Tag Archives: Monetary policy

Michael Hudson Names the Pathogens in Our Economic Thinking


J is for Junk Economics, Author: Michael Hudson.

By Alexander Reed Kelly – “I know that’s [a] technical word but to create a way of looking at the economy of making national income statistics that make it appear as if Goldman Sachs is productive. As if Donald Trump is productive. To make it appear that people who take money from the rest of the economy without working, without really providing any service [are] actually contributing to [Gross National Product] and to economic growth.”

“Well under Thatcherism or Clintonism or whatever you want to call it, the idea is to turn the sidewalks over to the monopolists financed by Wall Street, to all of a sudden begin charging and the result is to make America a high cost economy. So, that when people like Donald Trump come in and say we’re going to make America great again, what he means is competitive again. But how can you make it competitive if you make Americans pay so much more in healthcare, as much in healthcare as an Asian would earn in an entire year. If you gave Americans all of their food and clothing and everything they buy and [sell] for nothing, they still couldn’t compete because of all of the costs that other countries pay for through the government; government healthcare, government spending, government roads.” more> https://goo.gl/oLat2t

Keynesian economics: is it time for the theory to rise from the dead?

By Larry Elliott – Imagine this. In late 1936, shortly after the publication of his classic General Theory, John Maynard Keynes is cryogenically frozen so he can return 80 years later.

Things were looking grim when Keynes went into cold storage. The Spanish civil war had just begun, Stalin’s purges were in full swing, and Hitler had flouted the Treaty of Versailles by militarizing the Rhineland. The recovery from the Great Depression was fragile.

The good news, Keynes hears, is that lessons were learned from the 1930s. Governments committed themselves to maintaining demand at a high enough level to secure full employment. They recycled the tax revenues that accrued from robust growth into higher spending on public infrastructure. They took steps to ensure that there was a narrowing of the gap between rich and poor.

The bad news was that the lessons were eventually forgotten. The period between FDR’s second win and Donald Trump’s arrival in the White House can be divided into two halves: the 40 years up until 1976 and the 40 years since.

Keynes discovers that governments deviate from his ideas. Instead of running budget surpluses in the good times and deficits in the bad times, they run deficits all the time. They fail to draw the proper distinction between day-to-day spending and investment. more> https://goo.gl/EyFn5m

Finance Is Not the Economy

By Dirk Bezemer and Michael Hudson – To explain the evolution and distribution of wealth and debt in today’s global economy, it is necessary to drop the traditional assumption that the banking system’s major role is to provide credit to finance tangible capital investment in new means of production.

Banks mainly finance the purchase and transfer of property and financial assets already in place.

This distinction between funding “real” versus “financial” capital and real estate implies a “functional differentiation of credit,” which was central to the work of Karl Marx, John Maynard Keynes, and Schumpeter. Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations.

When the financial bubble bursts, negative equity spreads as asset prices fall below the mortgages, bonds, and bank loans attached to the property. We are still in the unwinding of the biggest bust yet. This collapse is the inevitable final stage of the “Great Moderation.” more> https://goo.gl/GmDT72

The cult of the expert – and how it collapsed


The Man Who Knew: The Life and Times of Alan Greenspan, Author: Sebastian Mallaby.

By Sebastian Mallaby – Bernanke repeated his plan to commit $85bn of public money to the takeover of an insurance company.

“Do you have 85bn?” one sceptical lawmaker demanded.

“I have 800bn,” Bernanke replied evenly – a central bank could conjure as much money as it deemed necessary.

But did the Federal Reserve have the legal right to take this sort of action unilaterally, another lawmaker inquired?

Yes, Bernanke answered: as Fed chairman, he wielded the largest chequebook in the world – and the only counter-signatures required would come from other Fed experts, who were no more elected or accountable than he was.

Somehow America’s famous apparatus of democratic checks and balances did not apply to the monetary priesthood. Their authority derived from technocratic virtuosity.

The key to the power of the central bankers – and the envy of all the other experts – lay precisely in their ability to escape political interference.

Democratically elected leaders had given them a mission – to vanquish inflation – and then let them get on with it. To public-health experts, climate scientists and other members of the knowledge elite, this was the model of how things should be done. Experts had built Microsoft. Experts were sequencing the genome. Experts were laying fibre-optic cable beneath the great oceans. No senator would have his child’s surgery performed by an amateur.

So why would he not entrust experts with the economy?

How did Greenspan achieve this legendary status, creating the template for expert empowerment on which a generation of technocrats sought to build a new philosophy of anti-politics?

The question is not merely of historical interest. With experts now in retreat, in the United States, Britain and elsewhere, the story of their rise may hold lessons for the future. more> https://goo.gl/7rAAmg

Imagine Jailing the Central Bankers Who Saved the World

By Mark Gilbert – The U.K. may be on the verge of an unprecedented experiment in public accountability. The courts may soon be invited to consider the following question: Should government officials face prosecution if the actions they took to support the financial system during the credit crisis stink in hindsight?

At issue is whether officials nudged, steered or ordered — take your pick — financial firms to act in unison, ensuring that no single bank looked more desperate for assistance than its peers. In other words, were these transactions rigged?

Rather than faking an open auction for cash, the central bank could simply have allocated identical amounts to each institution, regardless of their size but ensuring that the amount of support was sufficient to bolster even the weakest institution, with the other recipients enjoying a harmless excess of funding. No secret deals, no under-the-table instructions, and no stigma. more> https://goo.gl/7GCCHL

Central Banking’s Manifest Destiny

By Mark Lundeen – Today, as it was last week, central banks still find themselves painted into a corner.

It’s a bad situation carried over from the 2007-09 mortgage debacle. Beginning nine years ago, the “policy makers” made the decision they would take any and all measures to save their precious banking systems. In 2007, after years of what Wall Street called “structured finance” they had no other choice if they were to “save the banks.”

To make a market for junk debt, such as sub-prime mortgages, these banks would slice and dice income streams from interest and principle payments from junk grade with AAA rated mortgages, which were then bundled into fraudulent creations with a specious derivative to “hedge credit risks.” With the full cooperation of the US Congress, they re-engineered the entire US mortgage market, and then marketed this garbage to the world as AAA rated debt.

As we all know now, it didn’t take long before this to develop into the greatest financial crisis since the depressing 1930s. The “financial engineers” responsible for this criminal enterprise weren’t prosecuted by the Obama Justice Department.

Washington couldn’t “save the banks” doing that! Instead the big banks were bailed out by the Federal Reserve and US Treasury Department. This criminal scam was on an international scale, so the response to the situation was also international; flood the global financial system with “liquidity” as they lowered interest rates and bond yields worldwide. more> https://goo.gl/TbqgkL

It’s time to junk the flawed economic models that make the world a dangerous place

By Paul Mason – The Kingston University economist Steve Keen has long argued that reliance on flawed models contributed to the scale of the 2008 crash – by encouraging decision-makers to underestimate risks, economic theory has the power to make the world more dangerous.

And the stakes are big, too. One of the theories that, even now, eight years after the crash, continues to disorient policymakers is the assumption that actions by central banks are irrelevant. A total of $12tn (£9.1tn) has been printed by central banks to stave off global depression, yet the threat remains real. Stagnation is a threat that keeps central bankers, governments and social theorists awake at night – with the palliative always being looser monetary policy.

Yet orthodox economic theory insists it would have no real effect if the central banks pulled all this support – since the equations tell them there is no correlation between monetary policy and output. Mark Carney or Mario Draghi could double interest rates and slash quantitative easing and the economy should grow at just the same rate, says the theory.

Paul Romer, scathingly, calls this “post-real” economics, and suggests a horribly simple explanation for its popularity: human frailty. Comparing the economics elite with its equivalent in theoretical physics, Romer notes the same problems: over-confidence, “an unusually monolithic community,” near-religious group loyalties, a tendency to disregard results that don’t match the theory – and too little consideration of the risks of being wrong. more> https://goo.gl/7ulp9X


Economists Give Up on Milton Friedman’s Biggest Idea

By Noah Smith – One of the core pieces of modern macroeconomic theory, handed down to us by the great Milton Friedman [2, 3, 4, 5] probably missed the mark. And now it might be on the way out. And this shift has big implications for how we think about economic policy and finance.

The idea is called the permanent income hypothesis (PIH).

Friedman first put it on paper in 1957, and it still holds enormous sway in the econ profession. The PIH says that people’s consumption doesn’t depend on how much they earn today, but on how much they expect to earn over their lifetime. If a one-time windfall of money drops into your lap, says Friedman’s theory, you won’t rush out and spend it all — you’ll stick it in the bank, because you know the episode won’t be repeated.

But if you get a raise, you might start spending more every month, because the raise was a signal that your earning power has increased for the long term.

PIH is so dominant that almost all modern macroeconomic theories are based on it.

So it’s not much of an exaggeration to say that Friedman’s PIH is the cornerstone of modern macroeconomic theory. Unfortunately, there’s just one small problem — it’s almost certainly wrong.

Not completely wrong, mind you, just somewhat wrong. more> http://goo.gl/03oQ59

Thank the Financial Crisis for Today’s Partisan Politics


The Age of Austerity, Author: Thomas Byrne Edsall.
Manias, Panics, and Crashes: A History of Financial Crises, Author: Charles P. Kindleberger.
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, Authors: Atif Mian and Amir Sufi.

By Amir Sufi – While political polarization has been all-American since the start of the US, its current upswing threatens to make it the worst in history. Sharp divisions between Republicans and Democrats have created gridlock in Washington, DC, between the president and Congress and within Congress itself.

In the US, decisions made during the 2007–10 financial crisis to rescue Wall Street fueled public anger that still resonates with voters of both parties.

The aftermath of the crisis—which included erasure of trillions of dollars of housing wealth and continued income stagnation for the working and middle classes while the wealthy benefited from rising asset prices—has provided fertile ground for even more partisanship and polarization.

Financial crises tend to radicalize electorates.

After a banking, currency, or debt crisis, our data indicate, the share of centrists or moderates in a country went down, while the share of left- or right-wing radicals went up in most cases.

Every banking crisis is associated with excessive lending. As the bubble develops, borrowers who are less and less creditworthy take on more and more debt.

Big mortgage lenders, including Wachovia, Washington Mutual, and Countrywide Financial, were bought by other large banks whose liquidity was essentially guaranteed by the US Treasury or the Federal Reserve. Even two big investment banks, Goldman Sachs and Morgan Stanley, were quickly converted into commercial banks so they could be “rescued” by the Treasury and the Fed.

Distressed homeowners got little relief from TARP [2] or from subsequent legislation and settlements with big banks. more> http://goo.gl/ZTFJ2u

The World Economy Looks a Bit Like It’s the 1930s

By Enda Curran – Just like in the 1930s, growth is being constrained by companies unwilling to spend, falling inflation expectations and governments backing away from fiscal stimulus.

The trigger for the current malaise was the financial crisis that left a hangover of debt and deleveraging amid tighter banking regulations that are exacerbating deflationary pressures.

It’s similar to the kind of shock that preceded the 1930s slump, according to an analysis by Morgan Stanley economists led by Hong Kong-based Chetan Ahya.

Like then, the end result could be a prolonged weak period and subdued inflation expectations, with a risk that those price expectations are un-anchored. The danger is that central banks move too quickly to raise interest rates or governments cut back on spending, triggering an even deeper slowdown. more> http://goo.gl/Btakjd