A Note from Maury Obstfeld on Kindleberger, Hegemony, and Speculation
In my inbox, from Maury:
Nice piece...
I would just underscore 2 points:
Hegemony means deep pockets, and a domestic politics capable of internalizing the benefits from systemic stability so that the hegemon is in a position to provide fiscal resources in support of the system. The euro zone has a centralized monetary authority, but treaty provisions have intentionally hobbled it from playing a fiscal support role (including through seigniorage).
Second, modern macro as we knew it before 2007 ignored the financial plumbing at the heart of the crisis. But pre-crisis finance papers such as Shleifer-Vishny's "Limits of Arbitrage" provide the most convincing response to Friedman['s claims that destabilizing speculation is impossible] ... if only they had been integrated into macro models...
Alan Taylor adds:
We are on the brink of repeating 1931 with a banking/financial sector that is N times larger relative to advanced country GDP, where N is at least 2 in many countries and even bigger in some key countries. Until sometime in the last year I used to console myself that this was compensated for by the fact that our macro policy making system was M times more flexible/intelligent than what we had back then with M>>N.
