus for the sake of correctly sorting things out. Eureka: Economy (M∙U∙T^-1) creates real value through free trade in the communal markets of products after specialization in comparative advantage. On the sidewalks (L^-3) of the Republic, “money, banking and finance” hoard nominal values (U∙m) in balance as in the shiniest function of Liquidity preference, M= L(r). The equilibrium across the left and the right sides (L^-1)!

             “Wise men would say” only certain “kinds” of people “rush in” to fusing the time to the space. And, that’s for the sake of beholding “the Shout of Victory” (T⁰): C’est l'équilibre!

 

But for prenuptial, conceptional, “in the short run” (aka instantaneous) and “in the long run” (aka Eternal), the real economy might, as the case may be, equate a pair, left  and right, of  dynamism. For instance, g+ π= 2m, where “g” for GDP, “π” for Price Level and “m” for Money, each in the percentage change per annum (% in T^-1). 

            If the economy fails to grow twice as fast as the money does, we are presupposed to have the inflation. And, that's the way it is. 

Time To Say Goodbye