Tag Archives: Monetary policy

Money And Credit: Paradigm Shift Is Overdue, Part I

By John M. Balder – All of us were taught in Economics 101 that central banks determine the money supply by using their high-powered (base) money and the multiplier. Both of these concepts should be tossed in the trash can. These notions are in error, as both the BOE and the Federal Reserve have recognized. In fact, central banks passively accommodate bank demand for reserves (as doing otherwise could prove disruptive to financial stability).

The influence central banks exert over money and credit creation is achieved via their control of short-term interest rates, and not via quantitative restrictions.

A quick aside here, I have always been curious as to why economists tend to focus so exclusively on the real economy, while choosing to ignore the financial system entirely. Similarly, my work in banking regulation in the early 1990s indicated that most regulators tended to ignore macroeconomic variables.

Is this a case of “where you stand on an issue is often a function of where you sit?” As one who participated in both endeavors, I have perpetually felt a need to connect macro with finance. This may be happening more today than it was 10 or 20 years ago, but it still has a long way to go. more>

Away from Oil: A New Approach

By Basil Oberholzer – Two main problems arise from the connections between monetary policy, financial markets and the oil market: the first is financial and economic instability caused by oil price volatility. The second is an environmental problem: a lower oil price inevitably means more oil consumption. This is a threat to the world climate.

Is there a joint answer to these problems? There is. While hitherto existing policy propositions like futures market regulation or a tax on fossil energy face some advantages and disadvantages, they are not able to deal with both the economic instability and the environmental problem at the same time. What is proposed here is a combination of monetary and fiscal policy. Let’s call it the oil price targeting system.

First, to achieve economic stability in the oil market, a stable oil price is needed. Second, to reduce oil consumption, the oil price should be increasing. So, let us imagine that the oil price moves on a stable and continuously rising path in order to fulfill both conditions. To implement this, the oil price has to be determined exogenously. Due to price exogeneity, speculative attacks cannot have any influence on the price and bubbles cannot emerge anymore. The oil price target can be realized by monetary policy by means of purchases and sales of oil futures. Since the central bank has unlimited power to exert demand in the market, it can basically move the oil price wherever it wants. more> https://goo.gl/eUh85j

Deficits In Trade And Deficits In Understanding

By Omar Al-Ubaydli – To see why the current trade deficit is benign, we need to understand the relationship between trade and the dollar’s value. Greenbacks are like any commodity in that the more people want to possess them, the higher their price. People acquire dollars primarily for two reasons: buying American goods and investing within the United States.

If the United States is importing more than it exports, then American consumers are exchanging dollars for foreign currencies to buy foreign goods more than foreigners are doing the reverse, meaning that foreigners are accumulating lots of dollars that they’re not using to buy American goods.

So why has America been recording a large, persistent trade deficit, and why isn’t the dollar devaluing? It’s due to the second major difference (from 1970s): The investment-based demand for foreign currencies—which we momentarily set aside—has ballooned. People no longer exchange currencies just to buy foreign goods.

Consequently, the dollar no longer corrects trade imbalances. more> https://goo.gl/L1VHHr

Michael Hudson Names the Pathogens in Our Economic Thinking

BOOK REVIEW

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

BOOK REVIEW

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

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