Wednesday, May 18, 2011

Leijonhufvud on Broken Financial Systems and Excessive Private Debt

There is an excellent paper by Leijonhufvud brought to my attenion by a comment on the last post here:
Axel Leijonhufvud, “Wicksell, Hayek, Keynes, Friedman: Whom Should We Follow?,” conference paper, Special Meeting of the Mont Pelérin Society Conference, 2009.
At the end of the paper, Leijonhufvud makes some very insightful remarks about debt deflation and the lost decade in Japan, noting how Japan’s failure to clean its financial system led to the malaise of the 1990s. The model for fixing broken banks after an asset bubble is clearly Sweden’s bank reforms in the early 1990s. I particularly like Leijonhufvud’s description of debt deflation as causing “financial sinkholes in private sector balance sheets” (p. 9) that need to be repaired before deficit spending will work effectively.

This is almost exactly what a Post Keynesian would say on these points, which is further proof that Leijonhufvud’s “coordination Keynesianism” is compatible with Post Keynesian thought.

1 comment:

  1. Would you say that Sweden style reforms should have been implemented in US in 2007?

    I ask, because Messrs. Krugman and deLong had proposed doing what Sweden had done in the 1990s. However, they seemed to shift towards support for the bailout that happened, once it seemed that their preferred option was politically unfeasible.

    This, despite them knowing that there would be moral hazard issues with a bailout, and that it would essentially subsidise banks for bad business practices - a tendency confirmed by some of the dishonest dealings in the foreclosure business.

    That's what confuses me about today's economists. Their job is to be people of ideas, but they reduce their prescriptions to what is politically feasible, as if they were advisors. Is it not a fact that if no good solution is politically feasible, then it means that no good solution can be implemented?