Publishing Institution: The Cato Institute / Journal: The Cato Journal / Topic:

201. The Eurozone Crisis and Global Monetary Reform: A Conversation

Author:: Robert B. Zoellick and Sebastian Mallaby
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Sebastian Mallaby: We are here to talk to Bob Zoellick. I have been in Washington 16 years, Bob is the personification of the kind of silo busting polymathic energy which says, I am not just interested in international economics, I am not just interested in international relations, I am not just a U.S. government official, I am also going to do multilateral diplomacy. So Bob has been on all sides of those various divides. He has a voracious intellect, so it is always interesting to speak with him whether he is in office or out of office.
Topic:: International Relations
Political Geography:: United States, Europe, and Washington

202. Understanding the Interventionist Impulse of the Modern Central Bank

Author:: Jeffrey M. Lacker
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The financial crisis of 2007 and 2008 was a watershed event for the Federal Reserve and other central banks. The extraordinary actions they took have been described, alternatively, as a natural extension of monetary policy to extreme circumstances or as a problematic exercise in credit allocation. I have expressed my view elsewhere that much of the Fed's response to the crisis falls in the latter category rather than the former (Lacker 2010). Rather than reargue that case, I want to take this opportunity to reflect on some of the institutional reasons behind the prevailing propensity of many modern central banks to intervene in credit markets.
Topic:: Financial Crisis
Political Geography:: United States

203. Federal Reserve Policy in the Great Recession

Author:: Allan H. Meltzer
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Overresponse to short-run events and neglect of longer-term consequences of its actions is one of the main errors that the Federal Reserve makes repeatedly. The current recession offers many examples of actions that some characterize as bold and innovative. I regard many of these actions as inappropriate for an allegedly independent central bank because they involve credit allocation, fill the Fed's portfolio with an unprecedented volume of long-term assets, evade or neglect the dual mandate, distort the credit markets, and initiate other actions that are not the responsibility of a central bank.
Political Geography:: America

204. The Fed's Fatal Conceit

Author:: John A. Allison
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: I strongly believe that the recent financial crisis, ensuing recession, and slow recovery were primarily caused by government policy. The Federal Reserve made some very bad monetary decisions that created a bubble, i.e., a massive malinvestment. The bubble ended up being focused in the housing market largely because of government affordable housing policies—specifically, the actions of Freddie Mac and Fannie Mae, government-sponsored enterprises that would not exist in a free market. When Freddie and Fannie failed, they owed $5.5 trillion including $2 trillion in affordable housing (subprime) loans. It's true that a number of banks made serious mistakes, and I would have let them fail, but their mistakes were secondary and within the context of government policy.
Political Geography:: United States

205. Only a Crisis Will Bring Money Reform

Author:: George Melloan
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: “Well, if I had a nickel, I know what I would do. I'd spend it all on candy and give it all to you. . . . Cause that's how much I love you baby.” That wasn't a very generous proposition even in 1946, when country singer Eddy Arnold wrote those words. But at least a nickel would buy a good-sized Baby Ruth or Clark bar. Today? A jelly bean, perhaps?
Political Geography:: United States and United Kingdom

206. Banking Dysfunction

Author:: James A. Grant
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: "Has anyone bothered to study the cumulative effect of all these things?" the chief executive officer of JPMorgan Chase reasonably inquired of the chairman of the Federal Reserve Board at a bankers gathering in Atlanta last June. The CEO, Jamie Dimon, was referring to the combination of cyclical hangover and regulatory constriction. The chairman, Ben Bernanke, replied, "It's just too complicated. We don't really have the quantitative tools to do that" (Grant and Masters 2011: 1).
Political Geography:: America

207. What Should a Central Bank (Not) Do?

Author:: Benn Steil
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The financial crisis that began unfurling in 2008 has led to the refashioning of the model central bank governor along the lines of Churchillian war leader, willing to try anything with the money he conjures to restore economic growth. This raises important questions as to what limits, if any, elected officials should impose on such aspiring great men, and what limits markets will ultimately impose on them if elected officials forbear. This article focuses on the second of these questions.
Political Geography:: United States

208. L Street: Bagehotian Prescriptions for a 21st Century Money Market

Author:: George Selgin
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In Lombard Street, Walter Bagehot (1873) offered his famous advice for reforming the Bank of England's lending policy. The financial crisis of 1866, and other factors, had convinced Bagehot that instead of curtailing credit to conserve the Bank's own liquidity in the face of an “internal drain” of specie, and thereby confronting the English economy as a whole with a liquidity shortage, the Bank ought to “lend freely at high rates on good collateral.” Bagehot's now-famous advice has come to be known as the “classical” prescription for last-resort lending.
Political Geography:: England

209. Gold and Government

Author:: Judy Shelton
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Something has gone terribly wrong with the world's monetary system. It's evident that some kind of fundamental reform needs to be implemented. The question is: Can governments be trusted to issue sound money, or is money too important to be left to the politicians?
Political Geography:: United States

210. From Constitutional to Fiat Money: The U.S. Experience

Author:: Richard H. Timberlake
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Over the course of more than two centuries, the United States has had two monetary systems. The first was a gold-silver standard that was framed in its essentials by the U.S. Constitution. In practical terms, it said that any legal tender money created by the federal union or the states or the "people" had to be gold or silver coins, or redeemable in gold or silver coins of specified weight and fineness. Since both gold and silver were constitutional media, the country had a bimetallic standard that ultimately became a monometallic gold standard.
Political Geography:: United States

211. The Coming Fiat Money Cataclysm and the Case for Gold

Author:: Kevin Dowd, Martin Hutchinson, and Gordon Kerr
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: A recurring theme in monetary history is the conflict of trust and authority: the conflict between those who advocate a spontaneous monetary order determined by free exchange under the rule of law and those who wish to meddle with the monetary system for their own ends. This conflict is perhaps most clearly seen in the early 20th century controversy over the "state theory of money" (or "chartalism"), which maintained that money is a creature of the state. The one side was represented by the defenders of the old monetary order-most notably by the Austrian economists Ludwig von Mises and Friedrich Hayek, and by the German sociologist Georg Simmel. The other side was represented by the German legal scholar Georg Friedrich Knapp and by John Maynard Keynes. They argued that on monetary matters the government should be free to do whatever it liked, free from any constraints of law or even conventional morality.
Topic:: War
Political Geography:: Germany and Australia

212. Why Monetary Freedom Matters

Author:: Ron Paul
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: I've thought about and have written about the Federal Reserve for a long time. I became fascinated with the monetary issue in the 1960s, having come across the Austrian economists, especially Hayek and Mises, and I was very impressed with August 15, 1971, because the predictions made in the 1960s came about. As a matter of fact, Henry Hazlitt made that prediction in 1944 when the Bretton Woods system was set up. He said it wouldn't work and it would fall apart—and it did—so that was a strong confirmation.
Political Geography:: United States and Australia

213. Where Is Private Note Issue Legal?

Author:: Kurt Schuler and William McBride
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: During the 18th and 19th centuries and for part of the 20th century, more than 60 countries had free banking. The major characteristics of free banking are competitive issue of notes (paper money) and deposits by commercial banks, low legal barriers to entry, little regulation unique to the industry, and no central control of reserves (the monetary base) within the national monetary system (Dowd 1992, White 1995). Among the countries that had a form of free banking was the United States. Even after the freest period of free banking ended, with the Civil War, banks continued to issue notes until the federal government effectively monopolized note issue in 1935.
Topic:: War
Political Geography:: United States

214. Making the Transition to a New Gold Standard

Author:: Lawrence H. White
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Suppose for the sake of argument that we all agree to the following proposition: If we could change the monetary regime with zero switching cost, merely by snapping our fingers, we would prefer the United States to be on a gold standard. In the most general terms, a gold standard means a monetary system in which a standard mass (so many grams or ounces) of pure gold defines the unit of account, and standardized pieces of gold serve as the ultimate media of redemption. Currency notes, checks, and electronic funds transfers are all denominated in gold and are redeemable claims to gold. We then face the question: What would be the least costly way for the United States to make the transition to a new gold standard? We need to choose a low-cost method to ensure that the agreed benefits of being on the gold standard exceed the costs of switching over.
Political Geography:: United States

215. Natural Rates of Interest and Sustainable Growth

Author:: Roger W. Garrison
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The evolution of macroeconomic theory and monetary policy has brought us to a state that calls for critical reflection. It is undoubtedly true that no newcomer to the field can even begin to understand the current state of macroeconomics and policy formulation without understanding just how, dating from the pre-Keynesian era, the profession has arrived at this state. High theory today takes the form of stochastic dynamic general equilibrium analysis, while policy discussion, which concerns itself with economy-wide disequilibrium, centers on the effectiveness (or ineffectiveness) of old-style fiscal and monetary stimulants. The market is a process and so too is the theorizing about it. The history of macroeconomic thought reasserts its relevance at times of economic crises and almost inevitably leads us to the question "How far back do we have to go to start all over?"
Topic:: Monetary Policy

216. Toward a Global Monetary Order

Author:: Gerald P. O'Driscoll Jr.
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: I will begin by disputing that there is a global monetary system. We do not have a system in any meaningful sense. There are 182 independent currencies in the world. Some currencies are fixed in relation to other, larger currencies (e.g., the Hong Kong dollar to the U.S. dollar). Some currencies move within a band against other currencies (e.g., the Singapore dollar and the Chinese yuan). Many currencies float on foreign exchange markets, but few float freely. Four major currencies float against each other: the U.S. dollar, the euro, the pound, and the yen. Countries also change their foreign exchange regime (e.g., Mexico in recent decades).
Topic:: Foreign Exchange
Political Geography:: Mexico and Singapore

217. Political Philosophy Clearly: Essays on Freedom and Fairness, Property and Equalities

Author:: Aaron Ross Powell
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Political Philosophy, Clearly, part of Liberty Fund's "Collected Papers of Anthony de Jasay" series, gathers nearly two dozen essays from the prominent economist and philosopher. From them emerges a fascinating overview of de Jasay's thought on the nature of order, justice, and the state.

218. Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike that Changed America

Author:: Ivan Osorio
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: President Ronald Reagan's firing of more than 12,000 illegally striking air traffic controllers in August 1981 is widely considered a defining moment both for Reagan's presidency and for American organized labor. For Reagan, it was the first of many lines in the sand he drew during his presidency. For organized labor, it marked an assault from an anti-union president determined to prevail against a Democratic constituency.
Political Geography:: America

219. Does the Elephant Dance? Contemporary Indian Foreign Policy

Author:: Malou Innocent
Publication Date:: 06-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: After more than 20 years of major market reforms that followed a foreign exchange crisis in 1991, India's stunning economic growth has enlarged its international profile. But unlike China, India's security challenges and perspectives on foreign policy remain largely unknown to the rest of the world. What kind of great power does India aim to be?
Topic:: Foreign Policy and Foreign Exchange
Political Geography:: China and India

220. Editor's Note: A Tribute to William A. Niskanen

Author:: James A. Dorn
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: This issue of the Cato Journal is dedicated to William Niskanen, who passed away on October 26, 2011, at the age of 78. From 1985 to 2008, Bill served as chairman of the Cato Institute and a full-time economic scholar. He continued working as chairman emeritus and distinguished senior economist until his death. He was also on the editorial boards of Regulation magazine and the Cato Journal.
Topic:: Disaster Relief

221. Alternative Political and Economic Futures for Europe

Author:: William A. Niskanen
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Defeat of a proposed constitution for the European Union by voters in France and the Netherlands in 2005 should have provided an opportunity to reflect on a broader range of alternative political and economic futures for Europe. But it did not. For the Lisbon Treaty, which became effective in December 2009, implemented most of the provisions of the proposed constitution that the voters rejected more than four years prior. It was important to reconsider the major current European political and economic institutions as well as alternative steps toward further European integration. For the major current institutions were created under different conditions, and the experience suggests that they may not best serve the peoples of Europe under current and expected future conditions.
Topic:: Disaster Relief
Political Geography:: Europe, France, and Netherlands

222. The Keynesian Path to Fiscal Irresponsibility

Author:: Dwight R. Lee
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The basic idea behind Keynesian policy for achieving stable economic growth is straightforward, and superficially plausible. When the economy is in a downturn with underutilized resources, Keynesians believe the federal government should increase aggregate demand by increasing deficit spending through some combination of more spending and lower taxes. With the aid of a multiplier effect augmenting the government's increase in aggregate demand, the economy will move back toward full employment. In contrast, they believe that when aggregate demand exceeds the productive capacity of the economy, the federal government can prevent inflationary overheating by reducing demand with a budget surplus generated by some combination of less spending and higher taxes. The resulting decrease in government demand will be augmented by a reverse multiplier effect, which will reduce inflationary pressures by bringing aggregate demand back in line with the economy's productive capacity. As discussed by Keynes and his early followers, there was nothing fiscally irresponsible about such a policy. While the budget would not be balanced on a yearly basis, it would be balanced over time as budget deficits intended to moderate recessions would be offset by budget surpluses used to restrain economic exuberance.

223. Is the Washington Consensus Dead?

Author:: Deepak Lal
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In the postwar years, most Third World countries turned inward partly in response to what they thought were the disastrous consequences of their 19th century integration into the world economy as the global economy collapsed in the Great Depression. The seeming success of Soviet central planning under Stalin also persuaded the leaders of these newly independent countries to substitute the plan for the market. Planning was all the rage, with the state seeking to control the commanding heights of the economy. Furthermore, the many theorists who created a seemingly "new development economics" provided the intellectual basis for the complex system of dirigiste controls on "anything that moved" (as one wit put it) in a market economy.
Political Geography:: Washington

224. Asset Bubbles and Supply Failures: Where Are the Qualified Sellers?

Author:: Bruce K. Gouldey and Clifford F. Thies
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: From their peak during the third quarter of 2007, to their trough during the first quarter of 2009, stock prices as measured by the S 500 fell 48 percent (see Figure 1). Through the third quarter of 2009, stock prices subsequently increased more than 40 percent. In contrast, housing prices, as measured by the Case-Shiller index, which fell 31 percent from their peak in the first quarter of 2006 to the first quarter of 2009, had not yet shown any sign of recovery.

225. Decisionmaking, Risk, and Uncertainty: An Analysis of Climate Change Policy

Author:: Kruti Dholakia-Lehenbauer and Euel W. Elliott
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: This article explores four questions. First, what theoretical frameworks help describe policy failure and success? Second, how might the decision that leads to failure or success be understood in terms of differing concepts of rationality and decisionmaking? Third, how does the discussion of risk and uncertainty as originally proposed by Frank Knight (1921) apply to a better understanding of both the first and second questions? Fourth, what is the relationship between serial and parallel processing and how are these administrative systems related to important aspects of the prior questions? Our chief contribution in this article is to show the ways in which these questions and their respective theoretical frameworks are interrelated as applied to one important contemporary policy question-climate change. We think our proposed integration of the various literatures offers important insights into the challenges policymakers face in deciding whether or not to adopt a particular policy.
Political Geography:: United States

226. School Choice and Achievement: The Ohio Charter School Experience

Author:: Nathan L. Gray
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: K–12 education policy has recently received much scrutiny from policymakers, taxpayers, parents, and students. Reformers have often cited increases in spending with little noticeable gain in test scores, coupled with the fact that American students lag behind their foreign peers on standardized tests, as the policy problem. School choice, specifically charter school policy, has emerged as a potential remedy. School choice is hypothesized to have both participant and systemic (sometimes called competitive) effects. This article concentrates on the latter by using a novel design not used before in studies of this subject. School level data from Ohio are analyzed to estimate if traditional public schools potentially threatened by charter schools respond with positive test score gains. Specifically, an exogenous change to the education system in 2003 provides a natural experiment to examine potential systemic effects. Results indicate that the threat of charter schools seems to have had a small positive effect on traditional public school achievement.
Political Geography:: America

227. The New Monetary Economics Revisited

Author:: David Cronin
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: This article revisits the key conceptual aspects of the New Monetary Economics (NME) by examining the idea of “monetary separation” and objections raised against it. So long as a dominant role for base money in exchange exists, using it to provide the unit of account remains advantageous and is likely to outweigh any mooted benefits of separation. Recent quantitative analysis, however, shows the transaction demand for government base money to be falling, a development that can be expected to continue in the years ahead. The passage of time thus seems to be weakening the principal basis on which monetary separation has been criticized—namely, the superiority of base money in payments. That development fits into the history of money told by Austrian economists, which emphasises payment practices evolving over time in response to technological improvements and market forces.
Topic:: Government
Political Geography:: Europe, Germany, Cyprus, and Luxembourg

228. Starving the Beast Revisited

Author:: Masoud Moghaddam
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The determinants of government budget deficits have been studied extensively, especially during the years in which the discrepancy between federal income taxes and expenditures has widened. In that respect, it is of interest to explore the causal relationship between government revenues and expenditures. If the direction of causation is from taxes to spending, then enjoying tax cuts without cutting expenditures necessitates starving the beast, as suggested by Milton Friedman (1978) and confirmed by a number of studies including Garcia and Henin (1999), and Chang, Liu, and Caudill (2002). On the other hand, if a tax cut is perceived by rational agents to be a cut in the cost of public goods, then spending would increase. In that case, taxes and spending are inversely related. Support for that relationship—the so-called fiscal illusion hypothesis—is provided by Wagner (1976), Niskanen (1978, 2002, 2006), and more recently by New (2009) and Young (2009). There are also a few studies in which no significant causal relation between tax and spend variables has been reported (e.g., Baghestani and McNown (1994).
Topic:: Government

229. The Behavior of the Labor Market between Schechter (1935) and Jones Laughlin (1937)

Author:: Todd C. Neumann, Jason E. Taylor, and Jerry L. Taylor
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Recent research on the Great Depression emphasizes the role New Deal economic policy played in slowing recovery. Policies promoting cartels and higher wage rates during a time that the economy was experiencing unprecedented unemployment were likely to have created a negative supply shock that exacerbated economic depression rather than helped to alleviate it. Still, for 22 months between two important Supreme Court rulings, labor and product markets were relatively free of intervention. In A.L.A. Schechter Poultry Corp. v. United States (May 1935), the Court ruled that the National Industrial Recovery Act of 1933 (NIRA) was unconstitutional. In addition to setting up industry cartels, the NIRA had imposed relatively high minimum hourly wage rates and restrictions on work- weeks and required firms to recognize the right of labor to organize.
Topic:: International Political Economy
Political Geography:: United States

230. The Scope of Government in a Free Society

Author:: James A. Dorn
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The purpose of this article is to delineate the legitimate functions of government in a free society. This exercise differs from determining the “optimal” size of government, which economists have estimated at 15 to 30 percent of gross domestic product. James Madison, the chief architect of the U.S. Constitution, was not primarily looking for an engine of economic growth; he was seeking an institutional design to limit the powers of government and protect individual rights. People would then be free to pursue their happiness and, in the process, create wealth.
Topic:: Government
Political Geography:: United States

231. The Money Trap: Escaping the Grip of Global Finance

Author:: Judy Shelton
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: To read Robert Pringle's new book, The Money Trap, is to experience the slow joy of recognizing that someone out there in the world of intellectual propriety and academic correctness is willing to state the case that the global financial crisis can be traced in large part to the lack of an orderly international monetary system.

232. The Partnership: Five Cold Warriors and the Quest to Ban the Bomb

Author:: Matt Fay
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Can four former Cold War policymakers and a prominent physicist of the era change the world through sheer force of personality? Former New York Times columnist Philip Taubman certainly thinks so, and in his new book he attempts to be the first to tell their story. The Partnership is the chronicle of how George Shultz, Sam Nunn, Henry Kissinger, William Perry, and Sidney Drell decided to take up the cause of nuclear abolition.
Topic:: Cold War and Nuclear Weapons

233. Stochastic Optimal Control and the U.S. Financial Debt Crisis

Author:: Peter Clark
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: At one point during the recent financial crisis the queen of England reportedly asked economists at the London School of Economics a seemingly straightforward question: “Why did academic economists fail to foresee the crisis?” This question can be broadened to include central banks, the International Monetary Fund, and technical specialists on Wall Street (“quants”). Jerome L. Stein, professor of economics (emeritus) and research professor in the Department of Applied Mathematics at Brown University, has written a timely book that provides a cogent and convincing answer to this question.
Political Geography:: United States

234. Sustaining China's Economic Growth after the Global Financial Crisis

Author:: James A. Dorn
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: As one of the world's leading experts on China's economic reforms, Nick Lardy has produced two earlier books that have become keys to understanding the challenges China faces in making the transition to a market economy and becoming a full-pledged member of the global liberal economic order. His 1998 volume on China's Unfinished Economic Revolution and his 2002 text on Integrating China into the Global Economy were both published by the Brookings Institution, where he was a senior fellow from 1995 until 2003, at which time he joined the Peterson Institute for International Economics, where he is now Anthony M. Solomon Senior Fellow.
Political Geography:: China

235. Warfare State: World War II Americans and the Age of Big Government

Author:: Charles Zakaib
Publication Date:: 10-2012
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In 2008, many Americans feared another Great Depression had begun. Amidst all the gloom and doom, however, Rahm Emanuel, Barack Obama's incoming chief of staff, sounded more hopeful: “Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.” There is no greater example of that mantra in American history than World War II, a time of unprecedented government spending and unsurpassed government control over daily life. In Warfare State: World War II Americans and the Age of Big Government , James T. Sparrow demonstrates how, in a crisis, the government can increase its reach into Americans' lives by promising an ever-expanding set of rights and benefits.
Political Geography:: America

236. Legislating a Rule for Monetary Policy

Author:: John B. Taylor
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In these remarks I discuss a proposal to legislate a rule for monetary policy. The proposal modernizes laws first passed in the late 1970s, but largely discarded in 2000.
Topic:: Monetary Policy

237. A Dangerous Brew for Monetary Policy

Author:: Charles I. Plosser
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: It is a pleasure to join you at Cato's 28th Annual Monetary Conference. In preparing today's remarks, I noted that this year's topic of how monetary policy should deal with asset prices was also discussed here in 2008. The speakers at that time expressed a wide variety of views and opinions. The fact that this important question continues to resurface here and at other prominent meetings in recent years suggests that a consensus has yet to emerge.
Topic:: Monetary Policy

238. Limits of Monetary Policy in Theory and Practice

Author:: Vincent R. Reinhart and Carmen M. Reinhart
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The Federal Reserve's conduct of monetary policy casts a spell over market participants, commentators, and academics. The pages of financial newspapers parse subtle differences among the comments of Fed officials and delve deeply into potentially multiple meanings of official statements. Academic discussions argue that the path of the policy rate may (as in Taylor 2009) or may not (as in Bernanke 2010, and Greenspan 2010) have fueled a home-price bubble in the United States.
Topic:: Monetary Policy
Political Geography:: United States

239. The Revived Bretton Woods System, Liquidity Creation, and Asset Price Bubbles

Author:: Harris Dellas and George S. Tavlas
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In this article, we argue that the present constellation of exchange rate arrangements among the major currencies has led to the creation of excessive global liquidity, which has contributed to asset price bubbles. Although the exchange rates of many of the major currencies—including the U.S. dollar, the euro, the yen, and the pound sterling—float against each other, the currencies of many Asian emerging market economies and oil-exporting economies are pegged to the dollar. Dooley, Folkerts-Landau, and Garber (2004a) labeled this system “Bretton Woods II” (BWII). The original Bretton Woods regime (BWI) lasted for about a quarter of a century. Dooley, Folkerts-Landau, and Garber (DFG) argue that the present regime, despite its large global imbalances, will also be sustainable.
Topic:: Oil
Political Geography:: United States

240. A Gold Standard with Free Banking Would Have Restrained the Boom and Bust

Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: President George W. Bush famously remarked in July 2008 that during the housing boom “Wall Street got drunk . . . and now it has a hangover.” It was the Federal Reserve that spiked the punchbowl. The Fed sowed the seeds for the bust of 2007–08 by overexpanding credit, keeping interest rates too low for too long. The Fed made these mistakes despite our having been assured that it had learned from past errors and that the art of central banking had been all but perfected. A commodity standard with free banking, and no central bank to distort the financial system, would have avoided such a boom-and-bust credit cycle.

241. U.S. Decapitalization, Easy Money, and Asset Price Cycles

Author:: Kevin Dowd and Martin Hutchinson
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: In Matthew 25: 14–30, Jesus recounts the Parable of the Talents, the story of how the master goes away and leaves each of three servants with sums of money to look after in his absence. He then returns and holds them to account. The first two have invested wisely and give the master a good return, and he rewards them. The third, however, is a wicked servant who couldn't be bothered even to put the money in the bank where it could earn interest. Instead, he simply buried the money and gave his master a zero return. He is punished and thrown into the darkness where there is weeping and wailing and gnashing of teeth.
Political Geography:: United States

242. Financial Crises: Prevention, Correction, and Monetary Policy

Author:: Manuel Sánchez
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The financial crisis that surfaced in 2007 has stressed the need to identify the ultimate sources of the incentives that were behind the preceding credit and housing bubbles. To lower the likelihood of future financial collapses, prudent economic policies as well as an adequate regulatory and supervisory framework for financial institutions are required. Monetary policy, in turn, should be directed toward price stability, which is a central bank's best contribution not only to long-term economic growth, but also to financial stability.
Topic:: Disaster Relief and Monetary Policy

243. Three Narratives about the Financial Crisis

Author:: Peter J. Wallison
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The most important lesson we can learn from the financial crisis is what caused it. Even though the Dodd-Frank Act (DFA) has been signed into law, this is still an important question. If we do not attribute the crisis to the right cause, we could well stumble into another crisis in the future; and if the DFA was directed at the wrong cause, we should consider its repeal. There are several competing narratives. One of them will eventually be accepted, and will determine how the great financial crisis of 2008 is interpreted, and thus how it affects public policy in the future.
Topic:: Financial Crisis

244. Supply: A Tale of Two Bubbles

Author:: Mark A. Calabria
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: To the extent that monetary policy influences asset prices, it does so via the demand for assets, by changing the borrowing costs to purchase assets, or via supply, where movements in interest rates can make investment in assets look more or less attractive. Fiscal policy interventions can also contribute to bubbles by changing the cost of acquiring specific assets. Most discussions of asset bubbles, particularly those involving the role of monetary policy, focus on demandside factors. This article examines the role of supply-side factors in the recent booms in the U.S. housing market and dot-com stocks. The importance of supply constraints in each market is discussed. Policy implications are then presented.
Topic:: Monetary Policy
Political Geography:: United States

245. Incentive-Robust Financial Reform

Author:: Charles W. Calomiris
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Will Rogers, commenting on the Depression, famously quipped: “If stupidity got us into this mess, why can't it get us out?” Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S. government that account for the systemic fragility of our financial system, especially the government's subsidization of risk in housing finance and its ineffective approach to prudential banking regulation. To avoid continuing to make the same mistakes, it would be helpful to reflect on the history of crises and government policy over the past three decades.
Political Geography:: United States

246. Preventing Bubbles: Regulation versus Monetary Policy

Author:: David Malpass
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Over the years, there has been a lot to consider in the Federal Reserve's choices of monetary policy and their relationship to bubbles. My conclusion is that mistaken U.S. monetary policy, usually related to the Fed's indifference to the value of the dollar, has repeatedly caused harmful asset bubbles in the United States and abroad. Policy is again at risk with the Fed's imposition of near-zero interest rates and its decision to conduct large-scale asset purchases (termed “quantitative easing”). Regulatory policy has often been ineffective at identifying or addressing asset bubbles, especially those caused by Fed policy. The solution is a parallel track to improve monetary policy so that it provides a more stable dollar and fewer asset bubbles; and to strengthen regulatory policy so that it provides a more reliable base for growth-creating free markets.
Topic:: Monetary Policy
Political Geography:: United States

247. Honest Money

Author:: Jerry L. Jordan
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: This article addresses some of the recent proposals for the conduct of monetary policies in the post-bubble environment. Advocacy of higher inflation targets is analyzed, and the challenge of maintaining monetary discipline in the face of massive fiscal deficits and mounting government debts is presented. Proposals for reforms of monetary arrangements must be based on consensus regarding the objectives of such reforms. The article concludes with some suggestions for near- and intermediate-term changes to present arrangements, as well as ideas for longer-term reforms.
Topic:: Government and Reform
Political Geography:: Canada

248. Milton Friedman's 1971 Feasibility Paper

Author:: Leo Melamed
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: The story is fairly well known. In 1971, as chairman of the Chicago Mercantile Exchange, I had an idea: a futures market in foreign currency. It may sound so obvious today, but at the time the idea was revolutionary. I was acutely aware that futures markets until then were primarily the province of agriculture and—as many claimed—might not be applicable to instruments of finance. Not being an economist, the idea was in need of validation. There was only one person in the world that could satisfy this requisite for me. We went to Milton Friedman. We met for breakfast at the Waldorf Astoria in New York. By then he was already a living legend and I was quite nervous. I asked the great man not to laugh and to tell me whether the idea was “off the wall.” Upon hearing him emphatically respond that the idea was “wonderful,” I had the temerity to ask that he put his answer in writing. He agreed to write a feasibility paper on “The Need for Futures Markets in Currencies,” for the modest stipend of $7,500. It turned out to be a helluva trade.
Topic:: Economics
Political Geography:: New York and Chicago

249. The Need for Futures Markets in Currencies

Author:: Milton Friedman
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Under the Bretton Woods system, the central banks of the world undertook to keep the exchange rates of their currencies in terms of the dollar within _1 percent of the par value as determined by the official values of gold registered with the International Monetary Fund. In practice, the central banks generally kept the margins even narrower: _1⁄2 of 1 percent or _3⁄4 of 1 percent. So long as they had confidence that these limits would be maintained indefinitely, persons engaged in foreign trade were subject to negligible risk from fluctuations in exchange rates. Even so, large traders with sharp pencils found it desirable to hedge any future transactions by buying foreign currencies forward to meet commitments coming due or selling foreign currencies forward to match scheduled receipts. These forward transactions were handled by the large commercial banks, often with the active participation of foreign central banks in the forward market.
Political Geography:: London

250. Friedman and Samuelson on the Business Cycle

Author:: J. Daniel Hammond
Publication Date:: 09-2011
Content Type:: Journal Article
Journal:: The Cato Journal
Institution:: The Cato Institute
Abstract:: Chicago School economists have come in for criticism since the financial crisis and so-called Great Recession began in 2007. Commentators have blamed recent problems on a laissez-faire faith in the efficacy of markets and simple rules for business-cycle policy—ideas associated with economics as taught and practiced at the University of Chicago. Events over the past four years, we are told, demonstrate the need for a restoration of Keynesian thinking about business cycles and activist government policies to keep markets from failing. However, there is another aspect of Chicago School economics that is commonly overlooked. This is the conviction that economists' understanding of the business cycle is meager in light of the knowledge necessary for activist countercyclical policy to be effective. From this comes the Chicago School concern that economists and policymakers not attempt to do something beyond their capability. Overreaching can make the problems worse.
Topic:: Economics and Financial Crisis
Political Geography:: Chicago

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