Governments Need to Take the Reins Back From Central Banks and Deal with Economic Imbalances

Macrobusiness flagged a short interview with Ann Pettifor, a highly-regarded international finance expert who is the Director of Policy Research for Macroeconomics on the ABC program The Business. Pettifor argues that economists are responsible for the bias today to over-rely on monetary policy to solve problems that can only be addressed by government spending. Leaning too heavily on monetary policy to try to address weak growth simply generates asset bubbles.

I have to confess that I have some additional motives for featuring this clip. One is that Pettifor is a very effective and persuasive speaker, particularly in making complex ideas accessible, and so I like highlighting her commentary whenever I come across it (she seemed uncharacteristically hesitant this time, and I suspect she was thrown off by the remote video link, it looks like the latency between London and Sydney was significant). The second is that the interviewer was Ticky Fullerton, who was a friend when I lived in Sydney (among other things, I cat sat her two Abyssinians for about ten days when I first arrived while she was doing a documentary in London for the ABC investigative program Four Corners). She’s ex what was then CSFB, now Credit Suisse, and gave up both finance and London to become a TV journalist down under. So I’m glad to see she’s continuing to do well.

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  1. Ben Johannson

    Ann is incoherent. She begins by acknowledging the Fed can move interest rates wherever it wants (stating the Fed is “hosing” liquidity is an implicit acknowledgement that it alone is the currency issuer and has no constraint), and then contradicts that by launching into the text-book/CNBC/Fama recitation about how yields and rates would have been driven up uncontrollably by markets if the Fed ceased its monthly reserve injections. This is simply ahistorical. Why didn’t yields rise after the end of previous rounds of Quantitative Easing if it’s the case (as she describes) that QE is the Fed holding the lid down while the pressure builds?

    She then repeats the discredited notion that borrowing reduces reserves, which it most certainly does not. Government borrowing is a reserve add as the funding comes indirectly from the Fed, something that was public knowledge in 1947 and yet has become arcane in today’s world.

    Her heart is in the right place but her argument just reinforces conservative economic dogma

  2. Banger

    I think Pettifor mentioned the key to our economic woes. We approach financial and economic issues through ideological lenses. Somehow, perhaps due to the fact economics unmoored itself from politics, it has moved through the realm of theology to sort of fundamentalism that has almost no basis in reality. The reason it does appear to be “real” is because that ideology (which goes way beyond neo-liberalism) undergirds not just our actual political structure but our culture as well. To be absurdly simplistic, the idea that pursuing my economic self-interest (as opposed to any other sort) will benefit society as a whole, is has no basis in reason or science. Human beings are not built to pursue self-interest because we are, in the most basic, sense social beings who aren’t just dependent on others but als viscerally connected to people and the environment.

    Loretta Napoleoni claims that the difference between the Chinese approach to economics (again deeply and properly rooted in politics) is pragmatic and non-ideological and that’s what allows it to out-compete the West. We can’t do what Pettifor suggests (to stimulate the economy) because if we did so the whole edifice of of economic, political and cultural thinking collapses. The political elites know consciously or unconsciously (I suspect it’s a bit of both) that without the idea of “individualism”, dog-eat-dog competition, scarcity, fear of the future, “security”, and the need for escapism (to avoid stress and release tension) the whole edifice of the emergent authoritarian situation will collapse and people will just meet their neighbors as friends, life will degenerate into creative play and great parties and a stunning flowering of invention as people are released from the bonds of stress and fear.

    Because, if you believe in an older intellectual framework of my father’s generation, i.e., that development itself will increase literacy, increase well-being, increase knowledge, increase happiness (which should be the goal), increase productivity and create a sustainable society, then you would have no hesitation in government stimulating the economy. I also believe that a growing economy based on a new calculus for “externatilities” (social and environmental) would create a very different infrastructure and basic technology to meet our basic needs. The science and engineering is there waiting to be used but due to the authoritarian political arrangements we live under cannot and will not be used. I suggest to you that the next step in our evolution is being aggressively inhibited by the corporate oligarchs who know that their raw power depends on keeping us in fear and stress for which they offer fake antidotes. They cure our collective hangover by more and cheaper Vodka.

    1. Chauncey Gardiner

      Thank you for a thoughtful comment. I particularly agree that fear, stress and artificially created scarcity have been and are continuing to be aggressively applied as tools of control and manipulation. Fear trumps democracy. Active application of a constant stream of fear and stress, especially over a prolonged time period such as that to which we have been subjected, is deeply damaging at both the individual level and to any society.

    2. anon y'mouse


      I know you do not care what I think (who does? not even I take myself seriously, if honest), but this right here…is beautiful.

      our conversations were never meant to imply i back stringing people up by lampshades because they are evil (although that is nice figurative shorthand). it is examining the power relations. it appears that we have moved towards each other in our views, in some ways.

      I’ve never seen anyone change their minds by arguing over the internet before. if not a masquerade or game, this gives me some hope that what we have been able to do we can teach others to do as well.

  3. washunate

    That headline assumes two rather large facts:

    1) That central banks aren’t part of governments.

    2) That economic imbalances are not wanted by governments.

  4. Hugh

    “Pettifor argues that economists are responsible for the bias today to over-rely on monetary policy to solve problems that can only be addressed by government spending. Leaning too heavily on monetary policy to try to address weak growth simply generates asset bubbles.”

    Bubbles are a feature, not a bug. Economists are useful, even enthusiastic, tools of the kleptocrats. The reason kleptocrats favor monetary approaches is that it funnels money into their pockets. Fiscal policy runs the risk of funneling it into other people’s pockets. Economists are like chauffeurs they may be driving the limo but they are not the ones deciding where it is going.

  5. craazyboy

    We need more economists pointing out that the finance sector has little to do with the real economy nowadays (except bad effects). Otherwise we need to rename the profession to “Financists”. Or maybe “Bank Physicists”.

    1. anon y'mouse

      if economists were more like physicists, they might spend more time examining the black hole into which the wealth of the world is being drawn.

      then we might get something useful.

      either that, or we get the supercollider boondoggles.

      1. craazyboy

        Except that the physicists the banks have been hiring are making mathematical risk models that prove there are no black holes.

  6. TC

    CREDIT is the answer. Not monetary policy, not fiscal deficits, but CREDIT. The Fed conjured out of thin air over $20 trillion of credit facilities for the purpose of backstopping what today remains a hopelessly insolvent trans-Atlantic banking system. The Fed can just as easily conjure CREDIT out of thin air to finance investment in the nation’s capital stock. This need not be done on budget.

    This end of marshalling credit in fact is codified in the U.S. Constitution as a power of Congress (see Article I, Section 8). One could argue the granting of this power is one of the very core purposes of our federal constitution in fact.

    Why monetarists struggle so with the Hamiltonian notion of credit I do not know. Investments in the creative capacity of humankind whose effect in fact is dis-inflationary, and rather serves to strengthen the purchasing power of the medium of exchange is not a difficult conception to wrap one’s brain around. These capacities the Hamiltonian notion of CREDIT facilitate. We could easily put these capacities to practice simply by nationalizing the Federal Reserve and transforming this broken institution–hopelessly insolvent, just like the banking system it lords over–into a Hamiltonian national bank.

    Elizabeth Warren had the right idea with her bill S.897 to finance Department of Education Stafford Loans at the Fed’s discount window at the going discount rate of 0.5%. Education, indeed, is one fine permutation of an INVESTMENT in the nation’s capital stock. Such investment offers the promise (although not the guarantee) of increasing the purchasing power each and every citizen attains–gains access to–through their labor. CREDIT is the most effective means of facilitating this most necessary form of investment in the nation’s capital stock. This approach is shown prudent by the fact that, what’s formed through credit-facilitated investment is a framework offering not only to pay back the investment many times over, but through the enhanced physical platform our credit-facilitated investment creates we promote an advanced means by which future credit might further leverage the naturally creative capacities of humankind.

    Keynes is dead. Long live Hamilton!

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