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Hoisted from the Archives (2001): Charlie Kindleberger's View of Financial Crises

Charlie Kindleberger's View of Financial Crises: Back when I started out as an economist there were several years during which it seemed that most of the articles I wanted to write had, I discovered, already been written in the previous decade by Barry Eichengreen. He reports that when he started out he found himself subject to the same phenomenon--only with respect to Charlie Kindleberger. So I spent part of last weekend rereading Kindleberger's (1978) Manias, Panics, and Crashes, looking for places where Kindleberger had already said what I think before I thought it, and had expressed it better than I can.

I found a number of such places: Kindleberger's declaration that in the last analysis the making of international economic policy under such circumstances "is an art" and that that "says nothing--and everything." And there was Kindleberger's summary that the rescuer of the system, the "lender of last resort", "should exist... but his presence should be doubted.... This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, or countries.... some sleight of hand, some trick with mirrors... because monetarist fundamentalism has such unhappy consequences for the economic system" when expectations converge on the "unfavorable" equilibrium.

Kindleberger's declaration that he does not wish to "contravert" the claim that the "presence of a lender of last resort weakens the self-reliance of the banking system and increases its likelihood of falling into excesses of overtrading, revulsion, and discredit," even though this argument "has overtones... that there is no use providing the poor with housing since they will only keep coal in the bathtub" and the possibility that the known existence of a lender of last resort causes expectations to converge on the favorable equilibrium: that it does not "increase speculation and overtrading" but "calms anxieties when overtrading occurs."

That finding the point of balance for all these conflicting issues and concerns is very difficult, and keeping the point of balance is almost impossible, is very clear in Kindleberger's "on the one hand... on the other hand" argument. That finding the point of balance is very difficult was also my thought on listening to Allan Meltzer this afternoon. This afternoon we have heard the Meltzer Commission Meltzer: the Meltzer who fears the growth of moral hazard, who thinks that large-scale lenders of last resort create by their very existence the crises they then are forced to handle, the one who believes that a lean IMF is a good IMF and that it is important that speculators f