Susan Strange was right

Susan Strange had a crusty personality, and she liked to tell truth to, well, if not power, then at least to the self-satisfied. And with her gravelly voice, she did it oh-so-well. And I liked her very, very much. Even though Susan passed away in 1998 -- 10 years ago -- she is much on my mind nowadays.

I have been rereading some of her work, Casino Capitalism (1986) and Mad Money (1998). She warned that we were heading for financial collapse for the very reasons that the financial system did collapse: "a monetary system cannot work efficiently unless there is political authority to say what money must be used or may be used; to enforce the execution of agreed monetary transactions; and to license, and if necessary support, major operators in the system" (1986, p. 25). She argued that through a series of decisions and non-decisions, the leading states of the international monetary system (particularly the US) have failed to govern the system.

The result is madness: wild volatility that makes everyone, even those people who never wanted to engage in risky behavior, gamblers in a global casino. Here, again, Susan speaks in 1986:

"For the great difference between an ordinary casino which you can go into or stay way from, and the global casino of high finance, is that we are all involuntarily engaged in the day's play. A currency change can halve the value of a farmer's crop before he harvests it, or drive an exporter out of buisnes. A rise in interest rates can fatally inflate the costs of holding stocks for the shop-keeper. A takeover dictated by financial considerations can rob the factory worker of his job. From school-leavers to pensioners, what goes on in the casino in the office blocks of the big financial centres is apt to have sudden, unpredictable and unavoidable consequences for individual lives. The financial casino has everyone playing the game of Snakes and Ladders" (p. 2).

We, the willing and the unwilling gamblers alike, have been living in a world in which the speed of "innovation" in financial instruments has outpaced the ability of governments to regulate, the ability of firms to realize what, exactly they are buying and selling, and the ability of anybody to figure how risky a transaction is. Moreover, Alan Greenspan's "incorrect ideology," Milton Friedman's one-dimensional thinking, and the seductiveness of the libertarian myth of perfect markets resulted in governments, particularly the US government, abdicating responsibility for governing. It wasn't just Reagan and Bush who failed to regulated. Clinton was quite guilty of this, too.

Now I do believe that overregulation is a bad thing. It decreases efficiency and leads to suboptimal outcomes. But under-regualtion or -- worse! -- failure to regulate at all leads to the mess we have right now.

So, what's the answer? Do we bail out Detroit or let them go bankrupt and try to restructure? What do we do with mortgages? What do we do with retirement, pensions, etc.? I teach my students that the economy functions on liquidity, stability, and confidence. Government has a role in each of these. The Fed, in particular, can help with monetary stability and liquidity. Liquidity can also be helped by infusions of cash by Congress to cash-strapped industries, but only if that cash ends up being used correctly. Overly high compensation for executives is a big negative. Confidence, though, is a psychological state. Confidence might come back if people believe that the government really is taking on the responsibility of governance. Leaders help change psychological states, and that's the promise of an Obama administration. I hope it works.

I really hope it works.

One more word about Susan Strange. (This is, after all, my blog.) Years ago, as a fairly junior scholar, I was sitting in a business meeting of the International Political Economy section of the International Studies Association. The section chair was asking for volunteers for various section offices (executive board or whatever). Susan was sitting behind me. She certainly didn't know me well. But she leaned for and shoved me in the shoulder and said, "You should volunteer." And I did. And that mattered in my career. Thank you, Susan.