Martin Wolf Defends Central Banks’ Negative Interest Rate Policies

The Financial Times has become even more erratic of late, mixing first-rate stories with all-too-obvious pumping for special interest. Today, the pink paper had a twofer in the articles it flagged above its masthead, Tamper with tax havens at your peril and Martin Wolf’s Don’t blame central banks for negative rates. While Financial Times readers laughed off the first article, they are likely to take the second one seriously.

Wolf is too good an economist not to know that his column exculpating central bankers is off base, but he’s also regularly invoked (as he does here) Bernanke’s “saving glut” theory, which conveniently lets the Fed and its confreres off the hook.

Here is what is wrong with his article:

Contra Wolf, entral banks are largely responsible for the mess we are in. The Fed stopped supervising primary dealers in 1992. Later that decade, after a derivatives crash that destroyed more value than the 1987 crash, the Fed took the view that it was fine to let banks not only use derivatives with minimal supervision, but allowed them to develop their own risk models with no central bank involvement, insuring that supervisors would be behind the curve. Greenspan and Rubin later fought successfully against the regulation of credit default swaps, a major driver of the crisis. The Fed ignored warnings its own Ed Gramlich and from the Bank of International Settlements about a housing bubble in the early 2000s, and refused to act to supervise and restrict subprime mortgages as required under the Home Owners Equity Protection Act.

The Fed, which was slow to see the crisis was coming, then overreacted. It made steeper cuts in the Fed Funds rate than were neeed to signal that it was on the case and ready to provide liquidity; the mantra at the time was “75 is the new 25” (basis point rate cut). At the time, I saw cutting the Fed Funds rate below 2% as crossing an event horizon.

Central banks bailed out the financial system without making demands or imposing reforms. No bank boards or executives were replaced. Banks were not told they’d need to write down and modify dud loans, most of all consumer mortgages. At the very outset of the crisis, Japanese authorities warned the US that their big mistake had been being soft on the banks. That advice was ignored. Before you try arguing they lacked authority, they were plenty creative in finding authority to do all their emergency footwork even though many of their actions were an overreach. And let us not forget that Sheila Bair at the FDIC, despite being fought by Treasury and having comparatively limited regulatory authority, forced Citigroup to downsize considerably in 2009.

Central banks also overwhelmingly rely on economic models that treat the economy as having a natural propensity to be at full employment; any other state is as a result of an external shock. Economists do not include the banking system at all in their models, and refuse to recognize that the financial system can and does produce endogenous shocks; in fact, Andrew Haldane of the Bank of England pointed out in 2010 that bankers have strong incentives to run wild:

Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments.

Those models overstated the speed of recovery and understated the severity of damage done by the crisis. This in turn provided poor guidance to governments in terms of how much spending they needed to undertake to create enough demand to offset the damage of the financial train wreck. For instance, when Haldane in this same paper did a rough estimate of the total cost of the crisis, and used one times global GDP as his working figure, he was attacked as being way too pessimistic. That now looks to be about correct.

More generally, central bankers have continued to fight the last war, of inflation, and have done serious real economy harm by using the reserve force of workers (higher unemployment) to reduce labor bargaining power as their method for keeping inflation down. Michal Kalecki’s 1944 Essay on Politics and Ideology pointed out that the obstacles to achieving full employment were social and political, not economic. Even though businessmen would make more money with full employment, they would have less power and status relative to workers. And Kalecki foresaw that the end game of letting businessmen have their way was negative interest rates:

We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome — as it may well be under the pressure of the masses — the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system…

In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in ‘playing with’ (public) investment or ‘wasting money’ on subsidizing consumption.

It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

Central bankers, particularly in panicked period right after the crisis, could readily have told governments and legislatures in private or public, “We can’t solve this problem. You need to run deficits big enough and long enough to get the economy back on track. The best way is through social safety nets, since those expenditures rise in bad times and fall off in good ones, so you won’t have to intervene much, which is controversial and hard to fine tune even if when you have the votes and the right leaders.” But they didn’t.

Wolf: “Ultimately, market forces are determining what savers get.”

This is rubbish.

First, Wolf is selling the “loanable funds” model which was debunked in part by Keynes and put to rest by Robinson and Kaldor. Investment is not limited by the amount of savings. Banks can create new deposits, meaning new money for investment, out of thin air, by lending. The Fed has very quietly admitted this fact (although in a typical intellectual disconnect, it does not seem to penetrate its policy view or its key models). The Bank of England has been more straightforward, even in recent years discussion endogenous money in basic primers. And a recent sighing comes in a VoxEU post by a Bank of England advisor: Banks are Not Intermediaries of Loanable Funds – and Why This Matters.

So in Wolf’s post, every time you read formulations like, “The central bank has nothing to do with this, it’s all Mr. Market,” that’s code for the loanable funds theory.

Second, central banks work very hard to influence what prevailing returns on financial assets are. Why do you think central bankers spend so much time telegraphing their rate expectation and planned interest rate moves if they were mere rate takers? Did Wolf manage to forget the taper tantrum of 2014?

Third, negative interest rates are not a state of nature. Before central banks decided to drive rates into negative terrain, they were observed intermittently, and at very low negative levels, in Japan in the 1990s. And let us not forget that the Bank of Japan bears primary responsibility for the unheard-of bubble that led to its colossal bust. In the 1980s, after the Plaza Accord drove the yen to stratopsheric levels (hurting exporters) and the Louvre Accord to undo that wasn’t as successful as desired, the authorities decided to lower interest rates for the express purpose of boosting asset prices to create a wealth effect to produce more consumption. Instead, they got more inequality, which was particularly divisive in Japan, as well as the eventual train wreck. Yet Western central bankers have continued to copy from Japan’s failed playbook.

Wolf: “The world economy is suffering from a glut of savings relative to investment opportunities.” The savings glut is a corollary of the invalid loanable fund theory, but I wanted to flag it separately.

We have lousy infrastructure in the US, and the world desperately need to undertake a World War II level effort to combat global warming. That’s just for starters.

The reason for underinvestment by business is very bad fashion and incentives. Corporations are now so short-termmist that as of the early 2000s (when underinvestment was becoming visible in the data) that McKinsey could not persuade clients to undertake projects that would have a payback of 11 months because they didn’t want to have a negative income statement impact (any investment project inevitably has a part that can’t be treated as “investment” and put on the balance sheet. For example, you have to engage experts, pay marketing expenses, hire more people). More generally, Andrew Haldane and others have found that businesses set their required return rates considerably higher than they need to to have profitable ventures, even allowing for a risk premium. The implication is that businesses chronically underinvest, particularly in opportunities with back-loaded paybacks….like infrastructure and R&D. That’s why those in more rational times are heavily funded by government.

Another reason for the lack of more investment is lousy demand. Businessmen don’t run out and invest more when money is on sale, which is what the loanable funds and savings glut story assumes. They invest when they see an opportunity. So the cost and availability of financing might constrain expanding, but making borrowing cheap won’t facilitate it. The big exception? If the cost of money is one of your biggest costs. Cheap money is a big subsidy to bankers and speculators, which has not gone unnoticed by the great unwashed public.

The one upside of Wolf’s fundamentally misleading article is that it says central bankers are feeling the heat. Unfortunately, a well-connected economist told me that he is suddenly hearing a lot of neo-Austrian talk from British economists that he says clearly know better. So while Wolf is merely sticking to established, if bogus, positions his latest bout of central bank public relations, there appears to be a concerted campaign, at least among some economists, to circle the wagons in support of deeply wrongheaded negative interest rate policies. If they don’t wind up reaping an economic whirlwind, they will in due course get a political one.

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  1. Disturbed Voter

    “The Market” is how business interests have always swept the dirt under the rug. Doing otherwise displeases powerful people.

    Aren’t negative interest rates, what non-US-dollar folks are using to stay afloat when the dollar is over-valued in this low primary interest rate regime?

    Without the “exorbitant privilege” of printing dollars there is no US prosperity, aside from the new marijuana farms.

  2. BruceNY

    Not all companies are as short-term as you cite. Amazon, for example, is (in)famous for its approach to capex and disregard for short-term profit. There are numerous other high profile examples of companies that when they see growth opportunities, are willing to tell their story and invest in pursuit of that growth at the expense of short term profit. Netflix, sales force, chipotle, tesla, etc. Also keep in mind that most of the S&P is now FIRE, Tech, and services (like healthcare). An insurance company is not going to radically change its annual capex spending, nor would an established tech company that primarily sells services (or is just a closet marketer).

    In fact, recent history would argue against capex splurges in pursuit of projected growth on a spreadsheet can be very risky. The sector that invested most heavily the last few years in capex is oil and gas, and look at that sector now. When I look at private business, what I mainly see is over-supply, combined with a bunch of new “disruptor” business model entrants surely making life difficult for expansion planning. Eg Netflix and cable – should cable be expanding as it loses subscribers? Should hospitals expand in the face of “doc-in-a-box” clinic proliferation? Should steel companies expand in the face of massive Chinese oversupply of steel and dumping? Should car manufacturers expand even as the pig in the python of auto leases now comes due, driving down used car prices? Etc.

    This is not to say that the two examples you cite – infrastructure and climate change tech – shouldn’t receive more capex, most definitely they should. But infrastructure spend is almost entirely government-driven. Private companies need the state contract before they can go repair potholes in I-95. As a frequent driver on that interstate, I can’t even begin to fathom what the delay is. But those repairs are not happening very quickly. As for climate change tech, it is happening. But even there you have some examples of companies that based their model on government subsidies and grew too fast, and now are bankrupt or have questionable balance sheets. There are also plenty of open questions surrounding a lot of this CC tech infrastructure buildout, such as who pays for the removal of small solar farm facilities once their useful life is over. So long story short, the two examples you cite that need new spending are not in the main decided by private companies.

    It would be great if you would cite some examples of industries where you think companies currently have underinvested. I honestly don’t see any, but perhaps you do.

    1. Larry

      I can give you one example of an industry where the snake is eating it’s own tail. That is the Pharama industry. The ultimate example of behavior in this industry is the McKinssey alum lead Valeant pharmaceuticals. They have simply become a patent troll. They leverage funds to buy patents or off patent drugs with one supplier and jack up the price. This model does not allow for any innovation and deprives governments of needed funds for all manner of productive spending (Government is still the #1 buyer of healthcare).

      Pfizer is another example of a company that continues to shrink R&D year over year over year. They are run more like a financial enterprise than a productive industry. What they’ve spent on share buybacks and dividends alone would fund a lot of productive research. Moreover they’ve destroyed a lot of productive human capital in the process of changing how they operate. Talented scientists with years of experience are cast out into the street with diminished opportunities for future employemnt. And make no mistake, by and large their training was a public expense that can now be considered wasted.

      Or if we look to the technology sector, what of IBM? They are infamous at this point for having their share price being the only important metric for corporate governance. They have downsized and continue to downsize as again they line investors pockets.

      That’s two industries and three examples. But just take a look at broader trends in the business world.

      The title of that article is Share Buybacks: The Bill is Coming Due.

      Companies have taken to borrowing money at low interest to buy back shares. In what fantasy world does this not represent elites just stripping companies for their own private gain? There is nothing productive about an activity like this. They’re not returning excess capital to investors because they can’t find any growth opportunities to invest in. Their reason for being is to return capital to investors. All other considerations must fall behind that one.

    2. tegnost

      Those may not be good examples. Amazon operates with a de facto negative interest rate by not paying sales tax, and in their case as well as netflix and salesforce are web based companies whose virtual value only becomes real after they’ve used it to acquire competitors or invest in server farms and warehouses and these three have certainly benefited from ZIRP to help them turn virtual cash into real cash. Tesla, imo, is really your only decent example because they advance battery technology, but I’m sure they benefit also from subsidy in some form for it, but I don’t know where. I fail to see where chipotle fits in. Then you point out that FIRE, tech, and healthcare are the economy when really tech and healthcare collapse without FIRE so really we just have a FIRE economy with gov’t policy forcing our consumption into it via inflated housing, required aca, and the bizarre assumption that we really really need to replace humans with robots and globalize like cancer. Disposing of solar farms? I’ve never pondered this, but would place it as another in an endless list of trash that our society needs to dispose of, like nuclear waste. So out of all this what I’m getting at is that companies are using cheap money to invest, like in the case of pfizer, in harvesting money from their company, which is more like looting than investing long term as you imply. The country could use some of that subsidy to all of the ge’s and apples and pfizers and fix bridges, build trains etc but as a policy choice does not, instead choosing to go negative, give FIRE more dough, and as I thought was made reasonably clear by the post, continue in that trend until there is a policy change to make it stop. Oh, and the delay in fixing I-95 is probably because they want to turn it into a private toll road, but first they have to let it get really bad in order to justify the sell off, a certain investment bank probably has that bond deal ready for when the populace can’t take any more pain…In Seattle two of our major arterial highways are toll roads, I think the 405 toll is $10/trip! Companies all over (boeing anyone?), are basing their business model on gov’t subsidies, we at least get something out of the solar and wind investments and in spite of solyndra it’s a growth industry as we and the businesses that invested in bridge repair, trains, etc… will be beneficially impacted, as per the excellent observations made in the post attributed to Kalecki.

    3. Marshall Auerback

      The problem is that the marginal investment dollar for corporations now goes toward share buybacks and is often accompanied by accounting fraud (see Bill Black’s work on this). To keep quarterly profits in line with what was expected on “the Street”, management has had to turn to increasingly esoteric financial speculation—in areas that not only failed to serve the public purpose but also actively subverted it. At the same time, the structure of incentives and rewards was changed such that risky bets, high leverage ratios, and short-term profits were promoted over long-term firm survival and returns to investors and the business itself. Tied to this is the issue of excessive executive compensation that has been tied to short-term performance, which increases the pressures to do anything that justifies huge bonuses.

  3. dcb

    My access to rticles on the site is limited, but I sent Mr. worlf a letter today both debunking him, and why he refuses to push things that have to be wrong. But he’s an economist and all too many in that field are like that. I sent keens work, and I explained just as a somple matter that we wouldn’t have there huge asset markets that have grown in log fashion if the savings thing was true. that kind of growth/ gdp should not be possible (I’m pretty sure)

    1. gary headlock

      Googling the headline in a private/incognito browsing window will allow you to bypass the paywall for FT.

  4. rich caldwell

    Nice to hear your voice in this “right-on” original post. A much appreciated reminder of where “economic true north” actually lies…

  5. MikeNY

    It continues to amaze me how unshakeably resolute establishment figures are in refusing to look at the overstuffed pink pig in the room. Larry Fink pens a piece about how very low and negative rates are counterproductive, and hurt the economy in the long run; Martin Wolf invokes Bernanke’s “savings glut” hypothesis to explain anemic growth and justify ZIRP and NIRP.

    Neither one has the balls to mention the underlying cause: too much money in too few hands. Because this truth i) threatens the established order, and ii) implies there’s something fundamentally wrong with all those flossy econometric models.

    But Yves, you are right: there will be a reckoning: political, if not economic.

    1. James Levy

      I’m not feeling well coming back from work today so this may sound nastier than I mean it to but, political reckoning from whom? Donald Trump is going to rob from the rich and give to the poor? The populist Right in Europe? Putin? The Chinese Communist Party? Where is this reckoning going to come from, because I don’t see it anywhere.

      1. MikeNY

        I think you’re seeing it now, James. Populism is the reckoning. Voters will embrace more ‘radical’ solutions on both the left and the right. And that will continue until the slide into oligarchy stops, one way or another.

      2. JEHR

        As an outsider, I would suggest that Sanders might just be capable of a “reckoning” should he be elected President.

        1. EoinW

          Is that the same Sanders who finally called a spade a spade when it comes to Clinton and had her on the run, then he turns around and admits to Charlie Rose she isn’t so bad after all? Keep dreaming!

      3. Vatch

        James, you have a valid point. Maybe Mike’s response will change my mind, but the low levels of voter participation imply that people simply aren’t ready to oppose the richest 0.01%. I have enormous difficulty altering the thinking of friends and family members who support Clinton or any of the Republicans. The mere existence of North Korea shows that a government can be extremely abusive and continue to get away with it decade after decade.

        1. craazyboy

          Definitely a question of timing. Do we get the reckoning before or after the Soylent Green factories start popping up all over the place? Will they call Soylent Green factories “Churches” and they are of course tax exempt???

      4. Jim

        “Donald Trump is going to rob from the rich and give to the poor?”

        What Donald Trump has accomplished on an emotional level is to mobilize profound class resentment (whether intentionally or not).

        This emotional resentment is the primary form of energy feeding populism on right. This energy(anger/outrage, desire for revenge, envy) helps to legitimize
        working-class origins and is part of the fuel necessary to generate a potentially emerging self-confidence and endorsement of a more populist economic/political/and cultural narrative.

        Sanders, in a less radical and threatening way, is mobilizing this same type of emotional populist resentment on the left.

        Such feelings are indeed capable of “getting out of hand” especially from the perspective of our neo-liberal “betters.”

        1. James Levy

          My guess is, however, that the angry Trump voter blames his/her problem not on the vampire rich, but the “idlers”(can we say blacks and Hispanics; and Hispanics are the ultimate weird target, as they are blamed for both taking “our” jobs while simultaneously costing us all in “welfare”). The only thing Trump can do is direct the anger DOWN. And to me that’s not a reckoning I’m interested in.

          1. Jim

            “My guess is, however, that the angry Trump voter blames his/her problem not on the vampire rich, but the “idlers” (can we say blacks and Hispanics are the ultimate weird target…The only thing Trump can do is direct the anger DOWN.”

            I would guess (again whether intentional or not) that a significant portion of this anger is, in fact, being direct upward–take, for example, the Trump critique of NAFTA, PPT etc–which helps to channel such emotional anger in an upward direction toward those individuals, parties and institutions responsible for these trade policies.

            Appropriate policy skepticism and resentment toward those at the top who helped decimate working class/middle class individuals and communities is now being mobilized by both the Donald and Bernie.

            Unfortunately the usual charge of such resentment mobilization as being simply downward guided racism tends to be accepted as gospel by many on the left.

            I believe such a perspective, while ideologically more comfortable, is mistaken.

        2. EoinW

          Quite right! This is the first stage of a revolutionary process. The problem is not the politicians nor the policies, the problem is the system. That’s because it is the system which creates the politicians and the policies. Therefore it is the system which must be done away with. No not reformed, it must be killed. However such thinking is too nihlistic for most people right now, which is why we are only beginning the first stage. People have been victims of social programming all their lives. You can’t just change the way they think by snapping your fingers. This will take time.

          The reason I prefer Trump to Sanders has nothing to do with policies nor personalities. it is because Trump undermines the image of the system. he speeds the process along a bit faster. Sanders is a red herring, teasing reformers with the idea the system can be reformed. His election will send the process down another dead end, not unlike the Obama dead end.

          The system has moved past the point of diminishing returns and now produces nothing but evil. It must be destroyed. Credit to Americans for beginning to contemplate this. North of the border people haven’t even woken up yet.

      5. Norb

        The level of depravation needed to move people to action will be great indeed. If my limited experience is any indication, some great external cataclysm seems the only force capable- and even then, preventing the Shock Doctrine from being implemented by the oligarchy seems questionable. People have been conditioned to think only about narrow self interest- they no longer consider broader social needs or goals.

        Invariably, political conversations end with the theme- if only I could get mine. There is no long term thinking, no moral imperative to reject evil and destructive behavior. There is a sense of individual greed or ambivalent resignation to predatory behavior. We are returning to a society based on small groups fighting for their own, limited goals.

        A vision of a better world is what is missing. Finding solutions to problems while locked into the capitalist mindset will only lead to more dead ends. This struggle is a moral and ethical one and must be debated on those grounds. People must choose between broad social prosperity or oligarchy. The depressing fact is that most people unwittingly seem to prefer oligarchy because in their heart of hearts they are selfish.

        Selfishness needs to be guarded against. A capitalist system embraces selfishness as a virtue.

        Change might be possible if people can be made to understand that capitalism= oligarchy.

        Predatory behavior by humans, if left unrestrained by moral and ethical forces, will lead to the collapse of civilization as we know it. We need to bring about another great transformation. The transformation will be the cultivation of the common good over narrow self interest.

        Success must be measured broadly not narrowly. Neoliberal supporters have succeeded because they have kept the peoples vision narrowly focused.

        What do we do? Force the vision open any way possible while simultaiounsly rejecting a selfish worldview.

    2. cnchal

      . . . too much money in too few hands . . .

      Yesterday from this post rrennel left this link:Looting: The puzzle of Private Equity

      Well worth the read (38 pages), it fills out the Pirate Equity and Calpers posts that Yves has been writing about for years.

      Here is how it starts.

      In 2007, The Blackstone Group (Blackstone), a publicly traded private
      equity firm, paid its Chief Executive Officer (CEO) Steven Schwarzman
      roughly $350 million in cash compensation. Including the stock he received
      in connection with Blackstone’s public offering, Schwarzman’s personal
      compensation for the year was over $5 billion.
      Five billion dollars is a stunningly large sum. For comparison, in 2007-
      08, the Chicago public school system spent only $4.648 billion to fund
      44,417 employees, including 24,664 teachers, to educate 408,601 students
      in 655 schools.2 Alternatively, Schwarzman’s pay, by itself, could have
      paid for a Nimitz class aircraft carrier (approximately $4.5 billion),3 with
      enough left over to operate Princeton University for six months
      -all 5,400
      employees and 160 buildings necessary to educate 7,085 students, publish
      2,000 scholarly works per year, run a 6.5 million volume library and a
      museum with over 72,000 works of art, and generally operate one of the
      world’s great research universities.

      Here is how it ends.

      The principal story I have concentrated on in this essay, however,
      focuses on the people at the top. The rise of private equity appears to be
      driven by a new form of private interestedness best described as corporate
      . One classic way for governments to fail is for office-holders to
      view their office as a means for private enrichment rather than public
      service. As Idi Amin demonstrated most dramatically, but many other
      dictators and nomenklatura have found, it is almost always possible for a
      small elite to become extraordinarily rich if they are willing to ruin the vast
      bulk of the economy in the process
      . In the political sphere, part of the
      corruption problem is that once officials begin to see their offices as private
      enfeoffments entitling them to personal wealth, whether from bribery,
      skimming, Boss Tweed’s “clean” graft and its modem counterpart in the K
      Street Project (directing government jobs and contracts to friends and
      supporters), they must fear that others will demand a turn as well. Short
      terms of office in a corrupt system, however, are even worse than long ones,
      as each office holder seeks to enrich himself as quickly as possible with no
      thought for the long term. In the long term, someone else will be in office.
      Apres moi, le deluge.

      Bernie Sanders: The business of Wall Street is greed and fraud.
      I’m a Bernie Bro

      These parasites are killing us and the economy, with Central Bankster help.

  6. washunate

    Greenspan and Rubin later fought successfully against the regulation of credit default swaps, a major driver of the crisis.

    I get the bashing of central banks; I personally would drastically reduce the Fed role to focus on its core missions of handling the technical implementation of monetary policy and ensuring trust in US payments systems. The Fed adds no value on the regulatory front and if anything it compromises their ability to act elsewhere.

    And yet, who hired Greenspan and Rubin? The Fed, Treasury, DOJ, and other actors are not self-perpetuating institutions. Rather, they are creatures of public policy. The notion that central banks are the main problem, rather than merely a symptom of systemic political failure, strikes me as too convenient for the liberal educated technocrats who want to keep their outsized privileges and so don’t want to rock the boat too much.

    1. MikeNY

      You are right. Call it collusion or complicity: CB hyperactivity + legislative torpor plays perfectly into the hands of oligarchs by making them absolutely richer and, more importantly, relatively richer versus the plebs. As I have said before, CBs are now toy poodles in the lap of the oligarchs.

      It works, until it doesn’t.

      1. washunate

        Thanks Mike. I look forward to your perspective on how exactly things stop working. I’m very much torn between whether I think things will slowly crumble as they have been or if there will be some kind of discontinuous shock in the near future.

        1. MikeNY

          As I, too, am torn. First, I’m uncertain (but sincerely hopeful) that our democracy can self-correct. That’s a reason to optimistic about the current wave of populism. Such things as the increases in minimum wages in WA, NY and CA, while inadequate, and increased recognition of the need for a living wage, disgust with imperial warfare, increasing usage of the word ‘oligarchy’ even by a few of our elites, and rising scrutiny of Big Pharma and Wall Street, to name a few — these things give me hope. Yes, there is so much, much more that’s necessary. But to quote MLK: evolution is better than revolution.

          As for how things fall apart if we can’t self-correct, your guess is as good as mine. I prefer not to think of ugly examples from modern history. I prefer to learn about, think about, discuss and advocate peaceful ways out of our mess. That’s why I hang around here.

          1. Jim

            “…I’m uncertain (but sincerely hopeful) that our democracy can self-correct.”

            I also believe that we can self-correct but it is not going to be nice or easy and it will necessitate completely modifying the present structure of power and only then will it become possible to formulate policies that will genuinely benefit the majority of our citizens.

            In the meantime economic stagnation/decimation for the average individual is accelerating as the emotional outrage over such stagnation/decimation also accelerates.

            Such emotional outrage/resentment on street level is more and more palpable and closer and closer to eruption.

    2. Yves Smith Post author

      The Fed is the most powerful, both in terms of impact on the economy and as a regulator and influencer of other regulators.

      Things should never have gotten so far that we’d talk about the DoJ needing to intervene, except on an exceptional basis. The Chairman and CEO, vice chairman, general counsel, and head of bond arbitrage were all forced to resign (in a mere four days!) by the Fed in a Treasury trading scandal in 1992. A little more of that sort of thing in the later 1990s and 2000s would have done an enormous amount in reducing misconduct.

      1. washunate

        I don’t mean to be argumentative, and I value your opinion a great deal, but I’m having difficulty approaching that comment. First of all, I agree the Fed is king amongst regulators. That’s why I propose altering the situation; IMO it is both too much power and an inherent conflict within what the Fed does.

        Secondly, I don’t understand why DOJ would not be involved in the financial sector? White collar crime is the most serious criminal threat we face, more than terrorism, border security, airport security, and drugs combined. Much of the day to day activity of course takes place within DHS (another problem with public policy), but surely there is some meaningful role for DOJ in the antitrust division, the FBI, the criminal division, BOP, DEA, INTERPOL, OVC, OLP, tax division, and so forth.

        Thirdly, I’m talking about the public policy that creates and supervises the regulators. The Fed wasn’t created by an act of god; it was created by the USFG. The Fed isn’t some out of control rogue actor; it is doing what the USFG wants it to do.

      2. washunate

        P.S., thought I’d give a concrete example of this kind of passing the buck around that shows the problem is the system, not simply arm twisting or bad acts by an individual agency like the Fed. The DOJ was directly involved in the Citicorp/Travelers merger. Here is how the person in charge summarized the defense of allowing the merger:

        We heard numerous complaints that Citigroup would have an undue aggregation of resources–that the deal would creates a firm too big to be allowed to fail. But, we essentially viewed this as primarily a regulatory issue to be considered by the FRB.

        That is a broken system, with the Fed doing exactly what the rest of the government is tasking it to do: in that particular case, of providing cover for massive concentration in the financial sector. The DOJ literally used the phrase too big to fail(!). This wasn’t an accident, or an error, or ignorance. They knew exactly what was happening.

  7. craazyboy

    My 1970s econ book had the Money Multiplier in one chapter and Loanable Funds in another. I just assumed that meant both were in play at the same time. Unless velocity of money drops way down for some reason and then my savings account would be “pushing on a quantum string” and both the Money Multiplier and Loanable Funds drop way down when we try and observe them.

    But anywho, thanks Martin. Clearly NIRP is a great idea. Why don’t we just give all our money to banks so they can spend it for us???? We’d just do something irresponsible with it anyway.

  8. Zach Braff

    Excellent article, thank you! Much appreciated. God, that Kalecki essay seems prescient, I’ll have to click that link next ..

  9. Anonymous

    ” the “loanable funds” model which was debunked in part by Keynes ”

    Would be delighted to have a source for this from Keynes.


  10. flora

    Thanks for this post. Great read. Banks would like this history swept under the rug.

    “The struggle of man against power is the struggle of memory against forgetting”

    ― Milan Kundera, The Book of Laughter and Forgetting

  11. Jim Haygood

    Wolf: “The world economy is suffering from a glut of savings relative to investment opportunities.”

    It’s more likely that the world economy is suffering from a glut of debt relative to investment opportunities.

    The canary in the coal mine is Planet Japan, whose 250% debt-to-GDP ratio appears to have achieved escape velocity, and soon will be exiting the solar system trailing glowing purple clouds of cosmic dust.

    Japan-based economist Richard Koo, in his 2009 book The Holy Grail of Macroeconomics, detailed how Japanese corporations spent a couple of decades after the Great Bubble relentlessly paying down debt instead of dedicating cash flow to capital investment.

    Nothing has changed. The Great Financial Crisis jacked global debt levels even higher; in turn, the IMF keeps slashing its growth estimates.

    From where did humanity’s corrosive debt paraphilia arise? From the siren song of fiat currencies, themselves backed by debt. We all worship at the altar of John Law now, comrades.

  12. Jim Haygood

    Bring in the clowns:

    At a press conference accompanying a new report surveying the global financial markets, Jose Vinals, the IMF’s financial counselor said that experience of negative rates in Europe and Japan have shown the tool to have been a “net positive for the economy.”

    “In my judgement, negative interest rates are useful for relaxing monetary and financial conditions which should support aggregate demand and also price stability,” said Jose Vinals, the IMF’s financial counselor.

    “It is true there are limits to the use of negative interest rates, for how long they can be, and how far down they can go,” he said. “There may be some distributional consequences from savers to debtors but the gains are bigger than the losses.”

    “Distributional consequences” = “sucks to be you”

  13. cwaltz

    Yves are all the economists idiots? The government has been scolding Americans for years about saving. They want us to save for our kids college. They want us to save for our retirement. We’re supposed to have savings to pay for our medical costs(of which our portion keeps going up.)

    Savings glut? Our government has told us that none of us are too big to fail and we NEED to save. If they don’t want us to save then they might want to stop creating so many vehicles for savings and decimating the safety net that might inform a population that it isn’t on its own all the time. Instead all it seems to care about is bombing the crap out of places it disagrees with(that conveniently have natural resources we want.)

    1. craazyman

      they’re not all idiots. some are idiot savants.

      but they all suffer from a mental disorder, which is unrelated to intelligence and can be contracted by otherwise very smart people, or at least by idiot savants.

      The disorder is the inability to separate in the mind the functional ideas of quantity and form. this is a disorder that comes from the intensive study of economic books to the point of mental exhaustion, which compromises the natural analytical immune system, Although certain individuals are more susceptible than others to this disorder, particularly bonehead guys who like to think they’re macho mind men, In particular, men who concentrate on mathematical economics are at very high risk of severely disordered and delusionary thinking.

      The disorder can progress to a stage in which the victim is unable to even conceive of the difference between quantity and form, and begins to see all of economic and monetary reality simply as numbers. They add and subtract the numbers and multiply and divide the numbers and perform operations on the numbers using various mathematical approaches, such as linear algebra, calculus and regression analyses.They begin to believe the numbers are fully equivalent to and completely describe the forms from which they emanate. The disorder progresses to a state of intellectual psychosis and the victim becomes unable to perform even simple acts of holistic perception. Quantity intrudes itself into every aspect of analytical thinking to the complete exclusion of all other methods of perception..

  14. Carole

    RE: “Cheap money is a big subsidy to bankers and speculators”
    ““Secular stagnation,” the official justification for negative interest, means a chronic shortfall in demand: not enough money chasing goods and services. Today virtually all money is created by banks when they make loans; and when old loans are paid off, new ones must be taken out to maintain the money supply. Central banks have traditionally dropped interest rates to stimulate this continual borrowing, but interest rates have now effectively been pushed to zero. The argument is that they can be pushed below zero – but only if cash withdrawals, and hence bank runs, are not an option.”

    RE: “loanable funds” & its “savings glut” spawn:
    Paul Craig Roberts: “The notion is that the economy’s poor economic performance is not due to the failure of economic policy but to people hoarding their money. The Federal Reserve and its coterie of economists and presstitutes maintain the fiction of too much savings despite the publication of the Federal Reserve’s own report that 52% of Americans cannot raise $400 without selling personal possessions or borrowing the money.”

  15. hreik

    Can anyone tell me if w R. Wray’s book, Modern Monetary Theory is appropriate as an intro to MMT? Ty in advance.

    1. Foy

      Yes I have Wray’s book. It’s very good as it runs through all the accounting entries with T accounts so that the MMT logic can be followed step by step.

  16. Lune

    While central banks may be so captured that they don’t care about the enormous damage their harmful policies are wrecking on the average citizen, they are probably very concerned about maintaining their stature and prerogatives. Along those lines, they should realize their hallowed “independence” and regulatory powers aren’t God given, but politically granted. They can be taken away just as easily if they don’t start behaving in the public interest.

    Independent central banks are a relatively recent phenomenon. The Fed is just 103 years old, and its creation was very controversial. Already, the Fed has faced threats that a decade ago would have been considered extraordinary: a real possibility Bernanke wouldn’t be re-appointed, controversy over Yellen, various moves to audit the Fed, the creation of alternate regulators (like the consumer protection board) and no longer even a pretense that the Fed remains independent of the Treasury. If they continue to tank the economy in favor of their banking and finance masters, they might find themselves at the pointy end of the pitchforks now pointed at Wall St. I’m not saying monetary policy in the pre-central bank days was any good, but mobs aren’t logical.

    If the plight of the average person doesn’t stir their concern, maybe a reminder that their own existence shouldn’t be taken for granted might…

  17. Foy

    This post is a classic example of why I read Naked Capitalism. Clear, concise and directly to the point that most people can understand. Forwarding it to others…

  18. RBHoughton

    Bowing in your direction yet again Yves.

    I just hope you ensure Martin Wolf sees what is written here. I think he’s big enough to respond properly.

  19. Keith

    Eight years on from the financial crisis things seem to be going from bad to worse.

    Some people noticed things were going seriously wrong in 2008 and started to realise the very obvious mistakes and omissions from supply side economics.

    How could economics be so wrong?

    The only conclusion that fits the bill is that the central tenets of supply side economics were put together by US billionaires after a long liquid lunch. They then paid economists to put this into a larger framework and used ministries of misinformation (Right wing think tanks) to spread the word and cover up its obvious flaws.

    Let’s dig deeper:

    1) Supply creates its own demand

    This is useful to ensure business owners don’t have to pay their employees too much. The consumer now has no relevance as “supply creates its own demand”.

    Try telling that to China!

    2) Trickledown

    Justifies lower taxes on the wealthy, their wealth will naturally trickle down to those lower down the scale.

    No evidence for it whatsoever, all the evidence points to capitalism trickling up.

    The trickle up mechanism of Capitalism is known the trickle down mechanism is not.

    a) Those with excess capital invest it and collect interest, dividends and rent.
    b) Those with insufficient capital borrow money and pay interest and rent.

    Just believe you suckers.

    3) All wealth is earned

    Again helps to justify lower taxes on the wealthy as they have earned their wealth.

    Conveniently ignores inheritance and the difference between “earned” and “unearned” income that all Classical economists were aware of. Those at the top have been maintaining themselves in luxury and leisure from “unearned” income from their land and capital for centuries and they like to keep this quiet.

    4) Money exists in steady state and circulates though the economy

    Useful for hoarding by the wealthy and allows debt to replace wages as wages are kept at very low rates.

    A short term idea that eventually blows up when repayments reduce consumer purchasing power to zero in the long term.

    An assumption that leaves economists blind to 2008 as they can’t see how money is created and destroyed on bank balance sheets and the very real danger to banks when they lend money into asset bubbles.

    Supply side economics – an economics so flawed it can have only have been based on the drunken ideas of the wealthy.

  20. Fiver

    Surely it was no accident that Bernanke locked in the greatest wealth pump ever devised – one with a built-in booby-trap (markets seize) if you try to disarm it (by raising rates) or bring up nasty ideas a wise and virtuous Federal authority might do, like the concept of senior financial criminals going to jail.

  21. EoinW

    Excellent analysis! I believe the key point is how Japan did all this in the past, it failed, yet western central banks have followed the exact same game plan. Because we don’t like these people we can say they’re stupid economists but I doubt that’s the reason behind things. What did Japan create and not create? it created more inequality and it still has not created a revolutionary backlash. Our 1% who run the West see that inequality and decide to copy Japanese policies so they can enrich themselves when the same inequality hits our society. It’s not following a bad idea, it’s getting the exact result they want. One must lose the mindset that those who run our society have society’s best interest at heart. That’s a narrative that’s dead and gone(if it ever existed!).

    The other thing they’ve noted through the Japanese experiment is that a quarter century later and those at the top are still at the top. So our western economists do the math – I assume they can count – 2008 + 25 means they’re safe until at least 2033. Why wouldn’t they follow a game plan that practically guarantees them a life time of looting?

  22. Blue

    So if the fed’s people have japan’s example right in front of them, what’s stopping them from taking the right steps?

    Also, I think its about time we stopped reading about economists in powerful positions being pussies to do anything meaningful and start thinking about how to get them out of their positions and put more competent and responsible people in? Can NC shed some more light onto this?

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