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We have collectively stopped thinking about how, when legislation on financial regulation gets hammered out, political economy enters into the picture, says Chrystia Freeland, the U.S. Managing Editor of the Financial Times.

Question: Simon Johnson has suggested that policymakers have been captured by the financial industry. Do you agree?

Chrystia Freeland: I think that Simon is a brilliant economist and the essay he wrote in The Atlantic was terrific.  As it happens, Simon and I have known each other for a long time and share a background in being involved, me reporting and Simon as an economist, and the collapse of the former Soviet Union and I think that it was that mindset which shaped Simon's intellectual response and offered him a prism through which to look at the relationships between government and the big banks here and see – I think that Simon would absolutely agree that there's not this sort of crony capitalism here that you would see in Russia, but to see some similarities. 

One thing that I think has become much clearer in the wake of the crisis, which I think maybe was not so apparent beforehand is the extent to which, intellectually, we were ill equipped to really understand the dynamics of what were going on in the developed western capitalist economies.  And I do think that one of the things that happened was, with the collapse of communism, a lot of us, and not just people who had a vested financial interest in this, but also academics, journalists, policymakers, a lot of us really bought into, for the best of possible reasons, the sort of end of history argument.  The view that this big economic question, which was the big question of the 20th century of what sort of economic system do you want? A communist system or a capitalist system had been definitively answered by the collapse of the Soviet Union and arguably by China's effective embrace of a market economy as well.  And I think that's right.  I think that big question has been answered. 

But I think what we then collectively tended to do is assume therefore that questions of political economy were no longer so central and that it wasn't so important in thinking about the economic rules of the game to think about those very basic, even sort of Marxist questions, about who benefits and who loses from any particular economic setup.  I think what we tended to start thinking; the intellectual toolkit which we used in thinking about economic decisions was really more engineering.  And we started to think that the big questions were going to be resolved just by sort of, smart people getting together figuring out what works best. And that was the way, that sort of very pragmatic approach was going to be the way that big economic questions got resolved.  I think there is still something to that and certainly when we write editorials in the Financial Times, that's the sort of approach which we try to have. 

But what I think we collectively stopped thinking about was – stopped really properly focusing on, was that when these big issues, when legislation about financial regulation, for example, gets actually hammered out by legislators, political economy enters into it.  And it's incredibly important to be thinking about which particular interests, which particular companies are going to benefit from this version of the law and which companies are going to benefit from that version of the law.  And it would be absolutely naive not to appreciate that's what lobbyists are for.  And also naive not to appreciate that as companies become bigger and more powerful they have more resources to throw into that lobbying game.  I don't think there is anything wrong with that.  That's democratic politics.  Everyone ought to, and does, lobby for their own interests. 

But I do think that we, as business journalists, and I would also say the community of economists need to factor into the equation a little bit more this notion. This appreciation of the fact that when there are debates, for example, over the regulation off credit derivatives: I think that's the hottest one in this space right now. It's not purely about intellectually opposing points of view, it's also about players on different sides of the debate standing to make or lose a very great deal of money.  And we fail our readers, legislators fail their voters when they don’t make clear that this particular way of regulating this particular market will make Bank X, much, much richer and maybe will carry the collective costs. 

Question: When the crisis hit, monetary policy did not adopt many of the unconventional techniques recommended for deflation such as price level targeting in the U.S., or currency depreciation in Japan.  Was the financial press aware of these options? (Scott Sumner, The Money Illusion)

Chrystia Freeland: I would disagree with part of Scott's premise, which is, implicit in the question is the notion that we are in a period of deflation, and also implicit in the question is that a lot of the unconventional tools of monetary policy weren't used.  I do think, actually, a lot of unconventional tools of monetary policy were used.  And one of the most creative players in the crisis turns out to have been Ben Bernanke with Mervin King not too far behind.  So, we did have and continue to have all sorts of unconventional forms of liquidity being injected into the markets by the world central bankers. 

Once they hit that zero rate where they couldn't use interest rates to gen up the economy, we have seen them using many, many unconventional tools to try to pump more money into the economy.  So actually, I do think we have seen all sorts of unconventional monetary policy responses.  And I do also think, and certainly journalists at the Financial Times are very well aware of the two economic arms that government has, monetary policy and fiscal policy.  And I think we've written with real sophistication about the monetary debate and then also about the fiscal debate. 

So actually I think both.  That we've had more creative policies than Scott would imply in his question.  But also that at the moments of decision I think that we were quite thoughtful and explicit in talking about what those options were. 

Question: How would you rate Obama’s performance so far?

Chrystia Freeland: I think to assess the links between the Obama administration and business is a really big, really complicated question and in some ways, it's still too early to answer it.  They haven't been in office for a full year.  And I think that there are different questions that need to be asked about the Obama administration in different areas.  So, there's one set of issues in healthcare, there's one set of issues in the environment and climate change, and there's one set of issues in financial services. 

To take financial services, I think fairness requires that we divide the response of the Obama administration into two parts.  The first is the immediate crisis firefighting.  There I think we really have to be careful not to apply the rules of calmness, of the markets having recovered, of the second Great Depression no longer seeming to be a possibility that might start tomorrow.  We have to be careful not to apply that mindset to the decisions we are taking in the crisis.  We also have to be mindful of the fact that the really big decisions about the financial crisis were all taken when George Bush was still President. 

Now, it is true that Barrack Obama made the explicit choice, effectively to carry on with those policies by promoting Tim Geitner from being the head of the New York Fed to being his Secretary of the Treasury, even so, the big decisions were already in place. 

Where I think the Obama Administration has a much clearer, much freer choice to make in its relationship with the banking industry in the post-crisis, is what the regulatory and legislative response is to this crisis.  And there we haven't yet seen, I think, a very robust response yet.  We had a choice by the White House to move on health care before moving on financial reform.  And in financial reform, we have not yet seen a sufficiently, in my view, aggressive response.  I do think that the right thing for this administration, for any administration to do is to say, actually, the rules of the game were a real problem ahead of the financial crisis.  And while before this crisis, maybe reasonable people could legitimately disagree about the extent to which markets self-regulate.  This crisis really is proof that they can't self-regulate and that booms and busts still do happen, and most importantly, that the collective costs of those booms and busts is really great.  And that is what gives government a right, and indeed a responsibility, to regulate in such a way that minimizes both the likelihood of those booms and busts, and more importantly, the collective costs of those booms and busts.  And I think the responsibility of government to do that absolutely outweighs both the growth penalty.  Because if you do have regulation that does inevitably cut down on innovation and that means that in your boom period, your boom is a little bit less vigorous.  And it also really means that government has a right to restrict the ability to grow of specific players and of specific firms.

Recorded on December 10, 2009