Financial Repression = Less Crises

Please see earlier post on the Reinhart Rogoff IMF paper

I wrote a few days back about how a serious, academic, review of past and prospective debt restructurings can be on the one hand useful, on the other hand not particularly predictive of market conditions, and on the third hand (I have three hands!?!) easily manipulated by the Financial Infotainment Industrial Complex into unhelpful click-bait.

But I want to also highlight an interesting, but less noted, point of the Reinhart Rogoff paper.  Namely, a world of financial repression leads to a lot less financial crises.

The big, ignored point, of the Reinhart-Rogoff paper

The most interesting insight of their paper – although one which contrasts sharply with the narrative that the Financial Infotainment Industrial Complex in the US would like to tell – is that the Financial Repression period (1945-1979) of economic policy-making correlates to a lower incidence of financial crashes, inflation-shocks, and banking crises.

It’s worth clicking on this screenshot of the Reinhart Rogoff figure on historical crises.  They made an index of banking crashes, currency runs, hyperinflation, and debt defaults/restructurings, weighted by country.  Spikes in crises all occur in the the ‘open markets’ periods, but rarely happen during ‘financial repression periods.’

Financial Repression = Less Crises


Only in the more liberal (with a small “L,” meaning “less-controlled”) economic period they study (1900-1939 and 1980-Present) did we experience very high spikes in financial crashes, inflation-shocks and banking crises.  Correlation is not causation – I hasten to add – but it’s so clear from their graph of financial shocks that Reinhart and Rogoff have to acknowledge it.

Is financial repression a good thing?

Now, no card-carrying member of the mainstream Financial Infotainment Industrial Complex wants to be caught dead advocating a more interventionist financial regime.   Among the financial news I read on a regular basis – The Wall Street Journal, Business Insider, Bloomberg – basically nobody is going to write “Hey, let’s gum up the financial markets to reduce the probability of financial crises,” which led me at first to think that this under-reported correlation in the Reinhart Rogoff paper has no support in media and politics.

The more I thought about it,[1] however, the more I realized that the idea of financial repression leading to fewer crises actually does have plenty of support.  I just usually don’t read that media.

In Washington, Senator Elizabeth Warren – an ex-academic colleague of Reinhart and Rogoff – represents the view, as far as I can tell, that if we regulate Wall Street a lot more – to the point of financial repression – then we won’t experience a replay of 2008.

In financial media, when I read Matt Taibbi in Rolling Stone or Gretchen Morgenson in the New York Times, my sense is that they share Warren’s basic view.  The point of regulating Wall Street is to create a system of financial repression sufficient to dampen financial excess, which will in turn dampen financial crises.

I don’t share what I interpret as the Warren/Taibbi/Morgenson[2] policy view, but I think Reinhart and Rogoff’s paper provides some academic ammunition for their views.

Please see related post on Academia, Markets, and Click-bait inspired by the Reinhart Rogoff paper

Please also see related post Reinhart Rogoff  and the irony of political affiliations



[1] Fine, it actually wasn’t me thinking about it, it was my wife who made the next point.

[2] I’m sure any one of this troika would be offended, each for their own reason, that I have lumped them together, as if they share a common world view.  No doubt there are important distinctions. Oh well.  My blog.  I get to do the lumping.  I lump them together because I don’t ever see evidence in their writing that they evaluate members of the for-profit financial world on the terms of the for-profit world.  In place of that, I see a lot of evidence of moralistic tsk-tsking about profit-seeking.  “Why oh why don’t those financiers consider the children first???”  I’m paraphrasing of course.

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2 Replies to “Financial Repression = Less Crises”

  1. I’m of the Austrian-school position when it comes to intervention. If the boom-and-bust cycle is partly undesirable (esp the bust…AKA crisis…phase) then I agree that change is necessary. However, I’m deeply committed to the idea that central planning is inherently bad. A simpler model would involve fewer laws and regulations but would also favor criminal prosecutions for misbehavior; civil liability seems to be the preferred incentive of late. Facing incarceration, deleterious financial agents would be far less likely to cook the books or engage in deals and activities that could, en masse, send us into crisis.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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