Is the economics version of defining deviancy downward mean that the new normal of high unemployment and inadequate job growth is seen as acceptable by policymakers (at least those not up for re-election this November)?
It’s one thing to recognize that we are working through a painful hangover after a private sector borrowing binge that produced a global financial crisis. It’s quite another to be complacent about bad conditions and steer clear of possible remedies.
The Fed unfortunately has been widely lauded for its emergency responses during the crisis (a view I do not share, but we’ll put that aside for now) and its actions afterwards are given a free pass in too many circles. The Fed now plays a far more openly political role than before, yet insists on the fiction of its independence; it was far more concerned about shielding banks and their investors from pain, and stood with the Paulson/Geithner Treasuries in opposition to resolution of sick big banks; it supported no-strings-attached rescues, both covert and overt, of financial firms, rather than other economic actors. As many readers have said, “Where’s my bailout?”
So now that the Fed sees the banking industry as being on the mend, it has become complacent (and note I am not advocating quantitative easing; I think monetary measures are likely to have little impact when banks are reluctant to lend. But the Fed’s body language has a big influence on policy discussions, so its lack of a sense of urgency undermines initiatives on other fronts).
Reader Doug pointed out a telling tidbit at the end of an article in the Washington Post earlier this week:
“I think we do have a variety of tools available, and we shouldn’t rule any tool out,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview. “If we’re uncomfortable with how long it’s going to take us to reach either element of our dual mandate [of maximum employment and stable prices], we’ll have to make some adjustments to policy.”
His comment: “So, they are currently comfortable with the pace toward ‘maximum employment’. Stunning. And adds grist to contention that official U3 of 9.5% is now acceptable.”
Tim Duy, a careful reader of the central bank’s tea leaves, reached similar conclusions. He was puzzled by the Post article, and turned to a recent Reuters interview of St. Louis Fed president James Bullard. Some mind-numbing observations by Duy:
First, Bullard and his colleagues underestimated the likelihood of a jobless recovery:
“We just started getting our job growth going three months ago, and then all of sudden we get a kind of a weaker number,” said Bullard, who is a voter this year on the Fed’s policy-setting panel. Nonfarm payrolls added a disappointing 41,000 private sector jobs in May, denting hopes for a speedy recovery.
Second, and related, the Fed actually believes we are experiencing a typical post-war recession in which output rapidly returns to trend:
Setting aside worries raised by softer economic indicators and Europe, the Fed continues to envision a moderate recovery, Bullard said.
“We would expect … at some point start to gradually withdraw the accommodation and then things would continue to recover, and then eventually we would get back to normal,” he said.
Does the Fed really fail to realize that the only reason the US economy returned to “normal” after the last recession was attributable to a housing bubble that was unsustainable? A topic for another time. Finally, the threshold for meaningful additional action is very, very high:
However, if the economy takes a decisive turn for the worse, the Fed would have to consider further stimulus, probably buying more Treasury securities to ease financial conditions, Bullard said.
“If things got really bad in some dimension and we were back in crisis mode, I think the FOMC wouldn’t hesitate to do more if we had to, but I don’t really think that that’s the situation we’re in right now,” he said.
Note: “back in crisis mode.” Note: “ease financial conditions.” Nothing like “to ease the pain of unemployment.”….
Other Fed officials appear even less likely to act.
This reading also confirms what I have heard repeatedly from former Fed staffers and people who know senior Fed officials: the central bank is remarkably insular. A former academic colleague of Janet Yellen, now a successful money manager, was telling anyone who would listen in early 2007 that the roof was about to fall in. He decided to call on her then. His comment” “She had no clue.” And per Bernanke’s March 2007 comment that subprime would be contained and produce losses of only $50 to $100 billion, she had plenty of company at the Fed.
Update 3:30 AM: Thorstein Veblen at Economists for Firing Larry Summers is also Not Impressed:
I’m actually curious what the point is of having an inflation target of 2% if you project inflation of 1%, and do nothing at all to get inflation to 2%. Seems like a credibility problem to me…
The Fed is now predicting that unemployment might still be 8.5% at the end of 2011, and 7.5% at the end of 2012 but, again, doesn’t see anything untoward about this. It’s just the natural order of things.
Underlying this, of course, must be an underlying belief in market fundamentalism. They must believe we’ve been hit with a real shock, and that the market should be left to adjust according to its own tune, and that the Fed is only there to prevent total armageddon. Getting us back to full employment or near to it would constitute unwanted interference with the market place. Unfortunately, it also has real costs — as people who are unemployed long-term lose skills, suffer depression, and are wasting years in which they could be doing productive things. During this time period, firms are also cutting back on Research and Development, meaning a slower rate of technological advance. Meanwhile, China is moving ahead with 10.6% growth expected this year…
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Are they happy with high unemployment?
Why should they give any thought to people they never meet (save to get their plumbing/electricity fixed, or their pool cleaned up), never meaningfully interact with?
Plus, the unemployed never go collect their checks at the office like it used to be. So, they are invisible to the media, the politicians (38th day of stand off on the UE benefits extension in the Senate, remember?) and the Fed people.
I would surmise that they just cannot possibly give a shit. After all, the Fed people frequent Wall Streeters, bankers, money managers and other respectable people who have means and wealth.
Life is honky-dory in their circle: ain’t got a recession here, right?
Hey, it’s a win/win for the Fed. Flush the little people down the drain along with Obama and the Dems.
See, that’s the key, Obama and the Dems pay the price, not the Fed.
Good Grief!
Perhaps the Fed and its minions have become realistic all of a sudden.
Perhapse the Fed has awakened from the deep slumber to conclude that there is no gain in employment (or business or profits) when the ‘price stability’ in question is the price of crude oil.
I can fly, too! All I have to do is flap my arms!
It’s hard to see any growth @ $75 a barrel when the US infrastructure was designed @ $25 a barrel. Something has to give and it is business, jobs, wages and customers not necessarily in that order. While the finance pirates are made comfortable the productive, physical economy is eroded from the bottom up.
As long as our energy suppliers accept US dollars they set real value to them. What else can be done? Their product is absolutely indispensible for any sort of ‘modernity’. Priced in oil dollars are valuable and the decline in dollar price, oil demand and increase in dollar value are all self- reinforcing.
Also self- reinforcing is the ongoing shortage of ‘liquidity’ that is less and less satisfied with debt; the outcome is a generalized liquidity/currency trap that keeps dollars out of circulation.
The Fed is helpless, it cannot add cash to circulation which sees a steady decline in the multipliers, which adds ‘uncertainty’ which encourages hoarding, which suppresses multipliers more. Dollars become more scarce and valuable which reinforces demand for them by oil producers.
The hazard of more valuable dollars is this: the demand for currency will trigger the dumping of dollar- denominated assets such as Treasury securities for increasingly scarce cash. Since the bond – and stock – float is orders of magnitude greater than narrow money it will take the ‘Mother of All QE’s to keep yields within reach.
Mebbe not tomorrow, but soon enough.
My general sense, there is no sense of urgency whatsoever in the ruling class. Not compared to the size of the problem. They literally believe mild tweak of monetary variable alone will fix current economic crisis.
Their thinking is somewhere between oh, we did it in 80’s and 90’s recession, plus we can learn from Japan bubble/crisis. Print more money and pretend like nothing happens. Everything will be OK soon.
Except it won’t.
1. 90’s recession was over after oil drop from $40 to sub $20. (remember 99c/gal gas? That was the cheapest in US history since the discovery of oil!) I suspect there was a backroom deal with Saudi at that time (vis a vis promise of progress with Israel problem)
2. In the late 90’s early 00’s. Japan economy was fully recessionary + 0% rate. GUESS where all those cheap money went?!!! (China, US portofolio) Yes, people, the early stage of dot.com, real estate bubble were all paid for by Japanese carry trade/japanese bubble moving to the US. Which in turn ignite China fast growth.
3. Banking regulations were demolished (Enron style accounting thrive.) Why bother manufacturing and producing when all you need is rent economy, accounting flim-flam and financial engineering? (swap, derivatives, etc. explodes)
4. than after late early 00’s comes the chinese money and access to cheap manufacturing. Why bother manufacturing anything when the chineses are spending their own money building factory and willing to work hard for dirt? Laptop that has $2000 price tag now goes for $400. Every electronic & consumer goods price plunges 10-15% annually.
5. Then Bush comes in, even looser spending, tax cut, low interest, more of everything.
——-
Then things flips all of a sudden.
What happen in late 2007? End of japanese carry trade, $150 oil, 2 wars, global food price crisis. Followed by Lehman, AIG, all investment banks goes under/frauds…etc. etc.. cascading to now $1.2T annual deficit.
They decide not to fix investment banks, instead they wrote blank check. The investment banks keeps making toxic asset and making even crazier gambles.
Weak european countries (PIIGS) resulting from debt binge, all being attacked by the banksters with fresh cash from bail out. Germany/France/ Europe react accordingly, putting euro in strict financial diet, stabilize the market, and rev up the export engine.
Congress still decide to screw around with fixing banking regulation and move away from failing monetary solution and into fine detail fiscal and national employment policy.
Fight with Saudi, neocon/likudniks Israel war mongering continues. Oil moves from $150-$30-$70 and stays at $70-80, recession or no recession.
Then more stupidity, after having lost european allies, and entire middle east islamic world, Obama goes to war with entire Asia. (Japan, China) Uighur, tibet, north korea torpedo attack, Iran.
So now China is drawing the line. They will make sure US only receive enough fresh capital to stay in perpetual mild recession. Just like Opec decide to set the oil price to create multi polar world. (they can’t easily put it back at $90 or 150 btw. but obviously they are not that stupid.) Did I mention we also pick a fight with russia too? ($300B reserve.)
Say goodbye to latin america too.
So basically, US has no chance pulling another G20/plaza accord/global hand out to bail out the economy. no more world sympathy left. Specially not after trying to ignite war between China vs. south korea using that fake torpedo story. No way to find $1T free cash each year for next 10 years to fund the Keynesian spending binge.
But inside Krugmann’s little head, we are as rich and as loaded as the Japanese. (18+% saving rate, 2% budget surplus, 15-25% trade surplus)
So, the answer is pretty easy, from here on now. There will be pure currency debasement. phase a) while asia absorb the inflation and sustain peg until yuan globalize. phase b) when all of a sudden everybody dump dollar in short period of time for no apparent reason.
Once people are able to answer where to move their $1-2T worth of wealth out of dollar, then it’s basically margin call, dollar run, bond spike, and ultimately US insolvency.
With US having no oil to run it’s high energy infrastructure and no consumer level manufacturing. It’s Soviet time basically. Only military gear, worthless financial paper, corrupt political class, and agriculture product that can’t reach market due to exploding/non competitive infrastructure. China export to US represent 16% of their economy and shrinking. They can live without US market. But can US live without walmart/chinse cheap supply? All those big economists talk are just “talk”. They have no idea how multi trillion dollar worth of wealth will move in the event of dollar run. They couldn’t even predict the survival of US car industry if their life depend on it. (eg. chinas tell their workers to stop supplying US companies. GM, Chrysler will die in 3 months. Ford 1 year)
You read it here first folks. Weimar-Soviet-America. Empire of banana republic.
“My general sense, there is no sense of urgency whatsoever in the ruling class.”
My sense is that the global neofeudalism plan is working quite well….
bingo, sgt_doom…if you want to impose a really radical top-down reworking of society in the USA, you have to keep the “crisis” perking along full steam ahead to justify all those radical changes.
“never let a crisis go to waste” – even if you have to continually invent new ones or manipulate continuations of old ones.
The Fed’s actions prove that it’s a criminal organization, while each individual member is a sociopath and/or a conscious kleptocrat.
We know that the elites’ desired number for the industrial reserve army of the unemployed is whatever number is most profitable for the big banks. We also know that in general their desired policy is to drive the quality of all jobs downward, in terms of wages, benefits, job security, worker safety. (Even the U6 number is inadequate to describe the real level employment.) All their actions prove this.
So the real question is, what level of unemployment, underemployment, predatory employment, indentured employment, is acceptable to the people? Their answer will decide their own fate – guaranteed descent into impoverishment and servitude, or a fighting chance at freedom.
“So the real question is, what level of unemployment, underemployment, predatory employment, indentured employment, is acceptable to the people?”
Answer is: the level that allows a fascist wolves dressed as socialist sheep to step in again, build new infrastructures, and a lovely Cathedral that stretches skyward to superbia. Predicted to occur in 2012, when fear is peaking.
Why would a fascist want to pose as a socialist, when everything today, from the most gossamer heights of ivory tower theories, to the overwhelming brute economic force of political and economic phenomena, to the minutiae of pop culture, are crypto-fascist?
It seems to me all the real fascist needs to do as things get worse is be himself.
fascism is socialism
Fascists seek to organize a nation according to corporatist perspectives, values, and systems, including the political system and the economy.
Socialism is an economic and political theory based on public or common ownership and cooperative management of the means of production and allocation of resources.
I would venture to say you no little of either eco. system.
If you mean they are the same as in an economic system then socialism is the same as captialism, ism, etc! Read before you comment it would add not only add to your knowledge but, keep the rest of us from having to read comments like this. However, thanks for the laughs anyway.
Calling fascism socialism is about the most ignorant rant I’ve ever heard.
Suggest you read a book for a change, it’ll be a unique experience for you, no doubt!
Show us 1 socialist state that is not fascist, which includes crony capitalist. I don’t think you can do it.
There is no major difference between socialism and fascism. Both are corrupt, immoral and suppress individual liberty.
And I have no idea why anyone expects anything different from the Fed or government bureaucrats other than what we are seeing. After all, one of the criteria for being appointed is worshiping in the Church of Keynes. That automatically disqualifies the rational and the competent.
“There is no major difference between socialism and fascism. Both are corrupt, immoral and suppress individual liberty.”
Actually those are characteristics of all governments to some extent, but a libertarian government would be a lesser offender. It would recognize your right to starve, die from lack of medical care, or have your life controlled by great concentrations of private wealth.
Socialism appears to be working quite well for the super-rich, otherwise we wouldn’t be beset with a socialist plutocracy in North America….
Uncle Billy Cuncator,
“Fascist wolves dressed as socialist sheep?”
The only way to counterbalance the political power of the bankers is with the organized politcal power of the working people.
The economic and social realites of a majority of Americans are in an ever-accelerating decline.
Just how long do you think this rhetorical strategy of branding any political movement that arises to challenge the monopoly of political power currently enjoyed by bankers as “socialist” or “populist” will work?
“Underlying this, of course, must be an underlying belief in market fundamentalism”
Please spare us this BS!! If you believe this then you can believe anything!!
“They must believe we’ve been hit with a real shock, and that the market should be left to adjust according to its own tune, and that the Fed is only there to prevent total armageddon”
Market as in “EXCEPT FOR MY BANKSTER PALS”. Oh yes when it comes to anyone else other than banksters, Fed believes in free market … Screw them for all I care is the attitude .. but should banksters be in trouble, the conniving scoundrel Ben Bernanke will come running to their rescue immediately with cash and policy measures which ensue that you can game the system at “NO RISK”-Take at 0% from me and place it with me at 3% .. and ENJOY YOUR BONUSES!1
“Getting us back to full employment or near to it would constitute unwanted interference with the market place”
Only bankster pals are eligible for Fed’s largesse and interference .. as for employment .. the only question to be asked is “will my bankster pal lose money” ..
This implies if you want Fed to do something on employment it has to be tied up to bank losses .. then you will see policy after policy happening as in 2008/2009. The scheming rats!!
killben,
You bemoan the fact that, as we speak, we don’t have free markets in the United States. The government steps in to subsidize TBTF bankers. Working people are left to languish. In this I don’t think there’s much disagreement. The disagreement comes on solutions. Your prescription seems to be: “If we don’t have free markets, get them!”
Yours is the illusion of classical economics. This mythology holds that markets somehow can operate independent of the state and its power. The problem with this is that this has never happened. It never will.
If working people want a say in the economic life of the nation—-in how economic resources are created and distributed—-they must take an active role in politics, become involved in the public realm. The belief that some supernatural “invisible hand” can achieve economic harmony and efficiency is a a throwback to an earlier era when those same powers were attributed to God.
The ones with good jobs will see themselves as validated by the FREE MARKETS invisible hand where those with out are unclean, sore losers, heretics. Austerity is just another Crucifixion exercise me thinks.
Skippy,
I don’t believe in ‘free markets’; however, fair markets would be very nice indeed!
Is there such a thing as responsible anarchy? Isn’t that what the free market folks are ranting about?
Doesn’t puzzle me, just annoys me.
That last bit, does that mean that there’s no God?
Just curious.
According to law, isn’t the Fed supposed to be concerned about the state of the economy? Doesn’t it have a prescribed responsibility to foster full employment? Are they not, again, doing their job according to their Federally granted charter?
As a society we need to demand that our representatives represent us. Vote em out in November, well not necessarilly all of them but certainly most. Keep voting them out until we get some representation.
As the Fed can’t really directly create jobs, why should we burden it with a responsibility that it cannot fulfill?
Dear Dear Down South, give us a quote here, something to carry us through the day.
DownSouth…
“If working people want a say in the economic life of the nation—-in how economic resources are created and distributed—-they must take an active role in politics, become involved in the public realm.”
I agree, but it rolls off the majority like water off a duck. They came, they saw, and they spent what they didn’t have…Now they are yelling their heads off for MMT…bail me out, give me more free money, I can’t kick the credit habit cold turkey! LOL…
They blame the Fed and with good reason. They blame the Treasury and with good reason. They blame the realtors and with good reason. They blame the administration and with good reason. They blame Wall St and with good reason, et al…but, it takes two to tango. Hell, now they are blaming those that didn’t go on a spending spree…and claiming those non spenders contributed to the credit collapse! The debtors are saying that the savers are somehow unAmerican! The fools fail to realize that America was built on the excess savings of workers that put off immediate gratification in order to save a few bucks! Those few bucks multiplied many times is the basis of capitalisim!…pooled savings invested wisely, not spent on bull shit.
The debtors point fingers in every direction save one…themselves. Nobody forced the fools to go for the granite counter tops. Nobody forced the fools to take seconds and thirds on their granite counter tops. Nobody forced the fools to use their homes to buy new vehicles, boats, meals out, vacation cruises, et al…but they did and now it must be someone else’s fault that they are up to their asses in debt and are facing a long, austere climb back to solvency. All you whining for MMT should read what happenes when a population loses faith in it’s currency…it’s called hyperinflation and you don’t want to go there.
Take a hard look at yourself in the mirror, grit your teeth, get an attorney, default if you must or pay your way out if you feel you must…but stop whining about a problem that you got yourself into by your own dumb credit binge and read the following until you comprehend it.
“There is in fact a manly and legitimate passion for equality that spurs all men to wish to be strong and esteemed. This passion tends to elevate the lesser to the rank of the greater. But one also finds in the human heart a depraved taste for equality, which impels the weak to want to bring the strong down to their level, and which reduces men to preferring equality in servitude to inequality in freedom.” Alexis de Tocqueville
Bravo!Bravo! I knew we were doomed when BO proclaims the “Credit is the lifeblood of this country”. What happened to savings are the lifeblood?
“There is in fact a manly and legitimate passion for equality that spurs all men to wish to be strong and esteemed. This passion tends to elevate the lesser to the rank of the greater. But one also finds in the human heart a depraved taste for equality, which impels the weak to want to bring the strong down to their level, and which reduces men to preferring equality in servitude to inequality in freedom.” Alexis de Tocqueville
There is in fact a human drive for domination that spurs all cannibals to be deceptive. This passion tends to elevate the lesser to the rank of the greater. But one also finds in the highly perceptive cannibalistic mind a taste for balance, which impels the more perceptive to want to raise the weak to their level, and which elevates men to preferring equality in alliances for freedom to individual inequality in chaos. i on the ball patriot
Deception is the strongest political force on the planet.
Cheap labor getting cheaper by the day. Mission accomplished.
Thorstein Veblen: “I’m actually curious what the point is of having an inflation target of 2% if you project inflation of 1%, and do nothing at all to get inflation to 2%.”
How can the Fed induce inflation other than by increasing the money supply and reducing rates, and it seems that they’ve pretty much reached the limit there.
Furthermore, what type of inflation would they induce? The only desirable form right now is wage inflation, and we’re not going to get much of that with a U3 of 9.5%. CPI inflation isn’t desirable if wages aren’t at least keeping track, and asset price inflation is what got us into this mess in the first place.
If anything I don’t see what ZIRP does other than enrich banks who profit from the short/long term rate spread. It’s yet another backdoor bailout for the banks that got us into this mess in the first place. That’s even more true because outfits like Goldman-Sachs now have access to the Fed’s discount window despite being non-depository institutions.
So what does ZIRP cost everyone else? It means a lot more money for the Fed to vacuum up, and hence a bigger shock to the economy, when the economy does finally pick up. There’s actually an argument for raising the target on the federal funds rate by a little, and I’m sympathetic to it.
Free money for the banks should be predicated on temporary interest rate cuts or holidays on existing loans from the banks. Then everyone else could benefit for a change.
@Alex – here, here. Since only the banksters benefit from 0%-.25% (consumers borrowing at 15-20% and getting no interest on savings/CD’s) – I think we would benefit from a RISE in the interest rate. 1-1.5% or more. Encourage savings. We’re simply repeating the mistakes of the oh-so-recent past – trying to re-flate a bubble with inflation. But is it the right kind of inflation? What if interest rates were to rise over time – that would mean (all other things being equal) that housing prices would DECLINE (less affordability). We would be right back to where we started from.
We need to take some medicine here. Restructure the economy. Change our political systems. Get on a different path. But wishing for more of the failed tactics of easy money and low interest rates means we’ll just get more of the same.
It’s literally biologically impossible for the FED to be independent. This isn’t simply a statement made for rhetorical effect.
They are heavily influenced by a pathological side of altruism: It’s connection to ‘natural human community size’ (Dunbar’s Number) and proximity (physical, psychological, social, intellectual, etc.)…
In other words… they take care of their own!
This problem has been made even greater by the streak of Randian Objectivism that’s dominated our economic and political culture. This “MYTH” holds that extreme selfishness promotes the greater good. THIS IS A FALSE ASSUMPTION AND CONTRARY TO EVOLUTIONARY BIOLOGY.
P.S. My own little creation, which might be called a theory of ‘social energy’ as the critical foundation of civilization, could be seen to lead to suggestions for bettering this situation. From what I understand… while I’m not an economist… MMT comes to similar conclusions regarding practical policy ideas: Direct ‘money’ (social energy ‘tokens’) creation by government for productive job creation. (not financed via a Central bank)
However the ability of current governmental mechanisms to do a wise job of that creation is a very fair concern… I’m not a fan of current ‘mega-government’ structures which suffer from many of the same fatal flaws as the FED… a bias towards their own ‘clique’ and the mega-corporations that support them.
Both big government and big business have a place… but their place is NOT as our masters… but as our servants. Specific remedies are needed and available for this. But don’t be waiting for mega-governments or mega-corporations to initiate any remedies. That initiative has to come from you.
While it may seem contradictory we may need a sort of ‘austere’ profligacy!
In other words, its possible we may need to throw a lot of money in at the ‘bottom’… but do it in a way that focuses on building productive infrastructure. It may also be necessary to re-define ‘productive infrastructure’… a few examples: neighborhood food production, recognizing value in a stay-at-home parent, tax-breaks and/or direct subsidies for local craftspeople, painting out graffiti and planting trees in parks… BUILD OUR COMMUNITIES ALONG SUSTAINABLE LINES.
The last few decades were a critical time for our world to use this brief ‘energy’ bonanza to build a sound future.
My generation… the baby-boomer generation has been a disastrous one for freedom and progress… they chose toys and lies as comforting teddy bears. They abandoned responsibility as citizens. And Democrats and Republicans both have been happy to keep the blinders on everyone for as long as possible.
Ms. Smith (and many others) is absolutely right… there’s been a massive fraud perpetrated in this country (and world actually). And it was done in pretty much plain sight!
It’s actually only the latest stage in a financial sector that has consumed the ‘turkey’ (its public) it was supposed to serve. For this same crowd to scream about ‘class warfare’ is unbelievable… but amazingly many seem to buy it… (along with Hummers and whatever else these whiz-bangs choose to sell).
Ayn Rand & Alan Greenspan: The Altruism Fly in the Objectivist Ointment
http://culturalengineer.blogspot.com/2009/10/ayn-rand-alan-greenspan-altruism-fly-in.html
Decision Technologies: Currencies and the Social Contract
http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html
It should be obvious… mass unemployment is a very stupid use of the energy of a society… especially when there is so much to do.
If people fall for it there really may be no hope.
Your society’s energy resides in the decisions of you and your neighbors.
In my investigation of my frustrations on the financial crisis, and all of the back-handed subsidies to the banksters, I was SHOCKED to learn that the Fed is PRIVATELY held. They don’t teach you that in civics class. It all makes so much more sense now…and angers me even more. It’s owned by the 12 regional banks, which private banks own the shares (and get 6% dividends on).
If you hate the Fed and support MMT, you are in a contradiction.
MMT in the US is no less than a fusion of the Treasury and the Fed. MMT–literally–gives the quasi-independent, semi-private, beholden to nobody Federal Reserve the keys to the Treasury’s vault.
If you hated TARP and QE, but love MMT, once again– You are in a contradiction. Those programs were MMT. Only, they were MMT in support of Full Solvency instead of Full Employment.
“OK, fine. I support MMT so long as it promotes Full Employment.”
If you have this stance, then just admit it: You are demanding that the Fed have an even greater influence over your life. You are demanding an even stronger, more powerful Federal Reserve.
MMT can promote anything. If MMT gets full acceptance by promoting Full Employment, great. But once Full Employment is achieved, do you really expect MMT to stop there? Do you realize how much power you are bequeathing on non-elected representatives to promote __________ [Fill in the blank].
Notice that when the MMT’ers talk about MMT, they rarely mention the ascendancy of the Fed. Ask Yves or Parenteau to define the role of the Fed in an MMT world….and you’ll experienced the most nuanced sophistry.
If they say that MMT in the US does not require the fusion of the Fed with the Treasury, they either don’t know what they are talking about, or they are lying.
That’s the problem in Europe. It isn’t Big Bad Germany that’s the problem. No, it’s the fact that the ECB has its hands tied.
MMT in Europe will not work is because the Central Bank in Europe cannot simply monetize public spending. [Unlike the US, the European State actually has to “give another thing of value” in order to monetize its public spending.]
In order for MMT to “work” you have to prostrate before the Federal Reserve.
Those of you calling the Fed a “criminal syndicate”, while extolling the virtues of MMT…you need to repent!
Bow down before the one you serve.
“If you hate the Fed and support MMT, you are in a contradiction.”
Nonsense. Most people who hate the Fed, including me, hate it because it’s corrupt and unaccountable, not because they hate the idea of fiat money. Saying that hating the Fed means you hate fiat money is like saying that because you hate a corrupt dictatorship you hate government.
I’m not even a die hard MMT fan, or at least not a fan of some of the policies its proponents advocate, but your logic doesn’t hold.
Not only is the logic flawed, but I think he kinda misses the point of MMT. Isn’t the point of MMT that fiscal policy is supreme over monetary policy?
Monetary policy is about price, while fiscal policy is about quantity. That’s the Mosler quote, right?
So when he is talking about the Fed as being part of the system and that MMTers have to like the Fed actions, he is missing much of the point of MMT in the first place.
What is positive to note is that at least some are learning to spell MMT.
Alex, my logic holds up just fine.
Did you support TARP and/or QE? These measures are MMT. It’s just MMT in support “Full Solvency”.
Many of us thought them to be perfect examples of the Fed corruption that you lament.
But Paulson, Bernanke and Geithner justified them, saying the Fed was acting properly and was fully authorized to take these measures because they were done for the “public welfare”.
And this is what you get with MMT. A VERY powerful Central Bank that gets to invoke “public welfare” for all sorts of nefarious purposes.
MMT is giving the Federal Reserve even more power over your life. If you are comfortable with that, so long as the Fed is “accountable” then so be it. But keep in mind: You are asking for accountability from a quasi-independent, non-elected group of bankers that both control and create money.
And just who do you think such a group–that actually controls the money– would be accountable to? Our Senators? The President? The American people? Yeah, OK. Good luck.
My point remains: If you support MMT, you are begging for a larger, more potent Federal Reserve. That doesn’t make it wrong. But be careful what you wish for.
Check out this paper: http://www.ucm.es/info/ec/ecocri/eus/Febrero.pdf
It’s pretty good, and it was written by someone who actually is sympathetic to MMT. He does an excellent job explaining the role of the Central Bank in an MMT regime.
If its legitimate, that we can reform an institution, while giving it essentially unlimited power by allowing to it create and control money, then I stand corrected.
But I think even Martin Luther would call bullshit on that Reformation Project. And my personal opinion remains: If you think we are going to give the Fed this awesome power (via MMT), while making it less corrupt, you are utterly delusional.
“Did you support TARP and/or QE? These measures are MMT.”
TARP, which I did not support, was definitely _not_ an MMT approach as the loans came from the Treasury. Money wasn’t printed to cover it.
QE I support, but only when the Fed buys treasuries. The commercial trash they purposely overpaid for is another story, as that’s using the power to print money to cover private debts. QE is an “MMT style” approach only when used to buy treasuries.
Lastly, like many MMT proponents, you’re confusing MMT as a theory of how a fiat currency system works with various policy approaches often advocated by MMT proponents. The line “MMT is correct as shown by 600 years of double entry bookkeeping” is correct, strictly speaking, but it doesn’t mean that policies advocated by MMT’ers are necessarily wise.
“Many of us thought them to be perfect examples of the Fed corruption that you lament.”
TARP had little to do with the Fed. Yes, Bernanke in cahoots with Paulson advocated it, using lies about the commercial paper market freezing up, and only “remembering” after the bill passed that the Fed could directly participate in that market. Nevertheless it was a Treasury operation.
QE is not corrupt when used to purchase treasuries.
“And this is what you get with MMT. A VERY powerful Central Bank that gets to invoke “public welfare” for all sorts of nefarious purposes.”
You assume that the Fed would remain as is under a full MMT regime, which would actually be very non-MMT in style, as it separates fiscal and monetary powers. Congress created the Fed and it can change or eliminate it any time it wants. The Fed’s powers could be given to Treasury for example. Do I think this is politically likely? No, but I don’t think a full MMT style approach to policy is likely either, so it’s rather pie-in-the-sky.
I also question whether an explicit MMT style policy is really all that different from what we have now (see my 1:18 below). How is the MMT style “government prints money it needs” really any different than QE (open market) operations that buy treasuries?
As for corruption, the problem is the non-MMT style powers that the Fed has and uses. Buying treasuries as an open market operation is fine, but commercial trash is another story. It’s also ridiculous that the Fed has regulatory and supervisory powers of the banks. It’s the ultimate example of the fox guarding the hen house. I note that in Canada, which everyone lauds (apparently correctly) as an example of good bank regulation, the central bank (Bank of Canada) has little regulatory power, and is pretty much limited to control the money supply and inflation rate. Regulatory and supervisory powers are part of the Department of Finance, which is part of the elected government.
Dan Duncan . . . You have ABSOLUTELY no clue what MMT is. Alex gets a lot closer, but still a ways off (Dan is so far off, one can get a lot closer while still being way off). If you would like to actually discuss this on an MMT blog, feel free. Posting this garbage here instead of there suggests you already know your interpretation wouldn’t stand up.
stf: “Alex gets a lot closer, but still a ways off”
Care to comment on my 1:18 below? Serious question.
“If you would like to actually discuss this on an MMT blog, feel free.”
Any suggestions other than billy blog?
Hi Alex,
Actually, on closer look you were closer than I suggested at first. My apologies. Only major disagreement with MMT would be your analysis of QE. Some other points in terms of tone or emphasis, but your overall rejection of Dan Duncan and differentiating between actual monetary operations and policy proposals were pretty much on.
Other blogs:
http://www.moslereconomics.com
neweconomicperspectives.blogspot.com
I’ll comment below on the other. Thanks for honestly engaging.
Also, Dan, the Febrero paper is trash. It’s such a complete caricature of MMT that no MMT’er can take it seriously. All three points the paper makes to supposedly counter MMT are complete misinterpretations of MMT. The author relied on critics of MMT in designing arguments, rather than actually reading MMT. That you cite the paper here and suggest others read it further demonstrates you have very little understanding of MMT.
“Did you support TARP and/or QE? These measures are MMT.”
Huh? Absurd. Not worth commenting on.
“Underlying this, of course, must be an underlying belief in market fundamentalism. They must believe we’ve been hit with a real shock, and that the market should be left to adjust according to its own tune.” – T. Veblen
How can we even talk about ‘the market’ in a regime of centrally-planned interest rates?
Prior to 1913, the yield curve was inverted as often as it was positively sloped. Financial crises (such as the 1907 panic) invariably saw short rates spike, as one would expect when credit fears are rampant.
The Fed’s central planners changed all that. Positively-sloped yield curves are the norm, as you would expect from a cartel whose members are in the business of borrowing short and lending long.
Even more contrary to nature, short rates are artificially pushed flat to the floor during financial crises, at least for banksters (and banksters-in-drag with suspiciously wide shoulders, such as Goldman Sachs and Morgan Stanley).
Calling the architects of this carefully-staged financial kabuki show ‘market fundamentalists’ is really rich.
The dilemma of the interest rate central planners is that they already blew out all the stimulative stops. Al ‘Johnny Law’ Greenspan effectively eliminated reserve requirements in 1994 with his devious ‘overnight sweeps’ authorization, and the Naz exploded to 5000. Mad Al slashed Fed Funds to 1% in 2003-4, cheered ARMs indexed to the lowest short-term rates in half a century, and real estate ran for the roses.
In the latest crisis, poor Weimar Ben doubled the Fed’s balance sheet, for only modest results to date. Last year he bought $300 billion worth of Treasurys in ‘Operation Twist II,’ only to see note yields climb HIGHER within six weeks.
Pushing on a string just isn’t working no more. Absent Keynes’ animal spirits, the leveraged speculating community won’t money-multiply all those stagnant bank reserves into hinky new forms of financially-engineered credit. What’s really needed is a hangover cure for Bubbleholics, so that Bubble III can finally launch, to the relief of everyone.
Any resemblance to an actual ‘market’ will be entirely coincidental and unintended. No banksters were harmed in the writing of this sardonic screed.
Ah yes the despicable Fed. The irresponsible Treasury. That Congress of poltroons. How the hell have we got to this little mess?
On reflection it seems that our woes are in many respects are our own fabrication. It’s a Rube Goldberg structure of non-laws, non-regulatory agencies and non representative representatives. It’s just a big non.
Now MMT, there’s some snake oil you can like. A veritable elixer of econcomic nirvana. You gotta love this stuff. It’s just good old yankee ingenuity.
Create a fiat currency, induce the Arabs to price their black gold in it. Import more than we export and pay in our irredeemable currency. Ah yes, you inscrutable folks, do your mercantilist stick and by God take our irredeemable currency or else. What happens when they say, or else what?
As do all kabuki, this one shall end very badly and sadly.
Folks, it’s come to Jesus time.
“our irredeemable currency”
Irredeemable? That’s funny, I redeem US dollars all the time for useful things like food, petroleum products and the pleasure of not having the sheriff’s department evict me from my humble abode. Personally I don’t have much use for a novelty metal like gold, but if your preferences differ you can even redeem US dollars for yellow metal.
Maybe you’re complaining about the fact that the US government no longer fixes the price of gold in US dollars. I’ve heard that complaint before, but I’ve still no idea why the government should fix the price of such a worthless commodity. Why not a useful metal like iron, copper or aluminum? Why not wheat or rice?
Siggy used ‘redeemable’ in the technical sense of ‘redeemable for the assets which back them.’
Federal Reserve Notes are primarily backed by debt on the Fed’s balance sheet. But you cannot bring in 10,000 FRNs and exchange them for one of the T-bills which ‘backs’ them.
Exchanging dollars for food and oil reveals relative prices. But it does not make dollars redeemable by their issuer.
Although the Fed treats currency as a ‘liability,’ how can an unredeemable note actually be a liability, when it is impossible to tender it for redemption? This is the ultimate in unaccountability.
“Siggy used ‘redeemable’ in the technical sense of ‘redeemable for the assets which back them.’”
I know how Siggy used the term and I was satirizing the use of a ‘technical’ term that is (perhaps intentionally) confusingly and misleadingly similar to a plain English word. I don’t think it’s a coincidence that when someone says “unredeemable” it suggests that a dollar has no value.
“you cannot bring in 10,000 FRNs and exchange them for one of the T-bills which ‘backs’ them”
You can’t buy T-bills anymore?
Thank you for your note and full marks as I see you get the point of this fiat fallacy.
“Federal Reserve Notes are primarily backed by debt on the Fed’s balance sheet.”
A fiat (nonconvertible floating rate) currency is not backed by anything at a fixed rate of exchange other then the currency itself. You can exchange dollars for dollars (make change), and that’s it.
US Treasuries are simply another (interest-bearing) asset form denominated in dollars. Deficits increase nongovernment net financial assets and the national debt is the saving of cumulative deficits as Tsy’s. The national debt = nongovernment net financial savings.
Technically, you exchange your dollars for whatever lights your fire. Just a little symantic humbug there.
Gold is really quite useful, checkout the motherboard on your computer and other electronic devices.
When you devise a fiat currency that maintains its purchasing power, let us all know. That will truly be something akin to the second coming. Actually it would be a first coming.
As to fixing the price of gold, the government never said that it was fixing the price of gold; it said that it would redeem dollars at the rate of $28.00/oz and then $35.00/oz and it now records our gold at the rate of $42.00/oz. Even at that, you can’t take your nicely printed Federal Reserve note to any bank anywhere and redeem for some quantity of gold. It is true that you exchange your Federal Reserve Notes for gold and a lot of other things at some variable rate. The market currently deems something north of $1,000/oz as being a fair exchange.
Given that you could once exchange dollars for gold at the rate of roughly $800/oz, that says something about the demand and supply of both gold and dollars. And oh yes, your friendly doctor would like you to pay a bit more for his services say 20% more than as recently as five years ago. It’s a fiat currency, it is the marvel of the world that people use it at all. Along those lines, as it has no inherent value, you best not hold it to long as there may come a time when the rest of the world will not exchange anything for it, save for a hearty sneer and the bird.
Over the past five years has your wage rate been increasing at a compound rate greater than 3.25%? If it has you are doing very well indeed and your are blessed. If it hasn’t, then you are in the big middle class rowboat and you are getting screwed by the government and its chartered agent banking system called the federal Reserve.
Think about that. It’s not a charter for a free market. It’s not even a charter for a fair market system.
“Just a little symantic humbug there.”
As I already replied to Jim Haygood above, the semantic humbug is in using the plain English word “redeemable” in a deceptive “technical” sense, when what you really mean is that dollars are not redeemable for gold at a government determined price. I’m not really nitpicking your terminology (which I know is widely used) but criticizing the thinking that lies behind that semantic choice.
“Gold is really quite useful, checkout the motherboard on your computer and other electronic devices.”
Actually platinum family metals are better for that purpose, as they’re at least as corrosion resistant and aren’t so soft that the plating easily wears off. Gold is just the cheap alternative.
Regardless, while gold has its marginal uses, it’s hardly the most essential commodity. Our society would have a lot more problems if we ran out of iron than if we ran out of gold. So what’s the love of gold all about?
“Given that you could once exchange dollars for gold at the rate of roughly $800/oz, that says something about the demand and supply of both gold and dollars.”
I’ve heard that the price of old comic books has gone up too. Some of the classics are now worth a fortune.
“Over the past five years has your wage rate been increasing at a compound rate greater than 3.25%? If it has you are doing very well indeed and your are blessed.”
What’s your point, that with a gold standard people’s real wages couldn’t go down? But it happened all the time under the gold standard, so how would gold help?
You seem to be applying a sort of reverse populism. William Jennings Bryan campaigned on the bimetal standard because deflation under the gold standard was destroying debtors, like small farmers with mortgages. Bankers _loved_ the gold standard.
“Redeemable” applies to a convertible fixed rate monetary system. This limits the money supply. A fiat system is a nonconvertible flexible (floating) rate system. There is no financial limit on the money supply, although there are real limits.
The backing of a convertible currency, e.g., gold, serves to fix the rate of international currency exchange, e.g., $35/oz Countries must acquire the backing, e.g., gold, to “back” their currencies. This typically happens when they run trade deficits and their backing (gold) gets transferred to the surplus countries.
Nonconvertible floating rate currencies relative to each other adjust based on the relative difference of the economies. Trade is based on relative values of currencies.
The US dollar is undervalued relative to the yuan, so the Chinese have to be willing to sell their stuff to the US at a discount to trade with the US. That’s a good deal for the US. It’s also a good deal for China, because they get to grow their economy more quickly that would otherwise be possible for them, since they haven’t yet developed a consumer base sufficient to handle their output.
On reflection it seems that our woes are in many respects are our own fabrication.
Of course, we are all to blame, as usual, although, as usual, the ones promoting that sentiment walk away with trillions, billions and multi-millions while the rest are biting the bullet, homeless or foreclosed upon.
Methinks you spout the gibberish, Sigster!
That walking away bit is a big leap with out foundation. My view is that if you want a fiat a currency, fine have it but do us all a favor and manage it in a manner the maintains purchasing power.
Lets suppose that you had a fiat currency whose issuance was limited by some means. Lets further suppose that you had serious constraints on the issuance of credit money; i.e., loans. Then you might be able to preserve purchasing power.
Now please note that there have been many financial collapses under the gold standard. Please note further that those collapses occurred because there had been excessive and imprudent lending.
This current mess is the result of rampant speculation supported by incredibly easy money and unprosecuted fraud. If you examine the forces that drive this sort of behavior you get to the fact that Wall Street has been engaging in a great chase for yield, by any means. Morality and ethics are cast aside and the deal is the end all. Along the way you are abetted by a Fed Chairman who publicly holds that the prosecution of financial fraud is unnecessary because the efficient market will automatically do the requisite policing.
Also in the foregoing, we will embrace the idea that price determining information is normally distributed in the ‘market’. You gotta realy drink the kool aid to accept that little beauty. Markets are the creation of people. As markets are the creation of people, markets are subject to all the foibles, fallacy and fraud that people can conceive of and execute. When people become universally objective and commit no crimes whatsoever, that will indeed be the first coming.
As long as the banking system has been stabilized, the Fed doesn’t really care about unemployment. If unemployment rises to the point where it starts to impair loan performance, then maybe they’ll take some tentative steps, but that’s about it. We’ve reached a point where the financial system largely IS the economy in the US.
RueTheDay,
Exactly my point! if high employment leads to substantial loan losses then you can expect the conniving scoundrel, Ben Bernanke will come up with instruments which will bail out the banks .. else he will just show his middle finger .. Rat!!
In prior recessions, you used to hear “buy American” messages. Not any more. I guess we just don’t make enough consumer products to make it worthwhile to run such a campaign.
Too many good/services chasing too few jobs to sustain aggregate demand = DEFLATION and AUSTERITY. INVOLUNTARY UNEMPLOYMENT is AUSTERITY! Why it isn’t seen as such by the “American people” is the relevant question.
Blame the Fed, Congress, POTUS, etc but in a capitalist society job creation and employment growth are largely the “responsibility” of the private sector. But flush with cash and excess capacity, CAPITAL is on strike – neither investing, lending, or hiring. If it is a test of wills over sovereignty – MARKET versus NATIONAL – the former is winning for now. But why?
Even though CLASS may appear to be the dominant fault line in American politics it cannot explain why the “American people” accept U6 at approx 20%, if not higher. If CLASS was the primary fault line then why isn’t FULL EMPLOYMENT the primary impetus for policies to alleviate this deplorable, debilitating situation? Deficits and inflation have more traction. Why?
Perhaps its time to begin looking at this conundrum through the lens of ETHNICITY. CLASS and RACE are still present, particularly the latter. But the dominant ethnic group – white Americans – is essentially captured by the ruling CLASS and hitched its wagon to it, knowing that the brunt of unemployment/underemployment is borne by other ethnic groups – BLACKS and HISPANICS. If we narrow this a bit more to SUBURBAN America, the last refuge of what’s left of the American middle class, this “alliance” between CAPITAL and SUBURBAN AMERICA becomes even more apparent. Of course the latter isn’t immune to AUSTERITY in its various guises, but it increasingly sees itself losing ground with nowhere else to look for salvation but CAPITAL. It’s the only game in town, darlin!
White suburban America has internalized the value system of the dominant class and its very existence is self-confirmation that upward, social mobility – the American Dream – is still viable, that capitalism still works for this dominant ethnic group. And so long as the brunt of AUSTERITY is borne by other ethnic groups outside of suburbia and largely concentrated in urban America where law enforcement is tasked with keeping the dysfunctional problems generated by unemployment/underemployment confined to it, then AUSTERITY is accepted by this dominant ethnic group. [Skippy’s previous comment is relevant here.] And even those members of the other ethnic groups who work their way out of urban America and escape to surburbia have more in common with their new neighbors, reinforcing the view that education, hard work, and living within one’s means still works, confirming in many of them that America is still a melting pot… Could it be any simpler?
Meanwhile the ruling class laughs all the way to the bank in the knowledge that the divide-and-conquer strategy pitting one ethnic group against the others explains why AUSTERITY is preferred to FULL EMPLOYMENT. Only when white suburban America concludes that its economic interests and those of the ruling class no longer coincide will ETHNICITY devolve/evolve perhaps into CLASS, making it the dominant fault line in American politics. But until then… the willing penintents of and for AUSTERITY in suburbia know who will bear the brunt of it – at least in the short term. And when you live in the “eternal present” that’s all that matters.
I think the Weimar analogy is incorrect. Thanks to the parasite class of banksters and financial frauds, The USA (and much of the world) the world looks a great deal more like the antebellum south. The US is being retrofitted as another third world toilet with a huge underclass struggling to SURVIVE on the equivalent of a dollar a day.
White middle class Americans, millions of whom already have been (and more will continue to be) disenfranchised, unemployed, uninsured and homeless. Pretty soon, room and board in exchange for work will begin to sound very appealing. As white America joins the global plantation, it won’t be too long before you hear us saying “yes massa.”
This is the entire objective of this completely engineered financial “crisis.”
Is ‘full’ employment not mandated in the Fed’s charter as Siggy and others point out? If so, I’m surprised it’s not prominently noted in the post that the Fed is in direct violation and therfore illegitimate on that score alone, in addition to many others.
The Fed’s mandate is “maximum employment,” not full employment. The maximum, apparently, floats like the value of our currency. Today it is a U3 of 9.5%
By some metrics (some insist more realistic) it’s 17%-plus. Of course, we could simply change official measurement parameters and, presto, get it back down to 6%.
Maybe you are underestimating the Fed – maybe they are plotting a new bubble at this moment, to play the role in “recovery” that the housing bubble did in the last recession.
You got it. It’s already been named — Bubble III. [Bubble I was the Naz 5000 internet rally; Bubble II was the real estate /CDO frenzy].
ZIRP has laid the foundation for Bubble III. It remains to be seen which asset class will go parabolic next. (I vote for gold; other nominations are welcome.)
But in a hollowed-out economy largely stripped of its productive capacity, Bubbles are not merely regrettable side effects — they are a way of life and the backbone of public policy.
Bubble me up, Benny! There’s no free money on this pokey planet!
They’re out of bubbles to blow. Wall Street and its servant (aka the Fed) now know that deflation is inevitable. Having successfully dumped all their toxic assets on the GSEs, they’re now prepared and calling for a full blown deflationary depression. Once we hit the real bottom, the banks can finally spend all that money the Fed printed for them to make them look solvent.
In The daily losses from unemployment, Bill Mitchell shows how the daily cost of unemployment is huge. Human suffering and degradation aside, the economic losses from unemployment are so high as to be just stupid, especially when this condition can easily be overcome through enlightened fiscal policy. In fact, the principal thrust of MMT is full empoylment/full utilization along with price stability. There is a broad literature on this. See, for example, Full Employment Abandoned: Shifting Sands and Policy Failures
by William Mitchell, Professor of Economics, Centre of Full Employment and Equity, University of Newcastle, Australia and Joan Muysken, Professor of Economics, CofFEE-Europe, University of Maastricht, The Netherlands (Elgar, 2008).
Even the “modest” so-called natural unemployment under NAIRU is tremendously inefficient and expensive, as well as wasteful of human resources. Plus, NAIRU is founded on bad economics. It is a failed idea that needs to be replaced with the realization that it is possible to have full utilization/full employment along with price stability through proper fiscal policy. Monetarism is dead, and now it’s a zombie that is eating us alive.
Let’s not forget that a “global economy” without global labor standards was doomed from the start, but of course, that was the entire point.
In the US, high unemployment will destroy what’s left of the economy, because the USA is a consumer driven economy. Unemployed people aren’t consumers because they have no income.
But of course when the world is run by people who believe Ayn Rand’s Atlas Shrugged was a serious work instead of the obvious satire that it actually was (how can you hold up the world if you’re standing on top of it again?) it is not difficult to see why that moron Greenspan and the other Villagers are completely oblivious.
The only comfort I take in any of this is that by destroying the US consumer base, the “elite” are eating themselves.
Sadly, this condition will not end without violence. It never does. When the aristocracy starts finding their grandkids swinging from lampposts, they will revet to being “satisfied” with just 95% of EVERYTHING ON EARTH instead of all of it.
Underlying this, of course, must be an underlying belief in market fundamentalism. They must believe we’ve been hit with a real shock, and that the market should be left to adjust according to its own tune, and that the Fed is only there to prevent total armageddon.
The author is confused. The Fed is incompatible with the free market and no rational central banker could believe that the free market is possible as long as CB’s control the supply of money and credit.
What we have boys and girls is a failure of interventionism and proof that no matter what the professed intentions, meddling with markets does not work.
Human greed and corruption are the realities that give the lie to the libertarian fantasy of a “free market.”
I think part of the libertarian “fantasy” of free markets is that governments inevitably become greedy and corrupt. Libertarianism, IMO, is attempting to distribute decision making – in order counter the corruption that comes from central government control.
Regulatory capture, revolving doors between regulators and big business, campaign contributions, etc. are all examples that demonstrate the incestuous nature between corrupt big businesses and government.
Polarizing the debate doesn’t help. You need the checks and balances on each party. But who provides this? That, to me, is the $64 trillion question.
The governments aren’t greedy. The governments didnt cause this crisis — the greedy “free market” did. Criminals, hucksters, frauds and cheats run this country.
That aint no government of mine.
The Fed does not control the supply of money and credit.
As pointed out by a 1990 Fed paper, credit is extended months BEFORE reserves are created. That is, the banks create money through lending, and it is the banks, therefore, that control the supply of money and credit.
Steve Keen had a good analysis of the reality of endogenous money:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
What I find ironic is that free market purists like libertarians base so much of what they believe upon a set of economic theories that don’t include banks and money. Given the centrality of banks in creating depressions, doesn’t the fact that banks don’t exist in neoclassical economics just scream “don’t look at the man behind the curtain”? Well, shouldn’t we be looking at the man behind the curtain, the banks? The Austrian school isn’t much better. “Malinvestment” is such a banal word for the fraud that it is meant to excuse. Thus, the Austrians, too, purposefully put blinders on when it comes to banks.
But even if all this were not true and the Fed really did control money and credit, who controls the Fed? The banks do, specifically the big Wall Street players. The other big lie that free market purists tend to cling to is the notion that the Fed is part of the evil government because its existence is mandated by law. There may have been a time when the government exerted real control over the Fed, but that has not been true since at least Volcker’s day. And Wall Street runs the government these days.
We live in a mercenary and insular society.
This is so pervasive that we are only beginning to see moves toward political realignment. For example, only now(!) have the Social Democrats USA, who are loosely affiliated with the Democratic Party (and maybe the most mainstream of what appears to be a number of socialist political parties in America) issued a DECLARATION OF INDEPENDENCE FROM THE CORPORATE WING OF THE DEMOCRATIC PARTY.
Along the same lines. Bob Herberts writes today about: Restoring a Hallowed Vision:
“My view of the labor movement today,” [Bob King, new President of the UAW] … said in an interview, “is that we got too focused on our contracts and our own membership and forgot that the only way, ultimately, that we protect our members and workers in general is by fighting for justice for everybody.”
. . . He is a believer in cooperative efforts and shared sacrifice, and is unabashedly idealistic as he outlines what can only be described as a new activism on labor’s part.
. . . “The Tea Party has been more vocal than we’ve been,” he said. “There is something wrong with that picture.”
Opps . . . here’s the link: Restoring a Hallowed Vision
Thank you, Yves, for another great post. For such invaluable public service you deserve a wonderful vacation.
You ask “Is … the new normal of high unemployment and inadequate job growth … seen as acceptable by policymakers …?”
It’s a new GEICO commercial—like asking about the Pope’s religion or a bear’s duty in the woods. Why should the Fed care? As long as the divisive, dissonant tea partiers keep ventilating their own feet in support of self-imposed austerity, low taxes on the off-shore rich and hands-off the corporate kleptocracy, the Fed doesn’t have to care. Thanks to confused wing nuts who equate fascism and socialism, the Palin-drones and ditto-heads, this new overheated world odor (volatile hydrocarbons) is indeed the new normal.
The buck for this egregious negligence of course stops at Obama’s desk. But he doesn’t care. It’s in the script by the authors of confusion. The righteous wing of the kleptocracy will predictably throw Oily Barry into Slick Willie’s theatrical 1994 ‘briar patch’, and for his 2012 reelection bid he’ll then trot out the old dog-eared lines about ‘feeling our pain’ and protecting the sheeple from the wolves. And thus the distracting drama will continue…
Ah… but not this time! Yesterday’s post about record defaults by the nouveau pseudo-rich marks a historic tipping point in this Ponzi drama. It’s stupefying how once again the bubblelicious Fed can be—or pretend to be—so willfully blind to this ominous trend. But this time, it’s also the wannabe-one-percenters who will now be forced to feel the painful impact of their cruel unenlightened self-interest in the inevitable deleveraging. When newly unemployed speculators, rigged-traders, MSM “journalists”, economist minions, and defeated warmongers join the ranks of the unwashed, then the Fed will rapidly lose the smug insularity of its ivory-tower impunity. And that tipping point is surely near.
Serious question for MMT advocates.
One of the policies advocated by many MMT’ers is that the federal government can print any money it needs, rather than issuing debt. When the time comes to fight inflation by reducing the money supply, the government can collect the money in taxes and then “destroy” those dollars.
How does this differ from what we currently have?
If treasury issues debt (securities) and the Fed buys them, there are no interest payments in reality (technically treasury pays interest, but those become Fed “profits”, which are remitted to treasury – it’s like paying yourself a dollar). When the security comes to maturity the treasury pays the principal, but it can do so by issuing a new security. In other words, as long as treasury rolls it over and the Fed holds the security (which it bought by printing money) then treasury can “borrow” money at no interest indefinitely. It’s no different in practice than having the Fed print the money and handing it over to treasury.
When it comes time to reduce the money supply and fight inflation, the Fed can sell treasuries and “destroy” the dollars that were used to pay for them. The government now has to pay off the security “for real”, but it can get the money to do so by raising taxes. Again, there is no functional difference.
What am I missing?
MMT’ers propose no bonds and letting the overnight rate fall to zero for several reasons. Debt issuance is unnecessary under a nonconvertible floating rate monetary regime, where the government issues currency, so it does need to tax in order to fund itself or issue debt to finance itself. Currency issuance and taxation are fiscal operations. Debt issuance is monetary operation that drains excess reserves generated by deficits in order to the CB to be able to hit its target rate without large OMO.
Since debt issuance isn not necessary other than for CB monetary operations, the question must be asked: What are the advantages and what are the disadvantages. The supposed advantage is allowing the CB to set the overnight rate, the base risk free rate as a benchmark. This supposedly allows the CB to manage inflationary expectations by rate adjustment.
What are the disadvantages? The first is that it creates the illusion that the government must borrow to finance its deficits and that taxes must eventually rise to pay the debt. This is completely erroneous, and it is driving the present economic and political debate, threatening the recovery and also the long term health of the economy by shrinking government welfare spending, thereby reducing nominal aggregate demand significantly.
Secondly, the CD is purposely independent of political influence, supposedly to keep politicians hands off the money supply. Well, the CB doesn’t control the money supply under the present system. It’s a fiction and the result of obsolete gold standard thinking. The upshot is that a small group of technocrats selected from an elite section of the population gets to set the base price of money instead of the market. These people are unelected and unaccountable. That is anti-democratic and also anti-capitalistic.
Bonds are a gold standard anachronism that now serve chiefly to provide a risk-free interest-bearing parking place for wealth. This is a needless subsidy of a privilege group and as such it is a dead weight that does not advance public purpose, but detracts from it. If a serious proposal were made to end bond issuance, watch the elite howl over the threatened subsidy, although, of course, they will come up with all kinds of bogus reasons why bonds are needed and help everyone. It’s BS.
tom’s comment about the myth of federal spending and the need to “borrow” money at interest to pay for it is the core of the problem we face as a country right now.
why should the government be borrowing money from the same banks we just bailed out? the absurdity does not begin there. the bush tax cuts of multi trillion dollars were almost as bad, as again the government then turned right around and borrowed money from many of the same folks whose taxes it just cut.
as for borrowing from the chinese, why would you, in a rational world, allow folks you are forced to borrow hundreds of billions from, privileged access to your domestic markets while your people and businesses are dropping like flies left and right as a result?
obviously, this is a game designed by a ruling financial class, not technocrats seeking to maximize their nation’s economic strength.
modern government’s have controlled their currencies until the fed reserve system, the central bank system, effectively autonomous from elected political authorities, was instituted in the usa, and progressively, across the planet. indeed, the usa through the treasury-imf-world bank complex has been forcing third world governments to make this change as well.
their reasons are about shifting power away from domestic and politically accountable actors to unaccountable global financial actors.
we also find the usa beginning to resemble a third world state to the extent that it bails out its private bankers, puts their privatized debts onto the public balance sheet, and then lets the banks go about screwing over their “constituencies” all over again.
while watching the recent bailout of wall street i could not help but think about clinton-rubin-greenspan’s bailout of citicorp and friends in mexico during the peso crisis of december 1994, within weeks of their new president zedillo taking office and realizing the previous president salinas, who pushed nafta negotiations through with bush sr and clinton in the late 1980s and early 1990s, had left one hell of a mess with the financial system, and once wall street and zedillo realized the mexican banks and state were screwed, clinton came up with a quick 50 billion loan.
a few yrs later zedillo covered up all the fraud and corruption behind the “toxic assets” the government took over, and their version of TARP, called FOBAPROA, was passed. the burden on mexican taxpayers and therefore their government’s social welfare budget was devastating….
people’s economic ignorance is not served by those who argue that if we just went back to truly free markets or the gold standard all would be well.
free markets serve the powerful. entrenched cartels and oligopolies in the domestic and global economy love peddling the myth of free markets. it reinforces their power.
those obsessed with a return to the gold standard do not know anything about world economic history.
Not bad, Alex. A few points:
“One of the policies advocated by many MMT’ers is that the federal government can print any money it needs, rather than issuing debt. When the time comes to fight inflation by reducing the money supply, the government can collect the money in taxes and then “destroy” those dollars.”
Of course, this is not to say the govt SHOULD always create money. MMT sees inflation beyond a target rate (such as the Fed’s 2% implied target) as the appropriate constraint to how much spending or deficit there should be (better to say deficit than spending here, as MMT’ers are generally in favor of tax cuts).
Also, “when the time comes” the deficit will already be smaller via automatic stabilizers. Fully 2/3 of the deficit (I think, according to CBO–correct me if I’m recalling incorrectly, but I know it was a significant %) is due to the downturn, not proactive policy actions.
“How does this differ from what we currently have?”
It differs greatly, because there would be either proactive policy to restore full employment, or (preferably, though it would take a bit to implement) quite aggressive automatic stabilizers, such as a job guarantee, and a number of other ideas.
“If treasury issues debt (securities) and the Fed buys them, there are no interest payments in reality (technically treasury pays interest, but those become Fed “profits”, which are remitted to treasury – it’s like paying yourself a dollar). When the security comes to maturity the treasury pays the principal, but it can do so by issuing a new security. In other words, as long as treasury rolls it over and the Fed holds the security (which it bought by printing money) then treasury can “borrow” money at no interest indefinitely. It’s no different in practice than having the Fed print the money and handing it over to treasury.”
True. BUT, there is still an interest cost IF the Fed has a positive interest rate target, because in that case the Fed would have to pay interest on all the reserve balances created in order to achieve its target. And the Fed’s interest pmts reduce the profits remitted to the Tsy. So, even if the Fed does this, there is still an interest cost with a positive target rate, but the rate on the debt becomes precisely the target rate, instead of an average of short and longer term rates set (mostly but not entirely) as a function of the Fed’s current and expected target rates.
“When it comes time to reduce the money supply and fight inflation, the Fed can sell treasuries and “destroy” the dollars that were used to pay for them. The government now has to pay off the security “for real”, but it can get the money to do so by raising taxes. Again, there is no functional difference.”
MMT would not see this as a serious inflation fighting mechanism, actually. A deficit creates net financial assets for the non-govt sector. A surplus reduces net financial assets for the non-govt sector. A bond sale has no effect, aside from interest payments, for the net financial assets of the non-govt sector.
Hope that helps.
“It differs greatly, because there would be either proactive policy to restore full employment, or (preferably, though it would take a bit to implement) quite aggressive automatic stabilizers, such as a job guarantee, and a number of other ideas.”
I view this as Keynesian stimulus that would be facilitated by an MMT-style policy, rather than an “inherent” aspect of MMT. Not that that’s necessarily a bad thing, but it can be done by issuing debt too.
While I’m an advocate of Keynesian stimulus, the extent to which the government can use it isn’t infinite. In a debt issuance approach, the limit is often viewed as gov’t debt as %/GDP. No two people agree on what a prudent limit is, but they generally agree there’s a limit.
What is the limiting factor from the MMT POV?
“True. BUT, there is still an interest cost IF the Fed has a positive interest rate target, because in that case the Fed would have to pay interest on all the reserve balances created in order to achieve its target.”
Why does the Fed have to pay interest on required reserves? There’s talk of not having the Fed pay interest on reserves, so excess reserves will be loaned out. One country (Sweden?) is even paying negative interest on its reserves.
“MMT would not see this as a serious inflation fighting mechanism, actually.”
What would MMT view as a serious inflation fighting mechanism?
“A bond sale has no effect, aside from interest payments, for the net financial assets of the non-govt sector.”
I don’t understand this. It reduces the money supply, which is the goal, rather than reducing private sector financial assets in general.
Alex,
I submitted a response with a number of links. It hasn’t shown up yet. Hopefully it will.
Thanks. I’ll look for it. It’s a pleasure having an intelligent debate about MMT instead of a shouting match.
Let me try again without the direct links and see what happens. Those are good questions, by the way.
“I view this as Keynesian stimulus that would be facilitated by an MMT-style policy, rather than an “inherent” aspect of MMT. Not that that’s necessarily a bad thing, but it can be done by issuing debt too.”
There’s a difference. See Pavlina Tcherneva’s WP542 from 8/2008 at levy.org.
“While I’m an advocate of Keynesian stimulus, the extent to which the government can use it isn’t infinite. In a debt issuance approach, the limit is often viewed as gov’t debt as %/GDP. No two people agree on what a prudent limit is, but they generally agree there’s a limit.”
The limit is debt service, not debt. The debt ratio is merely assumed because a particular interest rate is assumed. See my WP53 called “interest rates and fiscal sustainability” at cfeps.org.
“What is the limiting factor from the MMT POV?”
The limiting factor is inflation beyond the inflation target.
“Why does the Fed have to pay interest on required reserves? There’s talk of not having the Fed pay interest on reserves, so excess reserves will be loaned out. One country (Sweden?) is even paying negative interest on its reserves.”
Banks don’t lend ER or RR. Loans create deposits. reserves only settle payments or meet reserve requirements. And banks can avoid as much RR as they want to (mostly, anyway) with sweep accounts. See principles 1 through 5 here: http://www.cfeps.org/ss2008/ss08r/fulwiller/Fullwiler%20Modern%20CB%20Operations.pdf
My blogs from June 18 2009 and July 9 2009 at neweconomicperspectives.blogspot.com explain how reserves actually work.
Also, regarding negative interest rates, see my two posts on that from July 11 and July 14 (both 2009) at neweconomicperspectives.blogspot.com.
“What would MMT view as a serious inflation fighting mechanism?”
For AD driven inflation, it would be a govt surplus. Billy blog just did a post on MMT and demand-driven inflation last week. Also, there’s a good deal of MMT research on financial regulation alternatives to avoid asset price bubbles.
“I don’t understand this. It reduces the money supply, which is the goal, rather than reducing private sector financial assets in general.”
It reduces a particular definition of the money supply, but not other definitions. It has nothing to do with reducing the ability of the private sector to spend. And it adds to the deficit an additional interest payment that raises the income and net financial assets of the non-govt sector. See my blogs “what if the govt just prints money?” (november 22, 2009) and “helicopter drops are fiscal operations” (january 7, 2010) from neweconomicperspetives.blogspot.com.
Alex, some MMT’ers (Wray, Mitchell) propose no bonds. Bonds are a holdover from the gold standard. A monetarily sovereign government that is the monopoly provider of a nonconvertible floating rate currency (like the US, UK, Japan, Canada and Australia, but no the EZ) is not financially constrained. As the currency issuer it has no need to fund itself with taxation or finance itself with debt. Government debt issuance is an anachronism dating to the convertible fixed rate regime under the gold standard.
The US Congress requires a $-4-$ debt offset of deficits, but that is a political restraint, not a necessary financial one. The interest on the bonds is a subsidy to the rentier class, pure and simple, and it constitutes a dead weight. Better just to eliminate it and get rid of the necessity to pay interest on the funds the government issues, since it is not needed, favors limited interests, and does not advance public purpose other than to increase nongovernment net financial assets. Targeted expenditure makes more sense for advancing public purpose than subsidizing the already wealthy, however.
FRB thinking, U3 and not U6.
FRB thinking, Public US debt, not Gross US debt, FRB stopped even reporting the Trust fund balances.
When a contract was canceled, one of the cancelers told me, to get to the people at the top, you start at the bottom.
Seems to me that we will be getting quite a few “new” economists as this plays out.
I think the Fed is very susceptible to internal groupthink and they thought that bernanke’s playbook would work. Now they see it isn’t, so they have been externalizing the balme – mainly the European aren’t “contributing”. But they cant do anything yet because of the calendar. They will step on the gas again post election when it’s obvious to everyone and so they are being begged even by the republicans. Right now if they engage in massive qe just prior to election, they will become a huge target and I am sure they are cognizant of that. They also know they are going to engage in qe sooner rather than later, which is why there is patently choreographed “regional governor opposition” that has been much discussed in Economist ft wsj etc. This shows how seriously they are taking the Chinese warnings via safe, and also price of gold. They ie they are talking like they want to preseve price stability, so that when they do the next qe it will be to prevent worldwide defaltion.
The Fed is just a tool of the kleptocracy. They aren’t insular. They are criminally complicit. Of course, unemployment is not a concern for them. Their business is looting and the facilitation of it. It is to profoundly misunderstand what is going on here to think that they are simply out of touch or incompetent. They are doing exactly what they mean to do, and are deadly serious out it. There are no errors, mistakes, or miscalculations involved. They do not need to be educated or enlightened. They need to be in jail.
Think about it. The dot com bubble. The housing bubble. Bear Stearns. The meltdown. The bailouts. The new bubbles. Nobody is that blind. Yet we are asked to believe that the very people who are supposed to be the most expert are. What we have here is not incompetence but a criminal mindset. As each cycle of stealing collapses on itself, they dutifully trot out and defend the next. This is the very essence of kleptocracy. It is criminality institutionalized. It is Nixon’s dictum that “when the President does it that means it is not illegal” extended to the Fed and our elites in general. Just because Nixon thought this did not make it so. Just because the people at the Fed act and think the same way doesn’t make it so either.
I know it is asking to make a jump in thinking but we need to start looking at Bernanke, Rosengren, Bullard, Yellen, Dudley, and all the others at the Fed in the same way we would look at any other hardened criminal, be it a rapist or murderer. We are warned by the likes of Cass Sunstein that this is the criminalization of policy differences, but it is not. It is about the criminalization of criminality. Just because our politicians, the banksters, and the Fed believe they have a right to steal from us does not legitimize their activities, not even if they write laws saying it’s OK if they do.
That is why I said they are deadly serious about what they are doing. They have gone far beyond do overs and innocent mistakes. They can’t go back. They will continue as long as we let them. And if we are to win back our country, democracy, Constitution, and economy, we must not let them.
The Fed really is insular. After spending a bit of time with various Fed types in social settings, I have learned that the more committed to the Fed they are, the more clueless they are about the rest of the world. Unlike the predatory sociopaths of ‘high finance’, Fed types can seem pleasantly simple. But in my experience you can count on their missing an enormous amount of texture.
They are either blind, stupid, complicit, or clueless. The GFC was cased by rampant fraud — Enron writ large — and the Fed as regulator was asleep at the switch while the freight trains filled with loot were passing by.
The Fed is like the BP oil well and then the relief well, as noted on another post a few days ago (from Yves):
Re: Our Glenn Stehle has likened it to hitting a target the size of a dinner plate….at 18,000 feet below sea level.
The Fed is essentially trying to hit a target the size of pea-brained retard… no that’s not right, …. hmmm, I’m not sure what the Fed is trying to hit, but zero is a good number!
* Tossed off bike today and flew upside down and landed on back …. whew, that was fun; glad I’m here to post crap!
Hi Yves:
You run about as tight a site as there is. I would email you this, but I cannot figure out how. I guess you don’t want to check emails. I would not either.
Just wanted to say as far as learning how to write, you may be the best instructor I’ve ever encountered. My upper level James Joyce class didn’t do it. I was confused and hungover most of the time, but by reading an amazing writer day in and day out I’ve learned a lot, especially how bad a writer I am. It’s not all about the econ all the time.
Scott
Given the intensity of response to this article – I think we hit a nerve!