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Interest Rates, the Markets and the New Financial World by Henry Kaufman : (Times Books: $22.50; 205 pp.) : The Money Mandarins: THE MAKING OF A NEW SUPRANATIONAL ECONOMIC ORDERby Howard Wachtel (Pantheon: $18.95; 213 pp.)

August 17, 1986|Gardner Ackley | Ackley (now retired) was chairman, U.S. Council of Economic Advisers, and professor of economics, University of Michigan. and

These two rather slender books overlap considerably in subject matter. Both analyze how financial markets operate, with considerable attention to what is new and changing about these operations, and what these changes may imply for public policies, here and abroad. Although both books are intended for a general audience rather than for academic specialists, both could be somewhat hard going for the financial novice.

The author of the first, Dr. Henry Kaufman, is executive director and chief economist of Salomon Brothers. He is widely known and highly respected in both financial and academic circles. Prof. Howard Wachtel, author of the second, is of a younger generation, and he is surely better known in academia than in the world of finance.

Kaufman argues that current U.S. Government regulation of financial matters and markets needs to be strengthened. His principal proposal is to replace our current network of largely independent regulatory agencies with a single, new "Board of Overseers of Financial Institutions," which would rationalize and integrate public policies involving the complex network of domestic financial practices and transactions. Alongside of this, he would create an independent new federal agency to supervise and regulate international financial practices and institutions. (This latter proposal is very close to what Wachtel recommends; although neither gives much detail on his proposed alterations of regulatory authority.) Presumably, only the regulatory roles of the Federal Reserve would be transferred to Kaufman's new agency, while the "monetary policy" role would remain with the Fed.

A second major section of Kaufman's book deals with long-term changes in the level of interest rates, and in the pattern of rates by type and by term: matters on which Kaufman is a well-known expert. This section may be of more interest to economic theorists and market specialists than to the general reader.

Kaufman deals briefly with international as well as domestic monetary and financial affairs, although he centers attention on the domestic side. Wachtel, in contrast, centers almost his entire attention on international financial problems. Whereas businessman Kaufman can and does write like a professor, academician Wachtel here writes rather more like a political journalist.

The matters with which Wachtel is concerned are of enormous importance. They are also enormously complex. In his effort to explain them simply--and colorfully--to the nonprofessional reader, he may occasionally somewhat mislead the novice. Essentially, for example, he seems willing to let his lay reader continue to hold on to the simple concept that money has, or at least represents, some physical reality. Of course, a relatively small quantity of bills and coins is necessary for consumers and retailers to use in small transactions. But most domestic money--and essentially all international money--consists of obligations of banks to pay. These obligations are created and transferred when banks accept deposits and when banks lend. Both the deposit and the loan bring about a transfer of the ownership or control of some third party's (usually a banker's) promise to pay. (This promise is normally extinguished by the transfer to the lending bank of still another bank's promise to pay.)

We need to worry--both domestically and internationally--whether too many bank loans are being made to customers who will use their "money" unwisely or unsuccessfully. Most specifically, we need to be concerned whether the total volume of lending is consistent with an appropriate and feasible volume of total production.

The post-war explosion of banks' promises to pay across international borders--in part through establishment of U.S. banks' branches or subsidiaries abroad, and of foreign banks' branches or subsidiaries here--has created a corresponding explosion of international money. In turn, of course, this has helped to finance an explosion of production, employment and incomes around the world, in both rich and poor countries. But here and there and now and then, it has financed an amount of production that cannot be carried out because real productive resources are inadequate, or that cannot be sold because international demand is insufficient.

Government's "monetary policies" can affect the volume of both domestic and international demand. But monetary policy gets quite complicated when the domestic banks that will be affected have branches around the world, or when the banks operating domestically include many foreign banks.

It may be that Wachtel occasionally both oversimplifies and, at times, overcomplicates the essence of international money, in his sometimes breathless excitement about some very real problems, the complicated essence of which he may not make sufficiently clear to his lay readers. But many lay readers will find it very much worth the try.

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