This blog was early to draw a comparison between the US financial crisis and emerging markets crises. As we wrote in March 2008:
Although the Journal does not draw this comparison, the US is in very much the same boat as Thailand and Indonesia in 1997, during the emerging markets crisis. And although the US arguably has a more diverse economy, the main things that differentiate us from them is the dollar’s reserve currency status (which means if we implode we do a great deal of collateral damage) and our nukes. We also like to think that because the US has been the biggest buyer of global exports, we are effectively too big for our cash rich trading partners to allow us to fail. Even if they accept that proposition (not clear, BTW), it’s not obvious in practical terms how they might act on it.
The “banana republic with nukes” meme has since gone mainstream.
Willem Buiter, who has some expertise in dodgy debtor nations, has a typically insightful post today, “Fiscal expansions in submerging markets; the case of the USA and the UK.“
Despite the dry title, what is noteworthy is that Buiter discusses in some detail how corruption, both in the government and society, limits policy choices. Put simply, diseased leadership has trouble pulling a country out of a debt crisis because no one trusts that they will do the right thing (and frankly, why should they?).
Buiter makes a compelling case that lack of credibility has real costs, and uses it to bolster his argument that the US and UK should not go on the kind of whole hog spending spree that most orthodox ecconomists are demanding right now. He thinks a currency collapse, a scenario that most would dismiss as impossible for the dollar, is in fact probable at higher deficit levels in part because creditors and investors know the US and UK lack the discipline to trim the sails soon enough.
While Buiter does not frame it this way, in effect he is saying that the downside of doing too little (deep recession and/or very sluggish growth) is preferable to doing too much (high inflation and the risk of collapses in major currencies.
But the most important aspect of the post is not the policy implications, but the fact that a Serious Economist has finally said that the lack of scruples in America and Britain has gone beyond the tipping point, and is going to exact high societal costs. The parasites are eating the host. I hope someone out there is taking notice.
From Buiter:
Increasingly, I find it helpful to analyse the crises afflicting the US and the UK as emerging market crises – perhaps they could be called submerging markets crises.
During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable. Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical. Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles. Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers.
There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.
As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time – what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies.
This morality tale has important consequences for a government’s ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms. If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetise the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations. Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary. This would raise long-term nominal interest rates and probably give risk to inflation risk premia on public and private debt instruments as well. Default would build default risk premia into sovereign interest rates, and act as a break on demand.
Beacause I believe that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts commensurate with the up-front tax cuts and spending increases they are contemplating, I believe that neither the US nor the UK should engage in any significant discretionary cyclical fiscal stimulus, whether through higher public spending (consumption or investment) or through tax cuts or increased transfer payments….
It is true that, despite the increase in longer-term Treasury yields from the extreme lows of early December 2008, recent observations on government bond yields don’t indicate any major US Treasury debt aversion…But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics – I expect that US sovereign bond yields will begin to reflect expeted inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia.
The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely. While it is hard to be scientifically precise about this, I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system (and to a growing list of other more or less deserving domestic industries and other good causes) will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old. The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.
Under conditions of high international capital mobility, non-monetised fiscal expansion strengthens the currency if the government has fiscal-financial credibility, that is, if the markets believe the expansion will in due cause be reversed and will not undermine the sustainability of the government’s fiscal-financial-monetary programme. If the deficits are monetised, the effect on the currency is ambiguous in the short run (it is more likely to weaken the currency if markets are forward-looking), but negative in the medium and long term. If the increased deficits undermine the credibility of the sustainability of the fiscal programme, then the effect on the currency could be be negative immediately.
The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.
So just don’t do it. Focus fiscal resources on getting the credit mechanism and other key parts of the financial intermediation process going again. Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment – that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments. The Obama administration is new and has had but limited opportunity to abuse the trust placed in its promises and commitments. That puts it in a better position that the UK government, which has been in office since May 1997. But many of the top players in Obama’s economic team are strongly identified with the failed policies, regulations and laws that brought us the disaster we are facing. So the amount of credibility capital is severely limited even for Obama. Use it to get credit flowing again. Tax cuts for friends and favoured constituencies, replacing clapped-out infrastructure and even the fight against global warming will have to wait until trust – public credit – is restored.
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Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.
This tickles one of my very sorest spots. I’m flabbergasted that at some point the Fed and Treasury — not to mention the Bush administration — began to believe they could fabricate reality by projecting expectations that we, credulous unwashed masses, could consume like soma and behave as they desired. Gambling on the credulity and foolishness of your citizens is not wise policy.
Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary.
I’m still highly uncertain about this. I don’t know if it’s bound to be inflationary or not. Credit creation is much more strongly affected by profitable lending prospects than by central bank control. I view both the world Buiter describes and its converse where the Fed suffers severe losses on its monetization efforts as realistic potential outcomes.
Default would build default risk premia into sovereign interest rates, and act as a break on demand.
I have long felt these premia are already present, and if so, they will raise real interest rates for virtually everyone, acting as a natural brake on lending, investment, inflation, economic activity, and so forth.
Instead, the US and UK fiscal authorities should aggressively use their fiscal resources to support quantitative easing and credit easing by the Fed and by the Bank of England…
This has been more effective in calming the credit market waters than I anticipated, so I think I side with Buiter here, again to the extent that a systemic liquidation event is not desirable.
The rest of the scarce, credibility-constrained fiscal resources of the US and the UK should be focused on recapitalising the banking system with a view to supporting new lending by these banks, rather than on underwriting existing assets or existing creditors.
How can this possibly be accomplished without a systemic liquidation event? Private investors will seek the greatest return on capital they can find. If distressed existing debt offers a more favorable risk reward profile than does extending new credit, guess where private capital will be allocated?
… either through an increase in nominal or real longer-term risk-free rates or through increases in default risk premia…
I view these measures, along with a lot of other credit market data, as hopelessly contaminated by government intervention at this point. I’ve stopped relying on them as indicators.
The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.
I would not at all be surprised to see the GBP blow. The USD is tethered to China, and until that link breaks, it will take seriously reckless behavior to depreciate the USD.
Under conditions of high international capital mobility, non-monetised fiscal expansion strengthens the currency if the government has fiscal-financial credibility, that is, if the markets believe the expansion will in due cause be reversed and will not undermine the sustainability of the government’s fiscal-financial-monetary programme.
The key indicator of capital flight, if markets to be trusted, would be a simultaneous depreciation in the dollar and rise in U.S. real interest rates. If they move the other way in tandem, it’s safe-haven seeking; if we see depreciation and rate falls, or appreciation and rate rises, it’s expected behavior. We’ve seen a little bit of capital flight from the USD in recent days, but nothing spectacular yet.
This is tremendously good thought and fertile ground, and I’m thankful every day for Buiter’s open and creative mind. Go man, go.
A couple footnotes, as though I hadn’t spammed poor Yves’ blog enough — apologies for my passion…
The USD is tethered to China, and until that link breaks, it will take seriously reckless behavior to depreciate the USD.
China could also deliberately devalue the USD relative to the EUR and commodities through portfolio allocation decisions, even without depegging the CNY, though with high probability of future losses. I think that’s China’s real nuclear option. With Geithner and Obama actively antagonizing China, we might well see it. In keeping with real nuclear weapons, it would cause not a blissful, abrupt passing, but gradual, painful decline.
Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment – that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments.
There is still absolutely no empirical evidence that Keynesian fiscal policy — much less quantitative easing — works, and a significant deal of evidence to the contrary.
Tax cuts for friends and favoured constituencies, replacing clapped-out infrastructure and even the fight against global warming will have to wait until trust – public credit – is restored.
I’m absolutely not opposed to dramatic increases in spending on things I consider very good causes, like renewable energy, health care, and education. I’m vehemently opposed to doing so under false banners of fiscal stimulus and during economic crisis. This is an excellent way to further shatter public trust.
With the high likelihood tax cuts will be used to pay down debt, they become part of the problem too.
Finally, I remain highly dubious that these gymanstics are preferable to the liquidation event I mentioned earlier. I’m a Mellonite, because I retain deep faith in the productive capacity and ingenuity of my beloved USA and her citizens once the burdens of excessive valuation and debt loads are removed, and excessive claims against the production of her people — phenomenal holdings of equity and credit — are reduced.
Thank you, Yves, and to you ndk, for all your insightful comments. Indeed, I hope someone is listening to Mr. Buiter.
“Put simply, diseased leadership has trouble pulling a country out of a debt crisis because no one trusts that they will do the right thing (and frankly, why should they?).”A-f**ken-men. They won’t and I don’t.
Yves: “I hope someone out there is taking notice.” The historians, but they alone. The American public is torn between the Stupor Bowl and American Idol.
I’ve said it before, but to reiterate I strongly agree with Buiter on all of this, and have held that general perspective since _before_ July 07. Massive debt issuance n our present context is likely to generate a materially worse outcome _than doing nothing_. It might be possible to do a one-off, high-effect-yield stimulus still, no one really knows where the event horizon is to inescapable monetization/default: we’ll only know for sure once we are on the other side, that’s the problem.
The desirability of a stimulus is generally a real one; the efficacy of a stimulus is debatable; the practicability of a big stimulus is not evident; the wisdom of a massive stimulus is zero.
“Despite the dry title, what is noteworthy is that Buiter discusses in some detail how corruption, both in the government and society, limits policy choices. Put simply, diseased leadership has trouble pulling a country out of a debt crisis because no one trusts that they will do the right thing (and frankly, why should they?).”
Corruption does not go away in a crisis. In fact, there seems to be massive evidence, totally unexplored by economists and analysts, that the Corruption accelerates. Pretty simple: if the roof is going to fall in, I’m goin’ to get mine while I can and get out. (Does Halliburton moving to Dubai ring a bell? Or Bush’s huge deficits which are even now to accelerate?)
Congrats to you and Buiter for looking at this, it is critical to understand the future.
Well I read Buiter myself, and take his analysis seriously.
However, I agree with Setser and Krugman that a modest degree of stimulus is worth the risk. Note that Buiter stated his opposition to stimulus was predicated on the belief that the government would not offset stimulus spending with tax raises or other cuts…therefore we can speculate he would be fine with a future stimulus bill that was coordinated with other budget cuts (essentially a rationalization, based on which spending had a higher set of multiplier effects) and a rollback of the Bush tax cuts in the top brackets.
Besides, don’t we all assume that a dollar decline in the mid-term is already baked in the cake?
The real question is whether it will be a managed decline, or a precipitous one. And I would think that a managed decline would be much easier to pull off if we were simply in a sluggish economy or slight recession, rather than a depression caused in part by the lack of stimulus…
Which American blogger is most Buiter-like?
Could it be Yves? (and Lune)
“Buiter makes a compelling case that lack of credibility has real costs”
My understanding is that the word “economy” derives from a Greek word meaning scarcity. But at the most profound level, our society as a whole believes we can consume more than we produce. We should have low taxes and endless benefits – and government should assure this. If we have lousy politicians, it is because we have lousy citizens.
Here is the Congressional Budget Office, the non-partisan official budget watchdog, with its latestr comment:
It has issued a scorecard on the long-term impacts of President Barack Obama’s and Congressional Democrats’ proposed economic stimulus plan, and the numbers are not good. The report took a look at the impact the plan would have on the economy over the next ten years, and found that the stimulus bill would actually lower the nation’s total economic output more than if the Administration did nothing….
So Joe Public”s instincts are right and he did not need a PhD to get it.
When Buiter argues that Both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, he misses something. Against what do we validate, against government statistics, does anyone trust those? This is part of the problem in that those entities which should monitor the performance of government are often open to political persuasion. Politicians tend not to be focuses on long term development, but on re election.
Lets just pick up on something else buiter says, namely Corporate governance became increasingly subservient to the interests of the CEOs and the other top managers. Whether or not this is true and I think most top managers became slaves to making profit rather than building a business, the average person believes this to be true.
Believing that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts is the crucial point. It is not whether it is true that counts but whether the general population believes it is true. There is no history of US or UK politicians raising taxes unless they have been forced to and so the populace is already planning for inflation. It is this planning for inflation by saving, by cutting purchases which is negating any affect of the bailouts. The more the government spends the less the consumer will spend because he knows at some point a big bill will come due.
For the UK then there will most likely be a change of government within a year which may be much closer in the political economic spectrum to Germany with the spending significantly curtailed. For the US there is a good chance of a double recession, as the rest of the world pulls out of the downturn they are likely to change their attitude to US debt. It will be whether the average guy has faith in the government that will ultimately decide the US’s fate.
Ralph Waldo Emerson penned a very keen insight from his "Wealth" essay; published in 1860 within the little book titled "The Conduct of Life".
“But the current dollar, silver or paper, is itself the detector of the right and wrong where it circulates. Is it not instantly enhanced by the increase of equity? If a trader refuses to sell his vote, or adhere to setts; and every acre in the State is more worth in the hour of his action. If you take out of State-Street the ten honest merchants, and put in ten roguish persons, controlling the same amount of capital, – the rates of insurance will indicate it; the soundness of the banks will show it; the highways will be less secure; the schools will feel it; the children will bring home their little dose of the poison: the judge will sit less firmly on the bench, and his decisions will be less upright; he has lost so much support and constraint – which all need; and the pulpit will betray it, in a laxer rule of life….The value of a dollar is social, as it is created by society.”
Again the dollar represents our society.
This dollar decline (corruption) as measured against the Euro began very early in the Bush administration. The dollar was signaling to the American people the "corruption" being perpetrated by George W. Bush's Admin. In a free market truth is always highly valued (so for capitalism).
I have said in the past that American wealth was transferred from the dollar to gold and Euros (among other asset classes). This is why the dollar declined. So the Euro's power during Bush's tenure was in truth-telling sense defending our wealth (virtue).
Let me show you what brutal business acumen (brains & balls) can do with this new found economic power in Europe:
In July of 2008 Enbev makes their move on Anhuauser-Bush. The Belgiums use the "cresting" of the American wealth in Euro's to purchase an American asset! There timing is very prescient. Again truth-telling, any European worth his or her salt knows what the free market is doing. In fact this should strengthen the understanding of it. So the next time you take a drink of a Budweiser (my favorite "suds") understand this is a Belgium firm that went from 13% of total global consumption of beer to 25%!!! [One note to the Belgiums; you want more sales here in the States of your home brew use less hops, your product is to "skunky" for American tastes].
The Euro is king due to the American societies corruption level. The Euro is safeguarding our virtue. I want our virtue back. F*ck the Dutch!! Of I also feel the deal is fair. We should not have legal right to break-up the two firms.
Mr Wullie Boots (as I think of him) is spot on. The Clinton/W years, the Blair-Brown years, have seen the rise of the Supercrooks. In Britain we need another Maggie, tho’ where she’s to be found, GOK. Whether President Pyjama will prove to be a third-dud-in-a-row, or a Maggie in drag, time will reveal.
If the above scenary will hapen in the next year,then China and asia GDP will fall by 25%,the GDP of the US will fall by 5%,but within 3 year the US will be OK,but China will be in the chaos and riots and a 40% jobles rate.
So,if the xchg rate will fall,then the US economy wil be better.But of course all of the exporting economy will fall in Asia.
Two articles in the FT today are wotrth linking. The first is a run of th mill article out of Japan and their desire to print like mad. Add Japan to the fiscal insanity.
“The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects.
The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.
“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, a upper house Diet member who will chair the new group.”
http://www.ft.com/cms/s/0/da08606c-f3f0-11dd-9c4b-0000779fd2ac.html
then we get the bvery nice debunking of the invocation of Keynes to follow:
http://www.ft.com/cms/s/0/a861325c-f394-11dd-9c4b-0000779fd2ac.html
Call me in agreement with NDK that devaluation of the dollar will be virtually impossible to execute barring a last stand and the geopolitical implications that come along with it. As for “nukes” with pakistan releasing Khan today and proliferation proceeding, don;t know that it represents much of an advantage anymore.
High Anglican moralizing bombast. If you’d want to signal “seriousness” to international debt holders vis-a-vis the U.S.$, institute a networth surtax on millionaire households for as long as needed to help to pay for stimulus/recap.
For the rest there is much panicked economic nihilism expressed on this thread, due to an ideological meltdown of “free market” ideology, ahead of the real meltdown.
The US chose to turn itself into a global empire.
There is no durable solution for any of this within the imperial frame.
Empire, ambition, world rule is the disease.
The choice is between attempting to maintain world rule through a broken system which the ruled (world-wide) barely tolerate anymore, or going back to a modern version of FDR’s Four Freedoms.
The British happily survived doing what they do in their special relationship to US money and power. There isn’t anyone out there for the US to affix itself to in quite the same way with the same hope of for continued, if derivative, existence at someone else’s expense.
There are foreseeable consequences to this, and the kind of ptentials which will play out.
But the basic one is there is no such thing as a healthy disease. This disease has been studied for millenia. No powr which has been infected with the virus has been able to cure itself. The quest for empire and world rule is habit forming, and thus addictive, among those with a taste for it. Thus the virus becomes self-propagating, as it has since 1963. Cold turkey is not often considered an option. But it is the only one that will work. If there is a doctor in the house.
Part of my problem, with both the bulls and the bears, is none of us really have any clue what’s going to happen. We can observe what is going on and we can make some analogies to what happened in the past, but this level of decline has never happened in the modern world we live in today of free market (and hence interconnected) capitalism, post-communism society.
All we can do is just protect ourselves and watch what’s going on around us. I’m nervous about the stimulus like Buiter is, but if Buiter reads this blog, let’s be honest, no one cares what you or I think about the stimulus: it’s going to happen regardless. Just protect yourself and hope for the best, while eating popcorn watching on TV.
After reading some of Buiter’s earlier posts wondering why US investment returns were higher overseas than overseas investments in the US, I think he avoids obvious explanations. Say I am investing in a furniture factory – will building that factory in China or in America yield a higher return? Up until 2008, that factory would have yielded much more profit in China. Now the demand for consumer goods is plummeting, leading to terrible returns on US investments overseas. Many products have labor as a significant to higher percenage of final sale than cost of fixed capital. The idea that the fixed capital would yield higher returns where labor costs are lower is simple.
Re the US and the rule of law, I link to Karl Denninger’s tirade from yesterday:
http://market-ticker.denninger.net/archives/773-So-Now-We-Learn…..html
Denninger goes off the deep end at times for my taste but he also cuts through the clutter someimtes and effectively highlightes the backroom Fed maneuvers that forced Bank of America’s hand.
@john c. halasz
I concur that much about this has roots in theological imprinting on a sliding scale. The real war is not economics, but ideology, its just regional tribal conflict from with in the country. America is split in so many ways with little left to come together on besides poster child enemy’s. The true radicals dress well and are elevated in society and their war will bring us all down. I have always been amazed at the dog and pony show, put on my elected officials in regards to religion and their ability to govern truthfully and with ethics when most have shown this to be a false prerequisite.
Buy design or synergy the internal struggle for absolute power rages on since one man talked with a burning bush some many thousands of years ago, this is the real enders game. Religion as we know it is diminished every day with new found irrefutable knowledge and that will not be allowed at any cost.
skippy
Ah the reality that we in U.S.A fear to even think–that deespite the formal chat of the Ivy trained economists and lawyers there is gold old fashioned corruption and incompetence afoot. We hate to admit it but it is true–Washingtonian here. Oh yes its all the Republicans but if we get Dems in there it will be o.k. Nope kidies, its systemic, don;t be distracted by rhetoric look at the facts. We have become a bananna republic-
High Anglican moralizing bombast…panicked economic nihilism
Smiled at these labels, and I think there’s some truth in them.
I found WB’s post less than the sum of its parts. Yes, the moralizing was appealing: the diagnosis of systemic corruption rings true for anyone now watching the looting of the Treasury, or heck, even anyone who has worked in corporate environments over the past twenty years. The most profitable strategy today is to lie, even when the person you lie to knows you are lying, and even knows you know they know you are lying.
But there are worse things than inflationary expectations in a deflationary environment. We’re heading down PDQ, and it’s not always helpful to tell a heart attack victim not to start exercising because they probably won’t stick with the program anyway.
Why does “Get credit flowing again” make any sense when credit being too easy is what started this mess? I agree that perhaps intelligent steps could be taken to protect, for example, businesses hurt by sudden difficulties in borrowing that were not at all expected in their planning nor justified by their profitability. But there is a difference between protecting others from flying shards of his egg shell and trying to put Humpty-Dumpty back together again; a difference that big banks and their politicians will encourage people to overlook in general conflation. Why should those who support “getting credit flowing again” think this will not encourage determined foolhardy attempts to return ridiculously easy credit to what it was? Isn’t future profligacy in banks just as much a danger as future excess government deficits? Personally, I think economists should mostly do what is reasonable assuming people will listen to them in the future just as much as they will today. Political guessing games are not needed now.
There is no choice but to add to the economy an amount of money larger than what ultimately is needed. Once the economy gets humming again, people will start spending more, which will cause whatever amount of money was added to the economy when its wasn’t humming to be at that point too much. No problem, after the economy gets on track, the Fed will just need to raise interest rates, selling the bonds that the Fed should come to be holding as Treasury will have printed them to finance all the stimulus. Another (even better, imo) option is to in the future (after the economy starts to rebound) clamp further down on bank lending; the monetization ideally should be permanent, merely a replacement of impoverishing debt money with (relatively speaking) real money. And postponing necessary extreme bank discipline slightly can not only lead to a soft landing, it also can obviate the suddenness of the ideal order-of-magnitude decreases in lending availability (reducing harm from flying eggshell). If foreigners will want to sell our government’s debt if we start printing money, fine, just get an idea (by, say, asking) how much it will make them want to sell, so we will know to print less money (the foreigners by selling debt will in some sense create money).
I see the stimulus package as a step in the right direction, whereas TARP is akin to the spawn of Satan, that basically is doing nothing but taking money from taxpayers and giving it to the bondholders of the greediest most foolhardy financial corporations.
It’s a breath of fresh air to see at least one economist finally wake up to the realization that morality does indeed matter. As Amatai Etzioni wrote in The Moral Dimension: Toward a New Economics: “The neoclassical pardigm does not merely ignore the moral dimension but actively opposes its inclusion.”
“[T]he fact is that neoclassicists have labored long and hard to show that practically all behavior is driven by pleasure and self-interest,” he continues.
But even though Buiter may have began to throw off his ideological shackles and is starting to see the world in multi-color, and not black and white as the regnant economic paradigm requires, his insights are nevertheless still quite blinkered.
For, as Etzioni goes on to point out, “neoclassicists tend to study the market, or even the economy, as if it was worlds apart from the polity, culture, and society…”
And that is exactly what Buiter does. As Etzioni goes on to explain:
[T]he variables ignored will come to haunt the actors, as is the case when the psychic implications, or the social, cultural, and political prerequisites of economic policy are ignored. This happens, for example, when without regard to the stability of a government, austerity programs based on monetarist theories are introduced into developing countries in order to curb inflation causing governments to be overthrown and the policy to be thrown out together with the policy makers (Diaz-Alejandro 1981; Nelson unpub.).
If one takes the time to wade through the stimulus package, regardless of what banner it is being floated under, it is clear it has a lot more to do with alleviating the suffering of the poor, unemployed and dispossesed than it does with getting the economy moving again. But what is the political alternative?
Also, I question Buiter’s sense of equity, justice and proportion. We have, after all, already lavished more than $8 trillion on the finance industry, and are apparently prepared to double, triple or quadruple that downpayment, whatever’s required to save the assorted lot of theives and incompetents from their greedy selves. (I know, only approx. $2 trillion of that is actually spent, the other $6 trillion being in guarantees. But I am convinced that, by the time this is all over with, 80% or 90% of what is now in the “guaranteed” column will somehow manage to make its way over to the “spent” column.)
So let me get this straight. We have already spent $8 trillion to bail out the finance industry, and are prepared to spend much more. But we can’t spend $1 trillion to help the millions who are suffering?
So there is something very, very wrong with Buiter’s policy recommendations, not only from a practical, pragmatic point of view, but from a moral perspective as well.
I don’t know about the UK but the US definitely is.
The closest historical parallel I can see with our current situation is pre-revolutionary France, 1788. Massive borrowing to finance two wars, in France’s case the 7 Years’ War and the American Revolution, led to fiscal collapse. A disfunctional government chronically allergic to raising taxes then proceeds to wreck the country.
I hope the aftermath is more peaceful here and now…
Let us not forget, like all banana republics, we also need a ruthless dictator. Sadly, Bush failed miserably at that task, proving incapable of setting up a properly ran Gestapo state to last 1000 years. Now, our dreams and hopes rest solely on the mighty shoulders of the Great Obama. Let us all hope he, the Great Obama, has what it takes to fill the shoes of the Great Stalin. Only then will our banana crops exceed all central government planning projections, only then will we sing socialist praises in unison, only then will our children blossom in the Proletarian Paradise to follow. This poem says it all:
O thou Great and Wise Father Obama,
Teach us thine wonderful, glorious ways,
And show us how to plant a proper banana,
And shine upon us thine splendor of days.
Vinny Goldgerg, Me.E., B.Wz.K.S.
(Maverick Economisto Extraordinaire and Biz Wiz Kid Supremo)
I prefer “banana republics with benefits”
“Let us not forget, like all banana republics, we also need a ruthless dictator. Sadly, Bush failed miserably at that task, proving incapable of setting up a properly ran Gestapo”
At least the dictatorships of Napolean, Hitler, Stalin, etc. were out in the open. George W. Bush was not the dictator his father was. I guess this is the American version: covert instead of overt. To me covert is of the most cowardice.
Shed some “light” and poof the banana republic is vaporized. As a nation our character does not tolerate such tyrant behavior.
Poet III (corrupted)
To think of the end first
Is to dwell within the inversion
For still the craft of corruption is
To attempt to make real the illusion.
Sounds like, as usual, Buiter is talking China’s book. He’s for a strong dollar.
He wants all the bailouts to go to the financial system, whatever it takes to “get credit flowing again” and allow the consumer to go deeper into debt. While wanting no spending that employs middle class people, replaces “clapped-out infrastructure” or does anything else to help the common man. In other writing he has also shown his utter lack of concern for anything populist.
He wants us to go deeper into debt to bail out the banks. It’s a bad idea. It’s just wrong.
Yves you called him left-wing. I guess there’s a wide range of opinion on the left, but I wouldn’t place an anti-populist like Buiter there.
PS Step314’s comments above are great.
A fall in the dollar will cause some short-term grief to anyone who is depending on a strong dollar, but I fail to see any long-term problems. The United States and Britain have been running trade deficits for a long time–ergo, both the dollar and the pound should have started gradually dropping against the net surplus currencies long ago. This has nothing to do with morality or loss of faith or emerging markets crises–it is simply a consequence of the fact that the people of the United States and Britain, in aggregate, have less of a tendency to postpone gratification than the people of the net surplus countries. Obviously, the government is somewhat responsible for these differences in willingness to postpone gratification, but then these differences in willingness to postpone gratification are also somewhat responsble for government policies. Japanese culture is different from Anglo-Saxon culture, but this difference doesn’t imply that one is morally superior to the other.
Once the crisis is over, the future of the United States at least will be one of high real rates of interest and very slow growth. This is because the public is ideologically committed to low taxes and the Fed is ideologically committed to low rates of inflation, and Congress is incapable of reining in spending–high real rates of interest is the only way to reconcile these 3 factors. Ideology is powerful stuff. In Keynes words: “the power of entrenched ideas is commonly underestimated compared to the power of vested interests.” (Incidentaly, the Fed is in the process of formulating a new ideology, to the effect that bubbles must be prevented, rather than merely cleaning up the consequences, so the recent stock/housing bubbles are the last we will see for perhaps 50 years to come. This new ideology will become part of the Fed’s lexicon in about 5 years.)
The anti-tax ideology of the public will only fade after a decade or so of high real rates of interest, moderate inflation and very slow growth. In the meantime, stocks, housing, bonds (including TIPS), gold and other commodities will all be crushed in value due to the high interest rates.
I go with Setser’s critique of Buiter in this case. From Setser’s blog:
bsetser responds:
The arguments against Buiter:
a) The fiscal deficit is helping the US transition from a no private savings economy to a high private savings economy. if that is right, it won’t be linked to a large rise in external borrowing/ a major current account deficit but rather a fall in the current account deficit. the risk of a dollar crisis was always tied (in my view) to the trade deficit not the fiscal deficit and the trade deficit is coming down. i would worry more if that were to change going forward, i.e. if the us stimulus emerged as the global locomotive rather than as a cushion for a transition from a 0% to 10% household savings rate.
b) a 40% public debt to GDP ratio isn’t that high for a major industrial country; there is scope for it to rise. The pace of the rise this time may be impressive, but if the debt to GDP ratio levels off and then comes back down, that seems doable to me. and i have more confidence than Buiter does in the ability of the us government to avoid large sustained fiscal deficits. The balance sheets that are in terrible shape in the US are found in the private sector not the public sector.
c) right now the problem with the dollar is its strength not weakness. and treasury yields while they have come up remain low — far lower than before the US started borrowing huge sums. buiter forecasts a big swing in the future — but for now there isn’t strong evidence of a large fall in demand for dollar denominated debt.
i.e. i see more evidence of a shortfall in demand for goods than bonds, so think that there is a case for the government issuing more bonds to help private actors in the economy buy more goods (or more accurately, keep private actors from cutting back on their goods purchases by as much as they otherwise would … )
The U.S. is not a banana republic. Most of our production is real, our resources vast. We still make, design, and grow a lot of stuff.
What is more accurate is that the U.S cannot support the dollar as a sole world reserve currency , without intervention from export-oriented countries.
“A fall in the dollar will cause some short-term grief to anyone who is depending on a strong dollar, but I fail to see any long-term problems. The United States and Britain have been running trade deficits for a long time–ergo, both the dollar and the pound should have started gradually dropping against the net surplus currencies long ago. This has nothing to do with morality or loss of faith or emerging markets crises–it is simply a consequence of the fact that the people of the United States and Britain, in aggregate, have less of a tendency to postpone gratification than the people of the net surplus countries”
Freed – crap analysis. Crap.
If all the corruption did not take place the dollar would be stronger. This would not be for absolute it would require continued work, innovation, strength, literature, education, entertainment, and still being the “first mover” into the natural capitalistic society we enjoy today.
I am not advocating a strong or weak Dollar, I am advocating telling the truth most of the time and punishing criminality. The Dollar (US citizens) will take care of itself; the power of “free floating” our currency insures this; it is defending itself by diminishing in value.
I’d like to see the Pentagon abolished and the money wasted therein put to better use. However, this rational act would likely bring about this outcome:
The United States = Banana Republic + Dictatorship + Nukes
For some reason the image of an unhinged Al Haig yelling “I’m in charge now” does nothing to calm my nerves…
Chris @9:01
I believe you've captured the essence of the problem. An empire ends either in defeat at the hands of the next hegemon or in collapse when the sustainers, especially foreign entities, withdraw their support.
Regretably there is a substantial constituency among the citizenry, both individual and corporate, for the status quo. The anti-imperial candidacies of both Ron Paul ( unfortunately the Doctor is still in the US House rather than the White House) and Dennis Kucinich were marginalized as unrealistic by media & its punditry. Recall the statement of the previous executive that "the American way of life is non-negotiable" and the current officeholder expressed somewhat similar views in his inaugural. I see little immediate prospect for renouncing empire.
Larry @10:05
I've been saying much the same these last several years. I cannot decide if the armed citizenry will make violence more likely, or perhaps less.
I believe the US military budget is in the single percentage digits of US overall spending. Plus, we have been warring with volunteers.
Really I meant to point out that Euroland and most of the rest of the world excluding the US invested heavily in emerging markets. I’m reading, that sum of foreign investment is more than the US real estate fiasco debt.
The race to the bottom is at hand.
I wanna note that Red China is in the midst of a drought in the northern half of their country affecting 50% of their crop production this year.
"I believe the US military budget is in the single percentage digits of US overall spending. Plus, we have been warring with volunteers"
Back of envelope analysis:
Average GDP per year Bush admin. $12 trillion
Military Budget $600 billion per year.
Enhanced military activities due to Iraq War including oil blood money $1.9 trillion over 8 years – $240 billion a year; I added lost income (no M&A or IPO stuff) from dollar depriciation of about $90 billion a year in Bush admin (will not add losses due to misdirection into real estate;that is a gimmy for George H.W. Bush) to Krugman's $1.6 trillion estimate for the war.
600 + 240 + 90 = $970 billion a year.
$970 billion/$12,000 billion = approximately 8%.
So on average this economy creates about 5.5% a year in profit (amelioration) I estimate.
It is like working for nothing.
Thanks for that Waldo.
Debates would be endless about whether or not warring in foreign lands is in reality protecting the homeland in some fashion but this about the only duty assigned to the commander-in-chief.
All this interference in the business cycle at home is about the last thing the President should be concerned with. (like he can do anything about it, totally misguided)
Congress is supposed to be overseeing business not directly involving citizens tax dollars in RE, insurance , banking, corporate pay….the list is endless.
Stephen Zielinski,
The United States = Banana Republic + Dictatorship + Nukes
Slight modification:
The United States = Banana Republic + Dictatorship + Nukes = Pakistan
Vinny Goldberg, Econo WizKid Emeritus
We have one “get out of jail free” card — namely the ability to borrow in our own currency.
The problems associated with a deflationary spiral are sufficient to go all in.
In the 30’s, the credibility of democracy and capitalism was MUCH lower then current US political credibility.
If there were ever a time to do the Keynesian stimulus in a big way, its now.
I prefer this to more messing around with banks. I think they are pretty much done — as good as they are going to get.
Plus there is no political interest in doing anything but punishing banks. Either way, nothing that will work is political feasible. Banks have been “saved.”
China’s economy is growing exponentially. At 2006 growth rates, in less than 14 years it will be bigger than the US economy. In 30 years, the Chinese will have a higher per capita GDP and will literally rule the planet.
Far from having “full-spectrum dominance”, the US would then have “full-spectrum subservience.”
What we see now is economic warfare simpliciter. The US and UK are trying to nip Chinese preeminence in the bud. They can do this by exporting inflation and using the same tactics that worked with Japan 20 years ago. The Chinese have no choice but to accept it and pick up the tab, and their leaders have no scruples about doing so.
Any analysis that fails to take this crucial political consideration into account misses the big picture of geopolitics.
George Packer in this week’s New Yorker has article on post bust Florida. He describes boom Florida as essentially a giant Ponzi scheme, although I guess any great bubble works that way. I agree with Yves and Willem that our business and political elites are essentially corrupted and obsessed with short term enrichment regardless of long term consequences to institutions, the environment, and to innocent by-standers. But for the poor guy who had been working in a plastic factory for $10.00 an hour and has been laid off and showing up for jobs with 2,000 other applicants and who is trying to keep a roof over the head of his wife and two kids, that guy and his kids need a bail out and health insurance. And if we need short term deficit to get that done, so be it.
For another book on what went wrong with our elites, I can recommend David Callan’s “The Cheating Culture.”
Richard Kline,
Still more “massive debt issuance” = progressively greater ‘fragility’ and, from the attached, it seems Treasury is aware but…
If you haven’t, I’d strongly suggest reading the 4 Feb, 2009, Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association: TBAC
from which, and in conjunction with Buiter, I get the _impression_ that the present course can very well lead to an uncontrollable rate spike.
There is a lot of oversimplification and “either/or” thinking in the thread above. I find it pretty distressing.
Buiter is NOT arguing against stimulus. He is arguing against the kind of full bore “let’s make up for all of the shortfall in demand” that most Keynesians, such as Krugman, are advocating. Most are calling for a much larger stimulus package than is now on the table in DC.
Buiter is also NOT calling for a strong dollar. He is saying that too much deficit spending for a country that won’t credibly raise taxes (ie is dependent on external financing) will lead to inflation. You get either creditor revulsion or the central bank monetizes the debt. And per his emerging markets analogies, he does not mean healthy levels of inflation (say 2-6%). He does not use the word hyperinflation, and I am certain he does not mean hyperinflation, but the 1970s 7-12% inflation forced the US briefly to issue DM denominated bonds (so-called Carter bonds). The prospect of 8%+ inflation in combination with the US’s massive financing requirements and no credible exit strategy could lead to a dollar rout. That is what Buiter is worried about, not a mere decline from current levels.
He is effectively arguing that a lower level of stimulus, designed to ameliorate the severity of the downturn, is a better course of action than trying to stimulate enough to bring us back to status quo ante.
As for his being left leaning, he does accept the value of stimulus in normal conditions and I am certain would be opposed to the tax cuts in the package as being ineffective. But he is worried that the collateral damage could be worse than the problem it is trying to fix.
As for defense spending, it’s current 22% of Federal spending if you use the narrow definition (which puts it at $550 billion). If you include defense-related spending in other departments, (DOE, Veterans’ Affairs), the total is closer to a trillion.
“The parasites are eating the host!” Applause.
In the age of Obama it’s truly lovely to see how many progressive economic writers on the Internet are, at least within the areas of their expertise, honest and insightful observers rather than partisan shills. Conquest’s law wins again.
Okay, let’s say military spending is at 25%, what are they doing with the remaining 75%?
This current stimu-less package looking for passage is unfunded. Deficit spending at its finest.
Send me an e-mail when Congress finally begins acting like caring adults.
“Truth-telling and trust became increasingly scarce commodities in politics and in business life.”
Oh, those good old days, when you still could trust people in politics, like Bill Clinton or Dick Nixon …
Clinton and Nixon were both impeached. Do we see as much real pushback today? Obama had to sacrifice Daschle because he had promised cleaner government, but look at the malarkey even with his appointees (Geithner hired a former lobbyist, despite Obama putting restrictions on lobbyists; Daschle had planned to hire two).