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Mark Thoma wrote on Feb 28th 2011, 14:12 GMT

QUESTIONS about the role of unions in the past are interesting, and we can learn from the answers, but for the most part this is water under the bridge.

Unions may have been the answer at one time—there is considerable disagreement about this—but the world has changed. In an increasingly globalised world where digital and other technology allow firms to easily escape unionised labour, unions have lost their ability to act as an equalising force in negotiations over wages and benefits.

Global labor organisations could provide an alternative, but this would require global institutions that do not presently exist, and that do not look likely to emerge anytime soon. For now, the answer has to come domestically and the only institution powerful enough to protect workers is government.

Brad DeLong wrote on Feb 27th 2011, 19:44 GMT

WELL, let me turn my microphone over to Ronald Wilson Reagan:

Ever since martial law was brutally imposed last December, Polish authorities have been assuring the world that they’re interested in a genuine reconciliation with the Polish people. But...[b]y outlawing Solidarity, a free trade organization to which an overwhelming majority of Polish workers and farmers belong, they have made it clear that they never had any intention of restoring one of the most elemental human rights—the right to belong to a free trade union...

Gilles Saint-Paul wrote on Feb 25th 2011, 13:55 GMT

ACCORDING to standard economics, wage bargaining by unions is similar to price agreements in cartels and in good logic should fall under antitrust laws and be prohibited. Just as cartels inefficiently increase the price of some goods, similarly unions inefficiently increase the price of some categories of labour.

Stephen Roach wrote on Feb 22nd 2011, 13:53 GMT

IF THERE is one clear message from the Great Crisis it is that America can no longer afford to stay the same reckless course of an ideologically driven self-regulation. Washington’s policy mandate is in need of a fundamental realignment.

It wouldn’t be the first time. Twice earlier during the post-World War II era the US Congress enacted landmark legislation that redefined the rules of engagement for the Federal Reserve. In both cases, these adjustments benefited from the political will that typically gets mustered in the aftermath of crises. In 1946, Congress passed the so-called “Full Employment Act”. Seared by the painful memory of an unemployment rate that hit 25% in the depths of the Great Depression, Washington vowed to set policy with an aim toward achieving maximal growth in employment. And in 1978, with the US in the throes of a debilitating inflation, Congress enacted the Humphrey-Hawkins Act that added price stability to Washington’s policy mandate.

While this “dual mandate”—full employment and price stability—worked reasonably well for about 20 years, it failed to prevent the Great Crisis. And so the mandate needs to be changed once again—this time, with an aim toward protecting financial and economic stability.

Avinash Persaud wrote on Feb 21st 2011, 18:36 GMT

IN THE clear light of morning, the legal or otherwise effective divorce between central bank and supervisory agency, or monetary policy and regulatory policy, was a mistake. At the root of the problem was an “institutional organisation issue” that could not be papered over by committees, meetings and crisscrossing lines of responsibility. Economists, in general, know more Greek than organisation theory.

The guards in the twin towers of monetary policy and regulatory policy surveyed their compounds as if the other did not exist. Over time there was greater specialisation, which made it is harder to see the blurred boundaries. Monetary policy was deliberately oblivious to the asset price boom—that was somebody else’s problem. Regulatory policy was oblivious to macro risks—that was the central bankers job.

Takatoshi Ito wrote on Feb 21st 2011, 18:18 GMT

WHAT we need is the better coordination among the central bank, Treasury and the Financial Supervision Agency. The coordination is certainly crucial in crisis management, but it is also very important in crisis prevention.

Concerning crisis prevention, John Taylor and his admirers argue that the Fed should have raised the interest rate in 2004-06 in order to prevent the housing bubble in the US, but that may not have been sufficient. It would have been much better if the supervision authorities (the Fed and the SEC) coordinated their actions to look into the dangers of "originate to distribute", the dangers of CDOs and CDOs squared, conflicts of interest among the credit rating agencies, off-balance sheet treatment of SIVs, and so on. The interest rate is too blunt an instrument. Blaming the central bank for bubbles is largely misplaced.

Markus Brunnermeier wrote on Feb 21st 2011, 18:08 GMT

CENTRAL banks have to broaden their scope in terms of goals and instruments. Price stability is of primary importance, but financial stability must also take priority if bank failures disturb real economic activity. In fact, the original motivation for creating central banks was to have a lender of last resort. Recent events have made clear that this function has to be supplemented by preventive measures. “Mopping up” after a bubble bursts is not sufficient anymore and central banks should lean against imbalances preventively.

Hal Varian wrote on Feb 21st 2011, 15:32 GMT

The Fed has a pretty good historical record for economic analysis and forecasting. It's true that they missed the growing signs of financial fragility in 2005-2008, but I attribute this to the rise of the largely unregulated shadow banking system.

It's also true that other mistakes were made, but hindsight is always 20/20. What matters is that when the the chips were down, the lender of last resort did the right things and averted financial meltdown. The high level of cooperation among central banks was particularly notable and quite different from the experience in the 1930s.

Eswar Prasad wrote on Feb 20th 2011, 12:28 GMT

CENTRAL banks are being asked to do more but this mandate creep could threaten their independence and effectiveness.

Inflation targeting has had a good track record of delivering price stability and anchoring inflation expectations, including in many emerging markets. But inflation targeting has come under sharp attack in the aftermath of the global financial crisis on the grounds that it leads central bankers to ignore asset-market bubbles and exchange-rate fluctuations. Some emerging market central bankers even argue that low inflation is neither necessary nor sufficient for financial stability.

An increasingly prevalent view is that central banks should coordinate the use of two instruments—a monetary policy instrument and prudential regulation. The former should be used to manage inflation, while the latter prevents imbalances from building up in the financial system.

Even this limited set of objectives creates tensions. What is good for the financial system in times of stress—low interest rates and abundant liquidity—may not always be good for managing inflation outcomes. While it is tempting to include asset prices in the monetary policy framework, it is dangerous to ask central banks to manage asset market outcomes without clear criteria being specified and without knowing how monetary policy actions actually influence asset prices.

Michael Bordo wrote on Feb 20th 2011, 12:14 GMT

BASED on the history of central banking which is a story of learning how to provide a credible nominal anchor and to act as a lender of last resort, my recommendation is to stick to the tried and true—to provide a credible nominal anchor to the monetary system by following rules for price stability. Also central banks should stay independent of the fiscal authorities. The recent crisis has weakened central bank independence and returning to the pre-crisis regime as soon as possible would be desirable.

If the central bank is successful in maintaining a stable and credible nominal anchor then real macro stability should obtain. But in the face of real shocks central banks also need to follow short-run stabilisation policies consistent with long-run price stability. The flexible inflation-targeting approach followed by the Riksbank and the Norges Bank seems to be a good model that other central banks like the Federal Reserve, should follow.

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