Four questions on the Financial System

Four answers on the financial system

(1) If the government prints money the result will simply be inflation and depreciation of the currency, not increased spending power. There may be some short- or even medium-term boost to the economy from cheaper money, but bear in mind that cheap borrowing is one of the reasons we got into this mess in the first place. Asia was saving, we were all borrowing and spending. We coudln't live beyond our means for ever - it had to stop some time.

(2) Money is a promise of future goods, services or work, or a sign that they have already been supplied. You cannot simply cretate it. The amazing thing is that we all manage to use it successfully without really understanding that. We treat those little bits of paper and metal as if they are valuable objects, yet their value derives only from a combination of convention and mutual understanding, admittedly enshrined in law.

(3) The amount of money in circulation needs to be appropriate for the amount of goods and services being exchanged. Too much and the money becomes less valauble (inflation); too little and it reduces the amount of exchange (recession). But even the world's best economists still don't know how best to strike this balance.

(4) We need a better understanding of how markets really work. Standard economics cannot explain why bubbles form, what can be done to prevent them, and why markets are so volatile. Economists (and, as is probably obvious, I am one) need dose of humility. Financial crises have been with us since the dawn of capitallism and we still don't know why they happen and how to avoid them. For me, behavioural economics is the most promising route to better understanding and, ultimately, better policy-making.

Behaviouralist