Commentary on Political Economy

Sunday 3 July 2011

Comments on Bernanke

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Report joseph belbruno | April 30 11:33am | Permalink
Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a "theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfect information" (Modigliani-Miller), of "common knowledge" (game theory), and Walrasian "tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and that reduce the entire field of "economic science" to "the problem of co-ordination" (just google Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution" for an attempt to "historicise" the problem).

It is evident that there can be no space in all of these "theories" for central banks, nor indeed for "financial intermediation" (hence Hayek's virulent opposition to central banks and fractinal reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour". But an understanding of why, how and where "information asymmetries" arise in the "channel" that links investment decisions with financial structure is absolutely essential. To leave the entire matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the need to minimise "transaction costs" - which then raises the conundrum of why the capitalist economy is not constituted by one "mega-firm"!)

In this paper ( ) , Bernanke and Gertler identify the "ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth, the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease, but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the second is that each successive "crisis" brings about a series of "mergers and acquisitions" whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system.
And finally (only because I do not wish to impose on the patience of participants further), the growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel "centrality" of State authorities in "crisis management", mean that central banks become "lenders of first (not last) resort".
I hope this begins to clarify some matters so we can all move to a higher level of analysis and discourse.

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