London, England: Peguin Books, 2010
2007 sub-prime mortgage crisis was a milestone for a global financial system which affected financially and also intellectually. It came to light that there is no free market efficiency nor an invisible hand and we need Keynes. Robert Skidelsky in his Keynes: The Return of the Master book examined the causes and frustrated solutions of financial crisis until Keynesian policies. According to Skidelsky, as we can understand from the title of the book, Keynes is the master of the economy and as it was seen in the time of financial crisis Keynesian Theories were needed to extricate the economy from during those times slump. In my opinion, Keynesian theories are mostly accurate but there is one point that I do not agree with Skidelsky, is that government should not have a right to intervene economy, I know we are all dead in the long run but government’s in other words ruling party’s term is shorter than our lives.
It was assumed that there is an invisible hand in the economy which stabilize prices and all fluctuations in economy just by people’s pursuing own interests. This is Adam Smith’s theory which was accepted until the deregulated (free) banks and financial markets was about to collapse and invisible hand did nothing. There was a downward spiral in economy mortgage backed securities started to depreciate, banks which had these instruments in their balance sheet (they are off-balance sheet items but still affect the value of the bank), all banks started to sell these instruments but due to increase of the supply of these derivatives in the market led to decrease their prices too, so banks started to live liquidity and solvency problems. Markets came to freezing point, confidence to system fell apart, interbank borrowing stopped. At this point monetary banks started inject money to the systems, “In October, central banks in the US, the UK, the EU, Sweden, Switzerland and Canada cut interest rates by 0.5%…” (Skidelsky, 2010, p. 11), recapitalization to provide equity cushion to banks. However, all these were not enough to boost the economy. So everyone remembered the Keynes one more time. Skidelsky demonstrated that with “On 17 February 2009 President Obama signed into law a $787 billion fiscal stimulus, calling it ‘the most sweeping recovery package in our history’.” (2010, p.19). Skidelsky mentioned the theories of Keynesianism in his book to make it clear Keynes return. Keynes suggested that during the financial crises monetary policies can lead to liquidity traps and then the only solution is spending money by government which is an actual spending not just a impulsion ( Skidelsky, 2010, p.96). In my opinion, this statement is true as long as it is a crisis time. Because leaving the regulation of the economy to the government, puts the economy into people’s hands who are here until the next election, this is much shorter than our lives. Also, their only aim is to secure their position so ruling party can spend money which they borrow from the society cheaper than private organizations just to show society like they are ‘working’. So the only thing that we have is just be in hopes of ruling party has a moral ethics to put the state’s welfare beyond their personal gain. But we will never be sure that is there any moral hazard because the controllers will be the people who ruling party makes them to do so. On the other hand, monetary banks are non-political organizations so they do not have any desire to earn money with new projects and making people to believe that they are ‘doing something’. Besides, monetary banks’ chairman works longer time then a time between 2 elections. So when an election is coming there will be uncertainty in economy which will lead to foreign investors withdrawal and uncertainty in the economy. To sum up, I believe, there must be a nonpolitical organization which rules the economy. Economy should not be ruled by government at least not only by it. Because economy lasts more than all the parties.
Skidelsy (2010) pointed the importance of Keynes’s theories in the light of the recent crisis. His claims are monetary policies should be used for establishing a stabilized low long term interest rate and state must take an ever greater role for ‘directly’ ruling the economy ( Skidelsky, 2010, p. 97). I could suggest that Keynesian economy is a really good cure for an ill economy but not a good diet to do all the times. As Friedman said crude Keynesianism should rise from dead only the recessions times.
WORKS CITED
Skidelsky, R. (2010). Keynes: The Return of the Master. PenguinBooks.