I wonder if economists in the Federal Reserve system itself count? Members of the Richmond Federal Reserve bank Steelman and Weinberg, in the lead article of the 2008 Annual Report of the Federal Reserve bank of Richmond, make heavy reference to Higgs' regime uncertainty concept:
Through the [current] crisis, the Fed’s approach has evolved and changed in numerous directions, including the direction of credit to particular market segments and institutions. Beyond winding down its many new lending vehicles, the Fed will need to make it clear to all market participants which principles it will follow during future crises…. Public policies by all agencies must be well articulated and time consistent so that market actors can make rational plans regarding their financial and other business affairs. Arguably, such policy uncertainty did much to prolong the Great Depression in the United States (pp. 16-17) [footnote to Higgs (1997)].
Third, there is policy uncertainty. After the onset of the crisis, the Federal Reserve and the Treasury took several actions to help stabilize the financial sector. However, these actions appeared to evolve on a case-by-case basis. Some institutions received support, while others did not, making it more difficult for market participants to discern the governing principles and to make predictions about future policy moves. These institutions were already facing an uncertain economic environment, which contributed to relatively sparse lending opportunities. Coupled with an uncertain public policy environment, it is not surprising that many have been hesitant to lend and that many have had trouble raising private capital.
[T]here is also a strong case to be made that the function of market discipline can be improved by constraining some forms of government intervention, especially those that dampen incentives by protecting private creditors from losses (p.5)…. However, additional regulation of financial markets would likely hamper innovation in that industry. An alternative approach is to seek to reduce the scope of explicit safety net protection—as well as creditors’ expectations of implicit protection of firms deemed too big to fail (p.11).
More broadly, they criticize the Fed (their own employers):
The Fed could benefit from heeding the advice of two classical economists, Henry Thornton and Walter Bagehot, who considered how the Bank of England could act effectively as the lender of last resort. The Thornton-Bagehot framework stress six key points:
• Protecting the aggregate money stock, not individual institutions
• Letting insolvent institutions fail
• Accommodating only sound institutions
• Charging penalty rates
• Requiring good collateral
• Preannouncing these conditions well in advance of any crisis so that the market would know what to expect.Current Federal Reserve credit policy has deviated from most if not all of these principles.
The authors certainly do not buy Higgs' thesis hook, line and sinker, but that's not the point: the point is that it is part of the debate, and not just within masturbatory austrian circles, but in the much wider economics community.
HT: I lifted these quotes from The Beacon, which is a very interesting Blog by members of the Independent Institute (which includes Higgs, though he didn't write the post from which I am cribbing).
