Yves here. It seems oddly fitting to resort to a tried and true approach for dealing with the unwind of the corporate bond bubble by resorting to Brady Bonds….a mechanism used with dodgy Latin American borrowers.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year
With thanks to Dirk Bezemer and Paul Craig Roberts for their generous help with this article
Even before the Covid-19 crisis has slashed stock prices nearly in half since it erupted in January, financial markets were in an inherently unstable condition. Years of quantitative easing had loaded so much credit into stock and bond prices that stock price/earnings multiples were far too high and bond yields far too low by any normal and reasonable historical standards. Risk premiums have disappeared, with only a few basis points separating U.S. Treasury bills and corporate bonds.
The Fed’s Quantitative Easing since 2008, plus large companies using their earnings for stock buybacks, drove the prices of financial assets into a realm of unreality. The result was that markets already wee teetering on the brink of fragility. Any rise of normal interest to more normal conditions, or any external shock, was bound to crash the artificial value at which financial markets were priced. The Fed’s policy was to perpetuate this situation for as long as possible, acting in effect as the Republican re-election team by pumping in yet more credit. But at near-zero interest rates, there was little that could be done.
A close parallel to this situation was the state of Third World debt in the mid-1980s. Mexico’s announcement that it could not meet its foreign debt service was the shock that brought ugly financial reality into conflict with the assumption that somehow any government debt could be paid – even debts denominated in a foreign currency.
The international financial system was rescued by the issue of Brady bonds – “good” new bonds for old “bad” ones. The capital value of these bonds was still far below the original debt, but they had the virtue of setting realistic levels by bringing the debt balance more in line with the actual ability of debtor countries to earn the dollars or other hard currencies needed to service these bonds.
The current crisis requires a similar wrote-down and recognition that fictitious price levels must give way to reality at some point. In fact, we have reached the end of an illusion – the illusion that bond (and stock) prices could be sustained indefinitely simply by financial engineering, without an economic base capable of producing enough surplus revenue to justify existing bond and stock prices.
So attractive were the former unrealistic bond and stock levels that the markets are still in the “denial phase” hoping that the Corona virus bailout may be used as an opportunity for yet further infusion of capital into the financial markets. But that merely postpones the inevitable adjustment to bring back financial asset prices in line with real economic capabilities.
There certainly is a financial panic, and prices are not necessarily more realistic in a panic then they were in the bubble leading up to it. The question is, what is a sustainable asset-price level? What needs to be supported is a realistic value of stocks and bonds. Bad debts should be taken off the books, not supported in an attempt to recover the unrealistic pre-virus levels.
A Successful Way of Coping with Overpriced Bonds and Other Debts
This was the situation with Third World debt in the early 1980s after Mexico triggered the Latin American debt bomb by explaining that it did not have the money to service its foreign bonds. Prices for Third World bonds plummeted as investors calculated the dollar-earning power of countries that had to export goods and services (or sell off their assets) to pay their foreign-currency debts. But their export proceeds simply could not cover the debt service that was owed.
The Sovereign Debt market was trading at such low prices that these foreign government bonds had become illiquid. Unable to obtain further credit, countries confronted by this financial state of affairs were threatened with political instability.
That is not presently the state of the U.S. bond and stock market, thanks to the Federal Reserve’s long Quantitative Easing and support of the financial markets (euphemized as the Plunge Protection Team). This artificial life support aimed at saving banks and large companies, pension funds and state and local finance from insolvency. But in doing this the Fed was subsidizing illusory values that could not be sustained.
The reality is that large swaths of the remarkable expansion in the post 2008 corporate bond market boom have seen a proliferation of corporate bonds that cannot be paid. The economy’s shutdown makes all bond and stock prices “virtual prices,” as if they would be in the absence of a virus and debt crisis. The fracking industry is only the most visible example. Airlines, entertainment, hotels and retail companies are facing losses that threaten their solvency.
The Fed fears a free market when it comes to asset prices. Or at least, it fears the political and economic consequences of withdrawing artificial support. But reality overpowered the Fed’s mid-March intervention – until an even larger infusion was anticipated. Even before the Corona virus, markets were debt-strapped that even the announcement of $1.5 trillion in a day did not stem a steep DJIA sell-off.
In recent days the Fed “announced that it would buy corporate bonds, including the riskiest investment-grade debt, for the first time in its history.”[1]
This is the “Denial stage” of the grieving crisis over the loss of an illusion – the illusion that the stock and bond run-up could be turned from government manipulation into an actual market reality.
Where is this supposed to end? The Fed could buy up all the bonds – from corporate junk to state and municipal bonds as a way to prevent their prices from falling. At an extreme, this business-as-usual scenario would lead to the Fed owning the junk- bond market and a large swath of the stock market.
This could admittedly have a silver lining: having concentrated the debt in its own hands, the Fed would then have a free hand to write off the debt, privatize the companies and start all over again with a lower debt overhead. That is what China’s central bank has been doing: simply forgiving debt that is owed to itself. The Fed would swap “good” public debt (good in the sense that the government can print the money to pay) for bad (meaning unpayable) bonds and stocks.
Bringing financial markets in line with reality would mean writing off a large swath of corporate debt and realizing that much corporate equity “wealth” has been created by decapitalizing corporations in stock buybacks instead of investing in the country’s productive capacity, including decent wages for workers. The American airline industry over the last decade has spent as much as 96% of its cash on stock buybacks – giving financial wealth to their CEOs and shareholders rather than buying up real wealth in the economy. Such financial wealth, if not underpinned by real wealth, is built on quicksand, and it is now disappearing as all asset markets are plummeting. So stock buybacks and other artificial ways to ‘create wealth’ were “investments” that have had drastically negative returns.
To implement a rationalization of bond and stock prices bringing them in line with reality, it has to be in the interest of holders of these securities. Acknowledging that bonds are not worth as much as the price at which the Fed is supporting them will not appeal to bondholders as long as prices are artificially supported. A bond-swap (new good bonds for old bad bonds) can only be achieved in a situation where it is more realistic and less risky to have a sound good bond than a low-priced (or fictitiously high-priced) bad bond.
Therefore, the Fed should let prices sink to their “market” level sansinterference.
The Fed is trying to support the unsupportable. By doing this, it has blocked a reasonable solution bringing financial asset prices in line with the realistic ability to carry debt.
Without the Fed’s support, bonds would need to be written down and stock prices continue to plunge. That would prepare the ground for something like the Brady Bond solution for Third World debts in the 1980s. Latin American and other Third World bonds were selling around 25 cents on the dollar in the wake of Mexico’s announcement that it could not pay its scheduled debt in 1982. There was widespread recognition that Latin American governments couldn’t pay their bonds. That was because these bonds were denominated in US dollars, and foreign governments can only print their own currency. When they did this to throw domestic money onto foreign exchange markets, their exchange rates plunged.[2]
Brady bonds addressed the problem by a swap of “good bonds for old.” The new bonds would receive IMF and other support, and were based on what foreign countries actually could pay in foreign exchange (mainly U.S. dollars). Bondholders could swap their old bonds, which were selling from 15 to 25 cents on the dollar, for new bonds priced higher than the market price but less than the original issue, but which at least were secure and less risky. They were “reality bonds.”
The government can organize something similar for corporate bonds after the market takes the artificial QE-added values out. However, to create a market environment for such an alternative, the Fed must let bonds and stocks fall to their natural “realistic” level recognizing that the existing debt overhead can’t be paid. Then, new “reality bonds” can be issued and the economy can start again with a non-crippling debt level.
Banks and major creditors would have to absorb much of the loss resulting from the runup of stock and bond prices to overvalued levels. But something similar was a feature of the Brady reforms, which called for burden sharing by banks (the London club) and also governments (the Paris club) who had to provide debt relief.
The alternative is that we will face reality without a solution.
[1]Jeanna Smialek, “The Fed Goes All In With Unlimited Bond-Buying Plan,” The New York Times, March 23, 2020. This report adds: “Because the Fed cannot take on substantial credit risk itself, the Treasury Department backs its emergency lending, using money from a fund that contains just $95 billion. Treasury Secretary Steven Mnuchin on Sunday suggested that the new money in the Republican bill could be leveraged by the Fed to back some $4 trillion in financing.”
[2]The situation was much like German reparations in the 1920s. (I have chapters in my Trade, Development and Foreign Debton the German experience and subsequent IMF theories that were equally disastrous.
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Why should the fed let prices sink to their ‘market’ value rather than buy, or rather attempt to make whole, these financial assets at their speculative/fictitious face value. It seems to me, the fed is primarily a vehicle for the capital/oligarchy. The FED and Treasury look to be following the policies and procedures of the post ’08 era. What stops them from paying inflated rates for all this junk before writing it down?
I agree with you. First we need a general vulgar understanding of what is actually happening in the world. THEN come outrage. Then comes a change in the system.
The starting assumptions and preconditions still are a mystery to the general public, so the charlatans claiming to bring solutions don’t have to speak to their utter hypocrisy. It looks to me that the foxes are still securely guarding the henhouse until further notice.
To fix this would require a source of information that is credible and not controlled by those foxes. Instead of going to such reliable sources (like this blog) people are going to places like Infowars.
Well, that’s precisely the problem that I’m warning about. First, the Fed will bail out the speculators, and THEN write down the loans. A giant giveaway and subsidy to the financial sector.
That’s what the IMF did BEFORE Latin American currencies collapsed. They would extend “stabilization loans” to support flight capital, and then, after the early bondholders had sold to vulture funds, proceed with the bond swap.
How do propose to solve the problem without hurting employees? And customers? Seems like the down side is collapse of the market, which this time around will be a depression as large or larger than great depression, with no one not being badly impacted.
For 4+ decades the neoliberal system has placed global governments in this position! We need to get out of it!!!!
I wondered about that too because in the process of letting them sink, they’d take the economy with them. By panic if nothing else. And it’s all 6s anyway – the Fed can buy up overpriced bonds and write them off just like reality priced bonds. No?
Not sure why this occurred, but the Fed made the most money in its history because it bought up what were considered ‘junk’ assets during the GFC. Did further Fed support, after the GFC, re-inflate the prices which the Fed then sold and made a bundle? Are we in a ‘rinse and repeat’ cycle where bonds become grossly over priced, in part because of Fed largess, and then comes the exhale where the Fed steps in and buys at bargain prices, only to reflate them again? Sounds a little crazy to me though. Could it be?
It is rather pointless for the Fed to make money. They can print money. All they manage to do is soak value out of the economy.
Making Shit Up is a violation of our written site Policies.
The Fed loaned against junk assets. It did not buy them.
The program was called the TALF, the Term Asset-Backed Securities Loan Facility:
https://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Loan_Facility
And the people who made money from it were in the private sector:
https://www.rollingstone.com/politics/politics-news/the-real-housewives-of-wall-street-246430/
This sounds like an interesting solution though I am sure that there would be a lot of resistance to it in Washington. The optics of treating the value of American bonds in the same way as 1980s Mexican debt may be something that they might not consider. In any case, I am reminded of the couple that lived the high life and ran up debts on a whole series of card debts. So they took a loan to pay off all their cards and consolidate all their debts on a single card. But then in a short order of time, that coupla ran up all those empty cards back up to the max limits again. So it would be with US debts – they would just run up more of them. So I will go over my skis and make a suggestion.
Perhaps what the Feds should do is a swap. Take Boeing for example. They could offer to swap Boeing’s debts in exchange for equity in that corporation. Because of the amount of equity held, they could then make illegal stock-buybacks (which once were in any case) for that corporation and enable them to get a look at the books. Make them invest their profits back into the company. Boeing is trying to play hard ball at the moment and demand that any bail out come free of any stake in the country so they can swing in the breeze until they come to their senses. Later on the government can sell off those bonds when Boeing is once more profitable – so long as they sell it off for the face value of those debts when they purchased them.
The bank of Japan has already done that by buying up ETFs. The only thing that will work is a write down. Think of the economy like an ecosystem. Debt levels are like levels of carbon, too high and the temperature of the planet will rise, giving us global warming. 2008 was the ecosystem telling us our way of life is destroying it and by destroying it, ourselves. If we decide to continue to uphold these high debt values, things will progressively get worse as they have the past ten years. If this crisis doesn’t destroy the dollar the next will. I also think the recovery period will grow shorter and shorter in between crisis.
Right. Matt Stoller has made this suggestion, and hopes that Representatives will insist upon it.
Yes, tough for Boeing to be profitable last several years when they are close to a government protected monopoly. Perhaps offer it to Vlad and see if he’ll trade his half eaten popcorn bag for an equity stake in that corrupt and crappy piece of garbage.
The current CEO of Boeing has said already that there is no way they will swap debt for equity. He said specifically, if that condition is imposed on the current bail-out, Boeing will not participate, because, “We have plenty of other sources to go to.” I wonder how many people will see that statement.
You are talking about nationalization, which seems reasonable in exchange for printed money, but in the US orthodoxy, nationalization is communist sin. The most amazing thing though is that instead of marking all this horse$h!t to market, the expectation is that these paragons of capitalism simply be given blank cheques.
“Nationalizing” bankrupt institutions is as American as Apple pie. The founding fathers would have found a central bank printing money to bail out failed capitalists and then letting them maintain control as bananas as I do, I suspect.
Ireland just did it with their health system!
with the exception of alexander hamilton….. he would see the wisdom.. surely.
It is the rare day when Michael Hudson demonstrates “ivory tower” thinking. This is one on them. I believe that Hudson’s analysis of where we are and how we got here are correct. And his solution to the inevitable corporate debt write down sounds reasonable, but he seems to be unaware that the “Greenspan put” is alive, well and many steps ahead of us all.
We have not reached an end to this illusion, and “fictitious price levels” can be maintained ad infinitum. Bad debts are being taken off the books as I tap…by the many new Fed Special Purpose Vehicles. And what better name for them – SPIVS. The “illusory values” and “virtual prices” of this torrent of bad debt will be ensconced in the charmingly named Term Asset-backed Lending Facility (TALF), Primary Market Corporate Credit Facility (PMCCF), Secondary Market Credit Facility (SMCCF), Money Market Mutual Fund Liquidity Facility (MMLF), and the Commercial Paper Funding Facility (CPFF). Hat tip to Wolf Richter here: “…the Fed provides loans to SPVs. These SPVs then do the actual deals.”
So, the bad debts are “illusions.” They become “fictitious; virtual.” Out there in never-never land. Kind of like a old junk car next to a rural barn. At least Timmy and Ben had the courtesy to attach a decent name to the SPIV precursor and template, Maiden Lane. The Fed will not “…be bringing financial markets in line with reality” I agree with Hudson that the Fed should let prices sink to their “market” level sans interference.” Earth to Michael…it’s not gonna happen.
As Michael would have it, banks and lending institutions would have to shoulder most of these losses. There would be a follow-up issue of “reality bonds” to rid the economy of these crippling debt levels. Hudson ends his essay with the line, “The alternative is that we will face a reality without a solution.” Bah-da-bing! Now, I have to hurry to my Anthropology class at 11:30.
Well, what you describe is sure happening today.
My point is that when the speculators have all taken their giveaways re financial securities, THEN there has to be a write down of the “real” economy.
At present, stock prices are soaring — while profit and output outlook is plunging.
How long can this last?
I know you have been following this much longer then myself Mr. Hudson, but after watching for 12 years, nothing but people being thrown out on the streets and not having anything to eat will change this. That or the dollar losing reserve currency status, which amounts to the same thing.
Most people I know complain to me, “I just don’t understand economics.” I try to explain MMT and how ‘your hard-earned taxes’ aren’t really necessary to fund social programs. Forget stock-buybacks and the role of government bonds. Or the difference between monetary and fiscal solutions. Well, my understanding gets rather shaky as well.
Economic and fiscal policy, money creation, stocks and bonds even, are some magical actions performed in the dark by wizards. The rest of us just bow down and worship, mumbling some incantations learned in school that we hope will protect us. Not a bug, but a feature, as Lambert often points out.
We need memes. Short enough to fit on those colored squares that FaceBook features. Can we explain the evils of stock buy backs in two dozen words? Or why the rich prefer bonds rather than taxes? Or why the federal government really taxes? Pithy, short, picturesque, catchy, memorable.
Yep exactly Eclair, I suggested something similar to MMT’s Professor Mitchell years ago when he asked his readers how to explain MMT to the masses, and gave him a whole list of short phrases (although still not quite short enough). His general writing, and much MMT writing for that matter, wont convince the masses, it’s so detailed and full of jargon it’s scary, they will get completely lost. It’s got to be short sharp catchy phrases for the public. And the phrases should respond in kind to the types of short glib phrases that the neoliberals use all the time.
I hate to say it but MMT needs a marketing guy. But preferably not Scotty from Marketing…
We need memes. Short enough to fit on those colored squares that FaceBook features. Can we explain the evils of stock buy backs in two dozen words? Or why the rich prefer bonds rather than taxes? Or why the federal government really taxes? Pithy, short, picturesque, catchy, memorable.
+1000
We’ve got memes by the score right here on NC! Today my favorites include “The dogs won’t eat the dog food” and “socialism for the rich”. The problem is, how do we get them on TV?? How can we make Rachel Maddow speak them? How do we get them printed in the NYT?? How do we get them into the textbooks??
I think everybody here is doing everything they can on every front. And we’re making progress (see Roubini’s shout-out for MMT). But the jury’s out on whether we can do it in time.
Yes!!!…Socialism for the poor, poor, destitute rich!…Kapitalism SAVED by socialism!!!
Makes me want to burst out in song…
“Poor, poor, pitiful rich… poor poor pitiful rich
ree-al-i-ty can be such a bitch…
poor, poor, pitiful rich!!
Who gets the next verse???
!!! Jumpers away!!!
.
The real economic capabilities of a country/corporation should be the pricing mechanism for bonds and stocks. Credit should be reality priced. Somehow that is all turned around so that bonds and stocks are the pricing mechanism for the corporation – the corporation being ground zero for “economic capabilities”. This is the world of bond vigilantes where all debts are bad and bad debts are perpetuated and made worse in an attempt to recover unrealistic gains to service costs and debts. This is a good illustration of just how corporations are as caught-up as individuals in a totally absurd rat race where money is the only thing that has value. Alice in Wonderland.
If the US falls into a deep recession or depression (they claim they will not let that happen) and faith in money, the dollar, collapses, how on earth will it matter whether or not we keep “rolling over the debts”? Unless it is merely a braking mechanism to coordinate a completely new economy. A bad system beats no system at all? Congress’s wonderful generosity and empathy for all of us is nothing more than stark-eyed financial panic being politicked with nonsense about profligate corporations (did they ever have a choice?). The whole system, top to bottom, is done.
>(they claim they will not let that happen)
And or course how pray tell will they prevent it? If they knew what they were doing we would have had a cushion for this crisis ready.
BTW, I was wondering about Germany – I was always under the impression that they basically took August off and went to the beach. Could they just bump it back to April?
My larger point is that if we weren’t just hamsters who have been spinning the wheel faster and faster and faster since Reagan then we could handle this a lot better.
just last night the corona reports out of germany are that the cases are exploding; they are probably just behind Spain which is as bad as italy – i wonder if when germany announced its 350 bn corona budget they thought the news would somehow stop the spread of corona – and then merkel herself got it. Look how awful NYC is – it took off just a week ago and they don’t have anyplace to store the bodies… The whole thing qualifies for vaudeville, humorless vaudeville.
I read Hudson whenever I can and appreciate his insights. But can we get a summary of what’s happening that regular people can understand? No disrespect to Hudson whatsoever, but I have a BA, MIA, and JD and can’t understand any of this stuff. My friends who were/are smart enough to avoid anything beyond undergrad are baffled by what the Feds are doing to enrich themselves, again and again blah blah blah at our expense. As much as I hate to say this, a series of memes would be a good place to start. Ugh I’m terrible.
I do better with visuals like flow charts. “A picture is worth a thousand words…”
If it can be represented in a chart, then I understand instantly what the process is. It was how I came to finally understand mortgage backed securities, CDO, etc. Words just weren’t enough until I saw it all in a chart.
Done:
I can’t come up with a better “meme” than what Alan Greenspan said when he testified before Congress in 2008 when asked if he was wrong about how the economic forces in our system could “self-regulate”; his answer was, “I was wrong!”
Jumpin’ Grandfather Frogs!
Since the late 1980’s Greenspan had held the Congress, the people of this country in his palm of the hand with his dramatic testimonies on how the markets would always self regulate!
And then he finally admits, “I was wrong” as the American people (and much of the globe at the time) were sinking into the mud of financial disaster after suffering under his “meme”…….Really!
Interesting proposal for recognizing losses and allowing financial assets to fall to realizable values in large volumes under a ‘one size fits all’ policy while providing creditors such as pension plans and university endowments with some assurances regarding their future payment streams. But how much of this outstanding debt has been issued by businesses in sectors that are not in the long-term public interest or whose business model is no longer viable, such as fracking or the overbuilding of retail and commercial real estate space? Who would run the triage unit, and don’t the bankruptcy code and courts serve a similar purpose?
As mentioned in comments above, I would also like to see related prohibitions enacted to prevent looting through corporate stock buybacks and massive dividend payouts that have so damaged our corporations, left them vulnerable to economic disruption such as the pandemic, and deprived them of funding for necessary R&D and capital expenditures;. Recognition of the public interest and the interests of employees should also be required through legally mandated board memberships. Further, it is important to legally curtail gaming of this proposal by the usual suspects on Wall Street, in private equity, and at hedge funds, which I vaguely recall was done with Brady bonds.
I don’t see any overriding public purpose served by socializing the losses of pre-existing shareholders. It’s a risk they take.
Yes the “shareholders shouldn’t lose money” is such a weird thing. Of course shareholders should lose money, I don’t care if the company makes a bad product or it’s factory gets hit by a random meteor. If you don’t like that, it’s why we have Treasury Bonds.
Yes indeed
Write downs may happen when there are a mass of pitchforks in the streets. For what it’s worth, Covid-19 further exposes the science fiction of the financialization process, potentially ushering in a generation more inclined to deal with real world economic cause and consequence. MMT 101 should be a standard course requirement in high school.
Thanks, Dr. Hudson!
Please keep telling folk what they need to hear. Some of us still don’t get it completely, but the sands are shifting. God bless!
Eclair, Dan: Here’s your “meme”:
GDP is the measure of a nation’s PRODUCTIVE economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because ALL spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.
What conclusions can you draw from this meme?
1) That government spending does not require taxes or borrowing (as neither its borrowings nor its personal or business income or property taxes are included in GDP), yet GDP includes provision of all of of household’s wants/needs for goods and services.
2) That an economy is really a “flow” (ie, an ongoing series of income/expenses) and that the “stock” (or “wealth”) view of an economy (ie, as an accumulation of assets/liabilities) is a fiction (ie, existing only in perception).
3) that government can fully provide for all the needs of its citizens (ie, food, shelter, healthcare, education) without a private business sector or it can “encourage” (not “create”) a private sector to fulfill all or part of those needs.
4) That much of what we think of as important to an economy (eg, the whole financial sector) is NON-PRODUCTIVE, little more than a giant gambling casino of little value to a nation’s populace (and of significant detriment in its encouragement of debt).
Professor Hudson thanks for the insights!
Your last sentence really said it all as we are up to that point!
‘The alternative is that we will face reality without a solution.’
After listening to neoliberal garbage philosophy for 4+ decades we need to take the pill and ditch it !
What ever happens people’s lifestyles we will be readjusted and they better start with the 6 inches between their ears!!!
1. It could be a distressing and unpalatable for the many.
2.Or something that can be maintained and sustained in a realistic way.
Because we run two economies a financialized one and a real one and the former sucks the life out of the latter as that is the only way it can survive. It is a parasite!
These events are lessons people need to internalize and take on board in earnest.
When death stalks us it is not bankers we turn to, or corporate executives, or hedge fund managers. Nonetheless, those are the people our societies have best rewarded. They are the people who, if salaries are a measure of value, are the most prized.
But they are not the people we need, as individuals, as societies, as nations. Rather, it will be doctors, nurses, public health workers, care-givers and social workers who will be battling to save lives by risking their own.
During this health crisis we may indeed notice who and what is most important. But will we remember the sacrifice, their value after the virus is no longer headline news? Or will we go back to business as usual – until the next crisis – rewarding the arms manufacturers, the billionaire owners of the media, the fossil fuel company bosses, and the financial-services parasites feeding off other people’s money?
Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.
https://www.wsj.com/articles/SB113392265577715881
“Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”
What has Ben Bernanke got wrong?
He thinks banks are financial intermediaries and there was no way he could understand the debt deflation of the Great Depression.
Policymakers can now convince themselves “debt doesn’t matter”, as it doesn’t appear to if banks are financial intermediaries, but they aren’t.
OK policymakers, you now have the information necessary.
The central banks started revealing how banks really work in 2014.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
What has Paul Krugman got wrong?
He still thinks banks are financial intermediaries even though the BoE and other central banks have stated otherwise.
DEBT IS MONEY WE OWE TO OURSELVES
DEBT IS MONEY WE OWE TO OURSELVES
DEBT IS MONEY WE OWE TO OURSELVES
DEBT IS MONEY ….
Come on policymakers, there are no excuses now.
Isn’t the Fed just practicing good MMT? Why do we need to change that?
Mr. Hudson, I have a request please. I am a homeschooling mother assembling curricula for middle and high school students. The suggested reading in this area is a lot of libertarian dross. Could you please recommend text suitable for this age as well as for laypeople? A lot of parents in my circle are trying to find primers that aren’t dry reading for themselves as well as children.
All I can say is my own books, Steve Keen’s Debunking Economics, and Randy Wray’s basic monetary books.
Thank you!!!
Michael: one question, if you are still reading: what would keep the fed from buying up corporate bonds this way simply to write them off (possibly after freezing payment requirements for an indefinite period)?