Lambert here: Not exactly “This is fine,” but still…
Yves here (1:15 PM Sunday). I know we have to run this sort of thing occasionally to keep an eye on orthodox thinking, but this piece is based on the loanable funds theory, which was challenged by Keynes and debunked definitively by Kaldor in the 1950s. The key assumption here is that if you make the cost of money cheap enough, people will borrow and invest (or spend). But any competent businessman will tell you they don’t expand their business for the hell of it, they do so if they see an opportunity. So the cost of money can constrain investment, but making it cheap won’t create new markets or more demand. The exception is businesses where the cost of money is one of the biggest business expenses….such as financial speculation and other leveraged investing.
By Laurence Ball, Professor, Johns Hopkins University, Research Associate, NBER, and Visiting Scholar, IMF, Joseph Gagnon, Senior Fellow, Peterson Institute for International Economics, Patrick Honohan, Professor, Trinity College, Dublin, Non-resident Senior Fellow, Peterson Institute for International Economics, CEPR Research Fellow, and Signe Krogstrup, Fellow, Peterson Institute for International Economics. Originally published at VoxEU.
During the Great Moderation period from the mid-1980s to 2007, economists grew confident that central banks could stabilise economies by raising and lowering short-term interest rates. A startling development during the Great Recession of 2008-2009 was that policy rates in advanced economies fell to near zero (Blanchard et al. 2016), yet that was not sufficient stimulus to promote strong recoveries. Rates have stayed near zero in many countries, suggesting a liquidity trap: further stimulus is needed, but central banks’ traditional tool of policy rate cuts is not available.
In the:
we examine the liquidity trap, or lower bound on interest rates (Ball et al. 2016). We first document the severity of the problem – how it has constrained monetary policy since 2008, and how it is likely to constrain policy in the future – and then discuss how central bank policymakers can respond. Contrary to the common view that central banks are “out of ammunition” when policy rates fall to zero, we believe they can provide stimulus, notably by pushing rates negative and through aggressive forms of quantitative easing (QE). Looking further ahead, policymakers can greatly reduce the danger of the lower bound by a modest increase in their inflation targets.
The Danger of the Lower Bound
There is little doubt that the lower bound on interest rates has constrained monetary policy since 2008. For the US, for example, a pre-crisis Taylor rule dictates a federal funds rate of -5% or -6% in 2009. The actual rate never fell below zero. Based on a simple macroeconomic model, we estimate that US unemployment rates from 2009 through 2015 averaged more than a percentage point higher than they would have if there were no lower bound on interest rates. Unemployment would have been higher still if not for the Federal Reserve’s policy of quantitative easing (discussed below).
A crisis of that magnitude is not necessary for the lower bound to constrain monetary policy, however. Our report emphasises that, going forward, even modest economic downturns are likely to push interest rates to zero. This prospect is the result of two factors. One is the low inflation targets chosen by central banks, typically close to 2%. The second is the apparent fall in the neutral real interest rate over the last two decades, to current estimates of about 1% or even lower. Together, these numbers imply that the steady state nominal interest rate is 2 + 1 = 3%. Starting from this level, a central bank can reduce its policy rate only 300 basis points before hitting zero – not enough stimulus to offset a moderate-size shock to the economy.
Using our simple macro model, we estimate that a zero bound on interest rates is likely to constrain policy whenever unemployment rises 1.1 percentage points above its natural rate. An increase of this magnitude is a very modest downturn; over the last 50 years, for example, six of the seven US recessions pushed unemployment above the natural rate by more than 1.1 points. The Eurozone does not have as long a history to establish regularities, but there is no reason to suppose a significantly different pattern. If recessions occur as frequently in the future as they have in the last half century, advanced economies will frequently find themselves with weak economies and central banks unable to provide conventional stimulus.
Monetary Stimulus Near the Lower Bound
Central banks are far from helpless when interest rates are near zero. Our report considers a number of tools that policymakers can use to provide stimulus in this situation, and emphasises two of these: negative interest rates and quantitative easing. These tools have already been employed to some extent, with positive results, and they could be more effective if used more aggressively.
We have learned in the last several years that zero is not an absolute lower bound on interest rates. Several central banks have pushed their policy rates below zero; Switzerland’s rate is currently the lowest at -0.75%. These negative rates have transmitted to domestic asset prices and the exchange rate in much the same way as cuts in policy rates have done when they were still positive. Moreover, concerns about the impact of negative policy rates on the functioning of the financial system have not been validated in practice to date. It seems likely that rates can be pushed even lower than has been attempted so far, at least by a modest amount, without unduly adverse side effects.
Quantitative easing programmes have already had substantial effects in the countries that implemented them. In the US, for example, it is estimated that QE purchases of long-term bonds between 2008 and 2015 had macroeconomic effects equivalent to those of a sustained reduction of about 200 to 250 basis points in the policy rate. With a greater volume of purchases, the effects can be greater.
Beyond government bond purchases, QE can be expanded by including risky assets such as corporate debt and equities. For given quantities of asset purchases, broader versions of QE could well have stronger effects on asset prices and costs of funds, and hence on economic activity, than purchases of government bonds.
Potential side effects of expansionary monetary policy have been stressed by some commentators. These include the risk of an overshoot resulting in a surge of inflation, the danger of asset price bubbles, disintermediation of the banking system (and hoarding of cash), challenges to the profitability of banks and/or the central bank, the potential for loss of monetary policy independence and perceived distributional impacts. Despite banking industry grumbles, there is so far little evidence of significant net adverse side effects. In general, such risks are lower in the depressed conditions that normally accompany a liquidity trap; should they occur, the most important side effects can be mitigated or managed. Besides, the sooner economic recovery is achieved, the sooner these policies will become unnecessary.
A Higher Inflation Target
Although policymakers have tools for stimulus at the lower bound, these may not always be enough. We therefore also consider adjusting policy frameworks to reduce the risk that nominal rates hit zero. Of the many proposals out there, the most obvious and simplest of such adjustments would be a modest increase in central banks’ inflation targets. Raising the target would raise the steady state nominal interest rate, giving policymakers additional scope to ease policy in response to adverse shocks.
As an example, we simulate how the Great Recession in the US would have been different if the Fed had entered the episode with a 4% rather than 2% inflation target. Given the magnitude of the shock, the federal funds rate would still have hit zero quickly, but with higher inflation, the real rate would have been more deeply negative. As a consequence, the economy would have recovered more quickly. The zero-bound episode would have been shorter: the federal funds rate would have risen above zero in 2011, rather than late 2015 as in actual history.
A review of the evidence suggests that the costs of a modest increase in the inflation target are slight. For example, shoe leather costs, relative price variability, and complications in long-term planning all appear small at inflation rates under 5%. There is also little evidence suggesting that the variability of inflation around a slightly higher target would be larger. Indeed, a higher inflation target might well reduce uncertainty about inflation. In recent years, inflation uncertainty has been high, reflecting worries that deflation may set in, and also worries that unconventional easing may eventually produce a sharp rise in inflation. A higher inflation target, by moving the economy away from the lower bound, would help return us to a regime in which markets are confident that the central bank can stabilise inflation through interest-rate adjustments.
Perhaps the most common reason that policymakers have resisted raising the inflation target is the concern that credibility will suffer. We believe this concern is unwarranted and misplaced. Central banks should seek credibility for their commitment to meet their ultimate goals – full employment and price stability – not for their commitment to a particular number for the inflation target. A greater risk to central bank credibility may be the protracted inability to meet their mandates at the current low targets, due to the lower bound constraint.
How should the target be chosen? In the early 2000s, central banks concluded that a weighing of the costs and benefits of inflation, and the risk of reaching the lower bound on interest rates, justified targets around 2%. A new analysis accounting for the experiences of the last decade – the Great Recession and the apparent fall in the neutral real rate – would likely find that 2% is too low. To best choose a target that takes into account changing circumstances, central banks could perform systematic reviews of the policy framework on a recurrent basis, perhaps every five years. Such a review, we believe, would currently be likely to conclude that moderate increases in inflation targets are necessary for central banks to best meet their mandates.
Conclusion
In the past, belief in the impotence of monetary policy has been a common and dangerous fallacy. Today, policymakers are tolerating underemployment because of doubts about the effectiveness of monetary stimulus, and exaggerated fears of side effects. Overcoming these tendencies would help the world’s economies avoid future lost decades.
References
Ball, L., J. Gagnon, P. Honohan and S. Krogstrup (2016), What Else Can Central Banks Do?, Geneva Reports on the World Economy No. 18, ICMB and CEPR.
Blanchard, O., D. Furceri and A. Pescatori (2014), “A prolonged period of low real interest rates?”, VoxEU.org, 15 August.
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As Micheal Gayed said, the Fed should STFU. IMO, Laurence Ball should do the same!
Using our simple macro model
Simple or simplistic?
No discussion of fiscal policy, or any discussion to boost demand.
Looks like a paid justification for negative interest rates for all but consumers. Try giving credit cards and home mortgages negative interest rates and watch the sudden burst of activity.
I nearly spat out my tea, when the suggestion for YET ANOTHER round of QE was suggested, followed by no discussion whatsoever of whether the Rube Goldberg device of printing money to buy bonds to encourage lending to businesses in the hope that they’ll become more profitable so they hire people who will then spend to bolster the economy is never once broached. And the suggestion that equities and corporate debt now be added to asset purchases has me T_T.
Maybe I should start issuing debt and see whether the FED buys it from me…
As always, the simplest solution is to give people with no money some money and they will spend it. If you insist on “moral hazards” then tie it to some semi-useful job from an employer of last resort.
These are the same people who go on about the lack of inflation because I can buy flat screen TVs for less (thank you, I already have one, and no matter how cheap they get I am not buying another) and NEVER, EVER address my ever increasing and expanding health care costs (PLENTY of inflation in that) while at the SAME TIME advocating that health consumers like me have more “SKIN IN THE GAME” (i.e., PAY EVEN MORE) My social security increases are 0 while my health care co pays, “adjustments,” surcharges, deductibles, and surcharges on deductibles ever increase.
AND, where was on the inflation in workers wages the last 40 years? Why didn’t that happen? Why does the FED so rigorously avoid the subject of how much WAGE inflation there is???
Of course I don’t have any demand – I am spending all my discretionary income (well, if I don’t I die, but the FED is discretionary) on health care!
I suggest this current crop of geniuses have a closer look at the history of their own fine institution.
Prior Fed Chairmen (William McChesney-Martin, Arthur Burns, Paul Volcker) all understood that inflation was the worst possible outcome and was to be avoided at all costs. That’s because the first job of the CB is to protect the integrity of the unit of account and means of exchange, only after that comes the duty to protect the purveyors of said instrument (banks).
Instead we got a new crop starting with The Maestro whose policies flipped 180 degrees from the wisdom that had steered the country’s finances through long periods of high real growth and real wealth creation.
So we get today’s unbelievable gyrations with the explicit stated policy intention to destroy the currency’s purchasing power. Meantime they destroy savers, pensions, and insurance companies by starving them of income.
Since none of these gyrations work anyway, now we’re entering a phase where stock markets are being nationalized with Japan leading the way. This is heretical insanity of the highest order. CBs are also nationalizing bond markets: where the sovereign issuer of debt turns around and buys the debt from itself. It’s utter and complete madness.
As Lenin said, “what then shall be done?”. In a word: capitalism. Bad debt must be allowed to clear. Deposit guarantee programs are in place, the FDIC has a credit line for $500B with the Treasury. If you’re going to nationalize something, make it the banks, NOT the stock market (on the day we gifted $174B to Citi we could instead have purchased 100% of the common for $4B, imagine how much better off we’d be).
It makes one realize who these CBs REALLY work for and whose interests they promote at the expense of the very fabric of our society and economy. End the Fed.
‘The most obvious and simplest of such adjustments would be a modest increase in central banks’ inflation targets.’ — Larry Ball
Ball presupposes that central banksters are in control. They aren’t.
In fact, they are in the same painful predicament as lab rats fruitlessly pressing a lever when there are no more food pellets.
Like the frustrated rats, the Fed’s PhD Eclowns have no concept why their monetary policy lever stopped working.
The priests in Galileo’s day contrived ever more complicated formulas to explain precisely how the sun and the planets orbited around the Earth.
The Keynesian priesthood has 100% membership subscription, from the universities and academia all the way through the revolving doors to the CBs and entities like the IMF and World Bank.
“The Earth is the center of the universe.The Earth is the center of the universe”. Just keep saying it and maybe someday it will be true.
“Potential side effects of expansionary monetary policy have been stressed by some commentators. These include the risk of an overshoot resulting in a surge of inflation, the danger of asset price bubbles, disintermediation of the banking system (and hoarding of cash), challenges to the profitability of banks and/or the central bank, the potential for loss of monetary policy independence and perceived distributional impacts. Despite banking industry grumbles, there is so far little evidence of significant net adverse side effects. In general, such risks are lower in the depressed conditions that normally accompany a liquidity trap; should they occur, the most important side effects can be mitigated or managed. Besides, the sooner economic recovery is achieved, the sooner these policies will become unnecessary.”
Wow. We are really screwed.
I love how ‘perceived’ distributional impacts is a ‘potential’ side effect. It is unpossible for their to be actual distributional impacts, but there is a potential risk that someone might *perceive* them! And this risk that someone might perceive a distributional impact is apparently reduced during a recession (?) and this risk can be managed or mitigated (yes, the 1% is at their best managing and mitigating perceptions)…
I even support a move to targeting 3% rather than 2% inflation (if we must continue to target inflation) but this is so utterly clueless on so many levels.
1). The Fed should buy up all student debt and immediately announce a permanent suspension of debt due and payments. The Fed has the power and tools to do this without being gouged and if it doesn’t it should say it does just do it.
2). The Fed should full fill its legal obligations under Humphrey Hawkins Full Employment Bill and vigorously advocate to Congress and the President and all forums to enact sweeping generous and fully financed programs promoting jobs benefits and increased worker wages.
3). The Fed should immediately raise interest rates to 2% and give forward guidance of future interest rate increases.
Boil all the fancy language and references down and what you arrive at is reckless hubris. There is no policy that can guide a monetary system towards social prosperity because that is not the way monetary systems work. A monetary system is a product of the culture, not the architect. Or to put it another way it’s the tail at the end of the dog.
If we had an honest culture, we’d have an honest money system. Since our culture is corrupt and depraved, and increasingly so with every passing day (vivid proof: Hillary’s run for president) then it only stands to reason that our systems will reflect that. This is how any monetary system will operate in today’s America: the elite insiders will find all the flaws and exploit them until the system loses credibility and collapses. Think you have an idea for a system that’ll work great, much better than the one we are currently afflicted with? Nope, wrong. You’re fooling yourself. Give it a bit of time and your ideal system will be just as corrupt as this one is.
Put rates at -5%, ban cash and witness the freak outs.
Is there a macro model for that?
The article just about nothing to worry whether 0% or -%5 ir .
This reminds me of something that happened at a restaurant earlier this week. They were having internet problems, so that people who wanted to pay with debit or credit cards slowed things down for everyone. Fortunately, some of us, myself included, paid with cash. The dystopian dream of a cashless society can’t possible work in a country with unreliable internet service such as the United States of America.
Yes ……. it’s called RIOTING !!
So much breathtaking malarky, but these two bits take the cake:
“Central banks are far from helpless when interest rates are near zero. Our report considers a number of tools that policymakers can use to provide stimulus in this situation, and emphasises two of these: negative interest rates and quantitative easing. These tools have already been employed to some extent, with positive results, and they could be more effective if used more aggressively.”
[snip]
“In the past, belief in the impotence of monetary policy has been a common and dangerous fallacy. Today, policymakers are tolerating underemployment because of doubts about the effectiveness of monetary stimulus, and exaggerated fears of side effects. Overcoming these tendencies would help the world’s economies avoid future lost decades.”
Just wow.
To answer the questio posed in the headline: “Just finish the looting already.” That’s what it’s all been about.”
+1
well, it begins with the false assumption regarding the benefits of ‘stable” inflation/ inflation targeting. are good, when the empirical evidence doesn’t even support that claim. so how can one begin with what more central banks can do when the i”initial economic truths” could be debated.
after all if inflation targeting was “good” the great recession wouldn’t have happened at all.
res ipsa loquitur (Latin for “the thing speaks for itself”) is a doctrine that infers negligence from the very nature of an accident or injury in the absence of direct evidence on how any defendant behaved.
I say this as a trained biologist who has spent a lot of time in labs, the economics profession is a joke, they have zero understanding of what proof is, and no concept of proper methodology
Absolutely right. They are under the misinformed idea that economics is actually science.
Yes, but sadly the politicians listen to economists rather than biologists. That is why we will have gone over several ecological cliffs by the end of the century; assuming optimistically that we survive that long.
c’mon, is this Post a hoax or is it rigorous social science? it can be hard to tell the difference.
I’ve got a closet full of shirts I bought then never wore. I don’t know why I bought them. if I take them to Good Will I may have to donate them, or I could sell them on eBay for, like, $19, OR, and here’s the magic of the situation, I could sell them to a central bank for $10,000 each!
OK, that’s an exaggeration. how about $5,000 each? I promise I’d buy some stocks, or even options, and go for a 10 bagger. That’ what they want, right?
Even better: you could lump all your shirts together into a “closet asset” and sell shares in the asset to interested parties. Then, when it becomes clear the asset is basically worthless (or, better than most CDOs, at least worth the value of the few shirts), you can sell the whole asset to the FED for a pretty penny.
Why miss the opportunity to double dip?
sell shares, but wear the clothes until you’ve tired of them or they go threadbre, then donate them to goodwill and get a receipt for a tax offset?
craazyman
September 4, 2016 at 7:48 am
“….or I could sell them on eBay for, like, $19, OR, and here’s the magic of the situation, I could sell them to a central bank for $10,000 each!”
ONLY if they are “art!”…or an asset that is viewed as art….or somethin’.
My suggestion is that you walk into the FED in Washington DC wearing JUST the SHIRT – no pants, (but shoes and socks – you don’t want to look like a kook) and you have smeared, on the shirt, using feces, the “$” sign – by the way, you can make it more “artistic” if you vary your diet so that you get various colors of $.
It would be the ultimate in “performance” art, and you hold a press conference and yammer on about money is sh*T or sh*t is money …. or sh*t is bonds….or assets are sh*t….and so on.
I don’t even know how I come up with this sh*t…..
‘walk into the FED in Washington DC wearing JUST the SHIRT’
Even as we speak, some guys are walking around Burning Man clad in a shirt and nothing else. They’re called “shirtcocks” — though jealous naysayers deride them as “shirtcucks.”
Should be required dress at J-hole, where central banksters can let their hair down.
The solution being proposed will lead to growth from hoarding of hard assets not from healthy economics.
Yes, that does seem probable. Free central bank money, that can be paid back with fewer real $ than was borrowed, is the perfect tool for real asset accumulation by those who can access it. But I suspect that is the intention — it’s a way of driving asset price inflation, which it is hoped will lead to consumer inflation and less saving by consumers. Provided that consumers are willing to save less, and provided that it doesn’t get out of hand ( http://www.macroresilience.com/2012/10/12/hyperinflation-deficits-and-real-interest-rates/ )
it probably can work.
I’m not sure that it can work in US under current conditions, since it may be that too large a portion of the population has too little savings to spend down in response to higher inflation.
Pensions would get destroyed… Would they leave the destitute to beg on the streets or would QE help replace those destroyed pensions?
That’s what is meant when it is said that monetary policy is a blunt instrument.
Our leaders need to get off their 1 variable one trick pony kick and start using other tools.
RE: ” …start using other tools.”
Agreed – with a tip of the hat to Frank Zappa, an icepick through the forehead would be a nice start.
@Samuel Conner – The linked article demonstrates a complete lack of understanding of how the hyperinflation in Wiemar and Zimbabwe occurred. It had nothing to do with collapsing demand for the currency. In both cases hyperinflation was caused by the destruction of the productive capacity of those economies.
lifted from john wrights astute comment in links re “stop those greedy savers from saving so much and ruining a perfectly good scam”
“One measure of the well-being of the USA population could be the savings rate, which was above 10 percent for most of the 1960’s to 1985 and then has moved to 5.7% now.”
I guess central planners would prefer 0%, keep us barefoot and pregnant, as the saying goes…
I couldn’t easily find the median savings rate, but only the aggregate savings rate.
I suspect the median savings rate, where half the population is above and half below, has dropped even more dramatically since the 1960’s than the aggregate savings rate as inequality has ramped up.
This is hidden in the headline savings rate, which is probably an average across all savers, rich and poor.
This suggests much of the USA population is already at the 0% savings rate NOW, but I can’t find actual numbers.
There is another factor in the savings rate that some people are unaware of. The definition of Savings is Income less Consumption. For probably the vast majority of Americans, this Savings is entirely devoted to paying off debt and none of it is adding to peoples’ net wealth. (The only exception is that the principal part of a mortgage payment adds a bit to net wealth.)
I did some more searching and came across:
http://www.epi.org/files/2016/state-of-american-retirement-final.pdf
This has charts showing retirement savings in 2013, which is not the same as savings rate/personal savings, but may provide some indirect information about them.
Here are couple of numbers, average USA retirement savings for the 56-61 age group is 163K (page 10), but the median for the same age group is 17K (page 11) in 2013.
This almost 10:1 ratio disparity of the mean and median retirement savings may well indicate the economic inequality in the USA.
Median retirement savings for the 56-61 age group peaked at 36K in 2007, so even when the economy was viewed as “good”, this number was not high.
It can be argued that one adds to retirement savings when basic living expenses are sufficiently secure and after debts are paid off.
This is not occurring, at least at the median level.
Thanks, lots of interesting charts for comparing groups, the conclusion…
“The trends exhibited in these figures paint a picture of increasingly inadequate savings and retirement income for successive generations
of Americans—and growing disparities by income, race, ethnicity, education, and marital status. Women, who by some measures are
narrowing gaps with men, remain much more vulnerable in retirement due to lower lifetime earnings and longer life expectancies.
Decades after the number of active participants in 401(k)-style plans edged out those in traditional pensions, 401(k)s are not delivering
substantial income in retirement, and that income is not equally shared.
Retirement security has also been affected by changes in Social Security, notably the gradual increase in the normal retirement age and
other benefit cuts implemented in 1983; by broader income and wealth trends, such as growing earnings inequality and the collapse of
the stock and housing bubbles; and by other factors, such as trends in out-of-pocket medical costs. A description of these broader trends
is outside the scope of this chartbook. However, we can assume that as the value of employer-based retirement plans is declining and
retirement savings are growing more unequal, retirement security is declining and growing more unequal, since there is little evidence of
countervailing trends.
The shift from pensions to account-type savings plans has been a disaster for lower-income, black, Hispanic, non-college-educated, and
single workers, who together add up to a majority of the American population. But even among upper-income white college-educated
married couples, many do not have adequate retirement savings or benefits. The evidence presented in this chartbook—that the retirement
system does not work for most workers—underscores the importance of preserving and expanding Social Security, defending
defined-benefit pensions for workers who have them, and seeking new solutions for those who do not.”
2008 – “How did that happen?”
Obviously there are no problems with the Central Banker’s models!
Let’s find the real experts that did see 2008 coming.
Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.
Steve Keen is one of those experts who is on record as having seen the private debt bubble inflating in 2005.
In 2007 Ben Bernake could see no problems ahead.
What does Steve Keen have in his models that the Central Banks don’t?
He uses realistic assumptions about money and debt in his models.
The Central Banks use the childishly simplistic assumptions from Neoclassical Economics.
Does Steve Keen have anything else to add?
Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.
Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.
Hyman Minsky came up with “financial instability hypothesis” in 1974 and Steve Keen carries on with this work today.
When bankers lend too much money into an asset bubble it eventually pops leading to debt deflation.
We have the Central Banker’s “black swan”, we can help their thinking progress from its current stasis.
Being neoclassical economists they thought the US housing market was heading to a nice high stable equilibrium, now they know better.
The US housing market was climbing to fall off a cliff in a “Minsky Moment”.
Have there been any other “Minsky Moments”?
1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)
How embarrassing, Wall Street did exactly the same thing as it did in 1929, in less than ten years from being freed from 1930s legislation.
It lent into an asset bubble to inflate prices until it blew up.
1929 – US stocks
2008 – US housing
This time Wall Street had derivatives for global contagion.
What was learnt from other “Minsky Moments”?
Japan has been in a balance sheet recession since 1989 and has learnt one hell of a lot.
Richard Koo has analysed this in detail:
https://www.youtube.com/watch?v=8YTyJzmiHGk
Fiscal policy is what you need with all this unproductive lending weighing everything down.
In another of Richard Koo’s videos he tells how Western experts came along and told Japan to cut Government spending and every time things got worse until they increased Government spending again.
It was long, hard, painful experience.
Japan was recovering when 2008 hit.
Japan was getting better again and the Tsunami hit.
Richard Koo was more of an observer and could not over-ride the Western experts and their bad advice.
The train of thinking that follows from finding one real expert.
Thanks for the link, puts the (what seemed to me, to be strange) fed push to raise rates in the near term into perspective.
I only found that video about a month ago (courtesy of ZeroHedge I think) and it is the one of the most informative things I have found in a long time.
It explains one hell of a lot.
A good insight into how problems in the Euro-zone were brewing along time ago due to the inflation of housing bubbles whilst trying to help Germany.
There is not much apart from the mainstream media to find out what is going on in the UK and that doesn’t tell you much. He goes into how London is still booming while the rest of the country isn’t doing that well, this being where our detached metropolitan elite live. No wonder they are so out of touch.
If only we could get our policymakers to watch it, they could start moving things in the right direction.
(Policymakers – I hate that word)
Seriously, great link. Worthy of a hoist.
that Minsky moment
so different and so new
unlike any others
”till it all blew
and when it happened
it took you by surprise
I knew that you’d wanna sue
from the look in your eyes
now it’s all mine
you ain’t got no legal right
everything you worked for
and i’m holdin it tight
that Minsky moment
it should probly be a crime
but I’ll be playin golf
forever till the end of tie-yie-yime
whoa oh whoa ho ooh whoa
whoa oh whoa ho ooh whoa
yie yie yie yie yiime
w/apologies to Jay and the Americans, That Magic Moment
C’man, just ran the Jay & the Am’s orig against your lyrics. You have absolutely nothing to apologize for. Thanks for this, and all the fish, too.
Thanks for your comments and the link.
Monetary policy stopped working a while ago.
More QE puts more money into the system at the same time the fed wants to start pulling QE money out of the system. How does the fed start pulling all the extra QE money out of the system using only monetary policy?
Try negative interest rates? That would make savers/customers even poorer, hurting the real economy.
Raise interest rates? That makes the dollar stronger but hammers US export sector.
Use shadowy off-book crypto-currency exchanges to make dollars disappear without a trace? Not a good idea.
The fed could try using fiscal policy here. Its certainly worth a try. Except, the fed took fiscal policy off the table 30 years ago for ideological reasons, so it’s back to monetary policies – that have stopped working.
How about purchasing long-term municipal infrastructure or urban renewal bonds? Probably there is loads of opportunity for corruption; perhaps it could be done highly transparently through some kind of proposal and review process like that suggested by Job Guarantee advocates for how to distribute centrally fund JB grants to fund local projects that would employ JB workers.
goldman sachs would certainly be happy with that
Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.
After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.
When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring. The end result 2008.
With the Euro-zone, the Germans were the first ones to go bubble crazy over the dot.com boom and their version of the NASDAQ collapsed by 97% in the bust.
To help Germany, the ECB lowered interest rates and blew bubbles in the Club-Med nations that burst when the Euro-zone crisis hit.
The Euro started going wrong after a couple of years when the first bubble burst, it’s been on the way out ever since.
The evidence seems over-whelming that monetary policy is far too broad a brush to control economies, but who are we to learn from past mistakes?
The Great Moderation was achieved by using inflation figures that missed out where the inflation was occurring.
In real estate.
2008 – “How did that happen?”
The problem with not looking at real estate inflation.
1989 – “How did that happen?”
The problem with Japan not looking at real estate inflation.
But… but… that isn’t the same thing at all. Where do I get in line to sell my corporation’s “risky assets” for guaranteed government cash? And I can make more anytime they want!
CBs buying any asset… Welcome to central planning without a plan.
Perhaps the actual reason is because they have never possessed a truly rational understanding of what inflation is and what it isn’t.
One of the most important things that policy makers need to understand about inflation is that it is not some kind of mysterious ‘effect’ that spreads out evenly over all of the economy’s participants, like a rising tide. The actual truth is that members of different income brackets can—and do—experience different rates of inflation.
It is indeed quite possible for the members of one income bracket to experience a period of high inflation at the same time that another income group is experiencing low inflation, disinflation, or even deflation.
Something very close to that is precisely what has been happening in America over the past 35 years or so. During this period, the income tax’s top rates were reduced in the 1980’s and again in 2001 & 2003. This simply threw large amounts of disposable dollars at all rich people, which they then threw at the asset markets, setting off a very robust level of inflation within the upper class.
At the same time, working class incomes were being squeezed by outsourcing, de-unionization, and the exporting of good-paying jobs to China and other low wage countries. This generated the very low levels of inflation that we’ve seen in the CPI.
You see, rich people don’t really mind inflation, as long as it is occurring within their own class, and not in the class that generally represents their costs.
It is equally important to understand that inflation is always and everywhere harmless when it comes to its impact on the purchasing power of most of those who endure it.
Yes, prices are always going up, but disposable incomes are also going up at the same time, enough to cover the higher prices being charged. We know this is true cuz, if incomes were not going up sufficiently, the higher prices asked for would not hold and would be forced down, instead, and that is not inflation.
So even though it is true that impressive nominal gains during a period of inflation do not necessarily mean that you have achieved any real gains in purchasing power, it is also generally true that no one loses during periods of true price inflation, at least in terms of purchasing power. (The one notable exception that everyone always points out—those on fixed incomes—is ridiculously easy to fix.)
And so one of the things that central bankers could do to extend prosperity to every corner of our populations is start informing the public that inflation is not really the bogeyman that it has long been made out to be. The only thing that ever matters is what is happening to the REAL ECONOMY. Are all able-bodied and able-minded citizens employed in real wealth producing activities, or are they not?
In the U.S., the Fed is enjoined by Congress to optimize employment and economic prosperity, but only up to the point when it looks like it might threaten price stability (this would be the Fed’s interpretation of its mandate). I say it would be much wiser to direct the Fed to try to optimize price stability, but only up to the point when it appears to threaten full employment and general economic prosperity.
“It is equally important to understand that inflation is always and everywhere harmless when it comes to its impact on the purchasing power of most of those who endure it.”
looks like you have studied too much modern economics.
did you consider declines of standard of living (BTW, this was the reason why inflation numbers were tabulated in the first place).
inflation in what you must have, deflation for lux items. The post to my view seems to imply we need to double down, then everything will be fine
“As an example, we simulate how the Great Recession in the US would have been different if the Fed had entered the episode with a 4% rather than 2% inflation target”
as in much of human reasoning, economics seems to easily confuse cause and effect when confronted with complex situations.
inflation is the effect rather than the cause of a healthy economy.
seems to me anyway if they try to create inflation in an unhealthy economy it seems to cause all kinds of problems, inequality being the main one.
They’ve been trying to create inflation ever since the GFC and still can’t seem to do it. Monetarism simply won’t do that.
Doing the same thing…insanity, etc.
True price inflation cannot cause a decline in an income group’s standard of living. True price inflation only occurs when incomes are keeping up with overall price increases. This is fundamental to understanding what price inflation really is.
It helps to keep in mind that “failure to improve” one’s living standard significantly is not the same thing as experiencing a decline in one’s standard of living.
Other kinds of price increases are truly harmful to living standards. A sudden cut off of oil supplies due to war (a ‘supply shock’) is going to drive up prices and that kind of price increase does translate into a decline in living standards.
Smaller quantities end up being available for purchase, so someone is going to have to do without. Markets ration the smaller supplies to those who are the least poor. In terms of the real economy, the poor always suffer from such price increases.
But when prices rise due solely to inflation (rising disposable incomes, generally), it is because—by definition—disposable incomes have risen enough for the higher prices being charged to hold. The same quantities of goods/services are being brought to market and sold, only at higher prices.
If a household experiences an increase in disposable income that is exactly matched by an increase in the prices it must pay for the same quantities of stuff that it buys, the result may be disappointing, but it cannot accurately be depicted as a decline in the household’s standard of living.
“Finance is not the economy” AND the nominal is NOT a reflection of the real. How the power relations are codified, ultimately determine who accumulates and the varying rates of differential accumulation, who keeps, AND who is “economically exploited and politically oppressed”. Otiose opulence of a few predicated on the immiseration of many is disdainful and viscerally repugnant and should be a source of shame for the so-called richest nation. May consider fixing the code, to address basic needs before salivating over any surplus.
Inflation does have one real and significant effect in that it helps borrowers and harms lenders on fixed rate terms. A high rate of inflation in the wake of the 2008 crisis would have helped mortgage borrowers significantly and harmed banks, an outcome that would have been anathema to the likes of Geithner (even if they hadn’t been terrified of banking sector contagion blowing up the economy). Continued low inflation is therefore largely a weapon of the creditor class against the debtor class, although it’s spun as being in everybody’s best interest. Try asking the Greeks whether more inflation would be a good or a bad thing.
There is so much wrong with this post that it’s hard to know where to start. The fact that 3 of the 4 authors are Peterson Puppets should tell you that the approach is going to be the same monetarism crap that has proven ineffective at stimulating the economy.
No matter how low you push nominal or real interest rates, the banks won’t lend unless there are qualified borrowers and right now most of the public is in no position to increase their debt. Businesses will not borrow either unless they see an increase in demand requiring additional production; low interest rates are not sufficient motivation.
QE is only an asset swap and does not increase the wealth held by the non-government sector. There is simply no robust transmission mechanism from the authors’ recommended actions to the real economy.
And, can someone please tell me how raising the inflation target can have any effect on anything other than economist’s macro models. If I talked to my clients about inflation targeting they would have no idea what that means. It just isn’t relevant within the real economy.
Overall, this is just another case of doing the same things that haven’t worked, expecting different results, and demonstrating the insanity of monetarism.
Have you seen this excellent talk from May 2016 by Richard C. Koo, Chief Economist, Nomura Research Institute? The link was suggested by another NC commenter.
It stays within the confines of the current economic system–so it has inherent limitations. Even so it’s outstanding and revealing in explaining why things haven’t been responding as expected, and exposing a major hole in conventional economic theory understanding and practice. (He does not address alternatives to debt-based money creation, but does show another big flaw to the conventional understanding of the existing system within which central bankers are currently working.)
He describes what we are facing in typical Asian understatement: major instability. Unless Yellen achieves something he clearly thinks is unlikely at this point.
We are Up Sh*t Creek, in other words.
if they go to ZIRP they have to reduce leverage.
otherwise, the ones with access to zirp will lever themselves to infinity and corner all the assets.
which is what PE etc have done.
maybe feature not a bug?
@TheCatSaid – I haven’t seen the talk, but I am familiar with Koo’s balance sheet recession concept. It is completely appropriate for the current circumstances and convincingly demonstrates why the monetarist strategies won’t work. It also helps explain the stagnation of the real economy, e.g., Lambert’s stats watch has been showing declining manufacturing indices all over the country for the past several months, and it’s getting worse.
Yes, I found it one of the best talks I’ve seen both about central bank policy and about Yellen’s current dilemma. Not to mention there are great, understandable and well-explained charts, including data of what has happened and is happening. (E.g. Japan)
It’s fast-moving, but because it’s on YouTube I could pause anytime I wanted more time to understand one of the charts.
The reason there are no robust transmission mechanisms is because that does not fit their ideology (oops, I mean science [sarc]). The transmission mechanisms happen through politics not monetary policy.
it was bound to happen. The paper money system has created too much money – claims. These claims cannot find assets to invest in.
The economists confuse money and assets with the economy.
This is apparently something so deep rooted in the western mind that it just refuses to go away.
Answer to “What else can Central Banks do?”:
They can stand aside and let governments spend interest-free money for infrastructure projects and guaranteed jobs program until everyone who wants to work, is working. How about that?
From the brief synopsis about the authors in the preface to this article, it is noteworthy how very well credentialed they all are, as well as the fact that all but Ball are currently “fellows” (“goodfellas”?) at the Peterson Institute for International Economics.
In considering the merits of their arguments for the Fed to ignore the so called “zero bound” in real interest rates, and to engage in continued predatory confiscation of the savings of the elderly and other citizens who are trying to avoid their ongoing protracted efforts to push savers into the stock market for eventual shearing, I have no confidence in the efficacy of their proposals in terms of improving the real economy. There is no actual historical data to support their view that further suppression of interest rates through bond purchases, or their proposal that central banks purchases of corporate debt and equities, has or would increase real economic growth.
We have seen the collapse of the markets in 2000 and 2008, and I believe there is a rising likelihood that the current bubble in all financial assets will also implode. Where is the actual historical data, rather than some mathematical model they have created, that supports their view that their latest proposed adventure in “monetarist solutions” would restore growth of the real economy? Or is this latest proposal really about maintaining central bank credibility by deferring implosion of the bubbles that central bank interest rate policy has again created in financial assets and real estate for the benefit of a small segment of society and to further concentrate wealth in the hands of a few?
This paper with their latest “Trust us, we just need to again double down and these policies are necessary” proposal to implement negative interest rates is an implicit acknowledgement that the models and theories of the activist monetarists who have run the world’s central banks over the past several decades are a massive public policy fail. At what point are they to be stopped and held professionally accountable for the damage they have caused others?
There is a need for an economic and monetary policy shift alright, but it lies in domestic fiscal spending by government, not more failed monetarist adventures.
https://www.bloomberg.com/view/articles/2016-09-01/want-a-free-market-abolish-cash
Is this fringe thinking or are they going to double down?
They may “double down”, but it’s hardly “thinking” and sadly not “fringe”. “Free marketeers” seem to believe that empirical data cannot falsify economic theory, which seems to imply that the terrain cannot invalidate a map or that maps don’t matter, only blueprints do. If not for the pernicious effects, it would be difficult to take these sycophantic apologists seriously.
@Chauncey Gardiner – You are correct. There is no evidence. It is doubling down on a bankrupt monetarist strategy. Doing the same thing…insanity, etc.
Unfortunately, these economists will never be held accountable as long as they can get funded by Peterson, Heritage Foundation, Kochs, etc.
[“Potential side effects of expansionary monetary policy have been stressed by some commentators. These include the risk of an overshoot resulting in a surge of inflation, the danger of asset price bubbles, disintermediation of the banking system (and hoarding of cash), challenges to the profitability of banks and/or the central bank, the potential for loss of monetary policy independence and perceived distributional impacts. Despite banking industry grumbles, there is so far little evidence of significant net adverse side effects. In general, such risks are lower in the depressed conditions that normally accompany a liquidity trap; should they occur, the most important side effects can be mitigated or managed. Besides, the sooner economic recovery is achieved, the sooner these policies will become unnecessary.“]
…should they occur, the most important side effects can be mitigated or managed.
Ban on cash, forced gambling because managed asset price? That confidence inspiring BS is quite exquisite, thank you very much…
…the sooner economic recovery is achieved… ???
LOL
Another insipid nitwitt…
funny, i first read it as “another inspired nitwit” and thought it to be spot on…
It’s as if John Maynard Keynes has been wiped from the memories of orthodox economists. Are there any books left that might have his name as author, or have they all been burned and removed from Amazon?
Keynes’ Economic Consequences of the Peace [his best work, preceding the intricate fallacy of General Theory] is posted at Gutenberg:
Woody ‘Woodenhead’ Wilson was not bloody amused.
At this point central bank tiddlywinks is no replacement for sound politics. Where’s fiscal policy, where’s the direction in the economy? Putting more lubrication in a machine with broken gears doesn’t fix it, just prolongs catastrophic failure. I would like to think somewhere in the thicket of economics courses they have one reminding economists-to-be that everything they are learning is a socio-political fabrication?
I’d love to see better ways of analyzing policies and outcomes that consider the societal value of outputs, not just a $ amount that doesn’t tell you whether something was worth doing or not in other-than-financial terms. As in, even though you could make a lot of money making certain products or foods, are we better off that they’ve been made/consumed? It’s worse than meaningless to talk about “growth” in the abstract sense, or even about “jobs” in the abstract, unless we’re considering growth of what? what kind of jobs, and for whom?
Implementing policies that will make GDP rise for its own sake is an exercise in folly and planet-killing and people-killing.
M-CAM’s Integral Accounting appeals to me as it provides a different way of thinking, acting and describing economics and interactions, and because it captures 6 aspects of value (of which money is only one).
What else can Central Banks do? Stop making asset prince inflation the priority. Try some things that put money directly into the hands of people in the bottom half of the income range.
The Congress and President should take responsibility for economic policy instead of leaving it to the Fed. Investments in domestic infrastructure are overdue, would create jobs, and would yield long-term benefits to the public.
We are faced yet again with 3 terrible choices:
1) These people really are as blocks, stones, worse than useless things, i.e., stupid beyond repair.
2) These people know perfectly well that their policy prescriptions have all along worked only to concentrate wealth and power at the expense of the real economy, and they therefore belong in jail along with Peterson et al.
3) They know reality has knee-capped the lot of them in theory but they cannot admit to it without career/reputation implosion – jail again, I say, if known bad advice is given to policymakers in matters of such import.
Other than politics and media, is there any other profession that has so thoroughly failed?
Are we trying to fix the wrong problem. Wouldn’t it be better to prevent the bust before they occur by dampening the boom before the boom emplodes. Then the economy wouldn’t need to be repaired over and over again.
http://wp.me/p42WQA-7c
Let’s just have a look at the cause of the problems.
Mr. Upside-down and Mr. Back-to-front have taken over the global economy.
Throughout history there have been very poor people and very rich people.
Looking at 5,000 years of human civilisation the Classical Economists of the 18th Century believed the poor would never rise out of a bare subsistence existence. This was the way it always had been and always would be.
Every social system since the dawn of civilization has been set up to support a Leisure Class at the top who are maintained in luxury and leisure through the economically productive, hard work of the middle and lower classes.
The lower class does the manual work; the middle class does the administrative and managerial work and the upper class lives a life of luxury and leisure.
We used to have third world and first world nations.
The third world nations had very rich people and very poor people and paid no attention to creating a civilised society where there was some redistribution to improve the standard of living for those lower down the scale. The same system that has existed for 5,000 years.
The first world nations used some redistribution to improve the standard of living for those lower down the scale to create a modern civilised society.
Mr. Upside-down looked at the information available and concluded the system trickled down, silly old Mr. Upside-down had got everything upside upside-down.
He lowered tax on the wealthy, removed redistribution and services for those lower down the scale and personal wealth rapidly began to polarise.
Soon there were problems with global aggregate demand and Mr. Upside-down couldn’t work it out at all.
In the Bretton-Woods agreement it was known there had to be a recycling of the surplus to ensure the wealth of nations didn’t diverge and polarise. Re-cycling the surplus was necessary to keep the system going.
Mr. Back-to-front looked at the symbol for divergence and thought it was the symbol for convergence, silly old Mr. Back-to-front had got it all back-to-front.
He designed a single currency area with no mechanisms for recycling the surplus
The rich nations got richer and the poor nations got poorer.
The rich nations in surplus, invested their surplus and got richer.
The poor nations, that took on debt to consume, had to keep making ever rising interest payments and got poorer until they gradually started to reach max. debt.
The poorer nations started to reach max. debt and their economies collapsed and Mr. Back-to-front couldn’t work it out at all.
I remember this system we used to have when I was younger.
It was called Capitalism, but it led to the lowest levels of inequality in history within the developed world.
It led to the golden age of the 1950s and 1960s.
It was developed from the unfettered capitalism of the 1920s that led to massive inequality, a Wall Street crash and a global recession.
It used strong progressive taxation to provide subsidised housing, healthcare, education and services for those lower down the scale, increasing the purchasing power within the economy.
We have had another bout of unfettered capitalism and it has led to massive inequality, a Wall Street crash and a global recession.
Maybe we just need a “New Deal” to bring about a recovery in global demand.
Raising the inflation target. That is similar to flooding a guy’s home with food because he is underweight. Make sure there is enough supply of food available. But if does not have the ability to feed himself (take on more debt), or the will or desire to eat (take the risks of more debt), then more food or easy money will not correct his problem.
These financial wizards are trying to justify more stupid central bank policies, I guess that is what they get paid to do. I cannot believe they really believe this garbage. But if they do, well that explains why nothing is working on Main Street, because the problem is no wage growth, and those in debt playing loan-shark interest rates. All this extra money will simply go to a larger financial sector that simply and only makes profits trading currencies
Far as I am concerned the roll of bank is to lend to those who run solid enterprises that contribute to the tax base to pay for defence and education.
These targets are not good or legitimate goals.
Put to top priority inflation rates and negative returns who in their right mind could even call them banks?
Such has not the use of a sock drawer.
We don’t need central banks. President Andrew Jackson analysed the situation and concluded they were not necessary. Its still true today.
Government can use any or all banks for its receipts and payments. The printing of currency notes and minting of coins is a private commercial endeavour – none of them are worth what they circulate at. It does not need a central bank for that fraud.
The purpose of central banks is solely to co-ordinate currency inflation so working people do not notice the decline of their wages from the exchange rates. We should get rid of them.
The West introduced market reforms to Russia that bought chaos, created the Oligarchs and left the majority with next to nothing.
The majority had the Western freedom to do what they wanted, but no money to do anything at all (even eat in a lot of cases).
Putin restored order to the chaos and the majority had now seen how hollow the Western freedoms are if you have no money.
This is the way things can go with this sort of freedom and high inequality.