10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-i 9780230112698_01_prexii Somebody in Charge 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-ii 9780230112698_01_prexii 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-iii 9780230112698_01_prexii Somebody in Charge A Solution to Recessions? Pierre Lemieux 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-iv 9780230112698_01_prexii somebody in charge Copyright © Pierre Lemieux, 2011. All rights reserved. First published in 2011 by PALGRAVE MACMILLAN ® in the United States—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the World, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave ® and Macmillan ® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–11269–8 Library of Congress Cataloging-in-Publication Data Lemieux, Pierre. Somebody in charge : a solution to recessions? / by Pierre Lemieux. p. cm. Includes bibliographical references. ISBN 978–0–230–11269–8 1. Recessions. 2. Financial crises—Prevention. 3. Economic policy. I. Title. HB3711.L57 2011 338.5  43—dc22 2010037347 A catalogue record of the book is available from the British Library Design by Integra Software Services First edition: March 2011 10987654321 Printed in the United States of America. 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-v 9780230112698_01_prexii Contents List of Charts vii Acknowledgments ix A Few Acronyms xi Introduction: Adult Supervision 1 1 The Limits of Authority 9 2 Keynes’s Old Clothes 39 3 The Car of Collectivism 63 4 The Laissez-Faire Scapegoat 83 5 The Crime Scene 103 6 Monetary Meddling 123 7 The State’s Animal Spirits 133 Conclusion: The Emperor’s New Clothes 155 Notes 165 Bibliography 185 Index 201 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-vi 9780230112698_01_prexii 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-vii 9780230112698_01_prexii List of Charts 1 Total government expenditures per capita in the United States 69 2 Regulatory expenditures by the U.S. federal government, 1960–2007 75 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-viii 9780230112698_01_prexii 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 February 4, 2011 19:21 MAC-US/CHARGE Page-ix 9780230112698_01_prexii Acknowledgments I wish to thank a few colleagues who have read parts of the manuscript of this book: Christian Calmès (Department of Management Sciences, University of Québec in Outaouais), Mark Brady and Jeff Hummel (Department of Economics, San Jose State University), and David Henderson (Naval Post- graduate School and Hoover Institution). I spent the winter of 2009–2010 as a visiting scholar at the Department of Economics at San Jose State University, where many colleagues suggested useful ideas during informal conversations. Alex Tabarrok of George Mason University’s Department of Economics as well as an anonymous referee provided useful criticism on a previous version of the manuscript. I also want to thank the Aurea Founda- tion (Toronto) and its advisor George Jonas for a grant that allowed me to spend time away researching and writing this book. Of course, none of these colleagues, friends, or institutions is responsible for any mistake I have made, nor do they necessarily share the opinions I express. 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-01 [...]... necessary to manufacture the machines, and so forth Producing laptops also requires finance, that is, finding individuals willing to forego satisfying their wants in order that machines may be produced and labor hired to manufacture computer components, and putting the savers in touch with the investors And all these operations have to be coordinated through time and space Moreover, tradeoffs have to be made... of a pencil Imagine that some event—say, a nuclear war—has destroyed all factories, and we need to build laptops anew This would first require manufacturing plastic, transistors, silicon wafers, and microprocessors, and everything that enters into these inputs and everything necessary to produce the latter, and so forth Try to follow the chain of all the machines necessary to manufacture the machines... shortterm rates, is it able to in uence long-term rates? To a certain extent, yes, because the spread between rates of different maturities cannot be too large, due to arbitrage: if investors think that long-term interest rates are too high compared with short-term rates, they will contract short-term loans, increasing short-term rates, and use these loans to relend long, bringing long-term interest rates... years, with a standard of living double that of the other.15 A last point must be noted about how finance constrains Authority Modern financial markets not only allow entrepreneurial individuals to raise capital more easily for their projects, they also allow people to move their financial capital across national borders Note that the term “capital” can mean either real assets (like machines and building),... goods, or financial capital, the claims on real capital and the goods it produces When we say that financial capital is mobile, we mean that people can obtain claims on real assets in foreign countries, and thus move their claims from one country to another by selling in one and buying in another One advantage of this international mobility of capital is diversification, as people can hold assets in different... MAC-US/CHARGE Page-1 9780230112698_02_int01 Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 201 1-0 4-0 1 Introduction: Adult Supervision ● Somebody in Charge But in order to start, we need to understand a few concepts in finance We have just seen what commercial paper, interbank loans, and the money market are A few more concepts are necessary to understand... would take more than a year and a half to expend (in expenditures or tax cuts) three-quarters of the money.27 Barth et al politely refer to a series of flip-flops that have exacerbated the uncertainty gripping the marketplace”28 and the “zigzagging from one approach to another.”29 Despite all its computers and surveillance apparatus, the contemporary state knows relatively little on what’s happening in. .. PalgraveConnect - 201 1-0 4-0 1 The Limits of Authority ● Somebody in Charge allowed to fail six months later A few weeks later, the government shifted gears again and rescued American International Group (AIG), an insurance company heavily involved in financial markets.24 The Emergency Economic Stabilization Act (EESA) of October 3, 2008, empowered the Treasury to spend up to $699 billion on the TARP, which aimed at... lies in the diversity of individuals and their preferences Think of people like Paris Hilton and Sarah Palin, Madonna and 10.1057/9780230118478 - Somebody in Charge, Pierre Lemieux February 9, 2011 15:32 MAC-US/CHARGE Page-9 9780230112698_03_ch01 Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 201 1-0 4-0 1 CHAPTER 1 ● Somebody in Charge Leonard Cohen, Bill Gates... governments A government with a lower credit rating will have to pay a higher interest As a consequence, governments have an incentive not only to pay the agreed interest and to reimburse the capital at maturity, but also to manage their budgets in a way that does not scare their lenders It is a well-known economic fact that well-functioning financial markets further economic growth For example, the World Bank . licensed to ETH Zuerich - PalgraveConnect - 201 1-0 4-0 1 February 4, 2011 19:21 MAC-US/CHARGE Page-xi 9780230112698_01_prexii AFewAcronyms ABCP Asset-backed commercial paper ARM Adjustable-rate mortgage BEA. globe. What could look to an external observer as small increases in money market rates or a temporary freeze on the commercial paper market was a manifestation of a deeper a very deep—problem. Analyzing. to banks as lender of last resort) besides establishing a special lending program. The autumn of 2007 saw more dramatic financial events, including the bankruptcy of Netbank. Many financial dramas