Category Archives: The dismal science

Bill Black: “Budget Hero” – Public Media’s Most Despicable Financial Propaganda

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives

We know that the supporters of austerity simultaneously urge us to reject “European socialism” while adopting the key European strategies that drove Europe into recession – twice. American conservatives assume that Europe must epitomize stringent financial regulation. The opposite is true. Europe adopted “light touch” financial regulation pursuant to neo-liberal economic theory. Its embrace of the three “de’s” – deregulation, desupervision, and de facto decriminalization was far more extreme than the United States. The City of London “won” the regulatory race to the bottom with the U.S. European’s adopted the full Basel II reduction in capital requirements without the minimum gearing ratio that the Federal Deposit Insurance Corporation (FDIC) insisted upon. The FDIC prevailed over the intense, but fortunately unsuccessful opposition of the Federal Reserve economists who were the principal architects of Basel II’s disastrous reduction in capital requirements. The result was that European Union banks had roughly twice the leverage of U.S. banks and faced no meaningful regulatory restraints. The result was far larger real estate bubbles in several European nations (as a percentage of GDP) than in the U.S., multiple financial crises, and a Great Recession that reached depression levels in several nations.

Defining Strategies and Tools for Reducing Systemic Risk

Yves here. Although this VoxEU is heavier on economese than may suit the tastes of most NC readers, it’s nevertheless worth your attention. It takes issue with a popular view among economists, that one of the ways to reduce systemic risk is to reduce cyclical swings in asset prices (or more accurately, to prevent banks from all following some great new lending fad and running off a cliff tout ensemble). The wee problem with that is economists were patting themselves on the back in 2007 that they had engineered a Great Moderation and the overwhelming majority were in denial about the existence of a global credit bubble. In fairness, many are thinking about how to create automatic counter-cyclical stabilizers, since as Ian MacFarlane, the former Governor of the Reserve Bank of Australia pointed out, an asset bubble looks like increased wealth to the community, so anyone who stands in its way is going to be extremely unpopular.

This VoxEU article offers an alternate line of thinking on how to to lower systemic risk.

Michael Hudson on Fictitious Capital

Michael Hudson spoke with Max Keiser about what he calls “fictitious capital” which is essentially lending backed by inadequate capital, such as collateral that has fallen in value.

Dan Kervick: Want Jobs? Forget the Fed!

Yves here. Late in the afternoon, after three days running of Mr. Market being in a bad mood, the Wall Street Journal sent a news alert titled “Fed Sees Action if Growth Doesn’t Pick Up Soon.” The message:

Federal Reserve officials, impatient with the economy’s sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring.

Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.

As I sputtered by e-mail:

This would be funny if it weren’t pathetic and real people weren’t being hurt.

The state of the economy is “unacceptable”? Really? Where were you when bank reforms were needed and the Obama administration was too chickenshit to go for bigger stimulus?

And the Fed has already tried every confidence fairy and central bank trick on offer. But Bernanke refuses to believe that loanable funds is a fallacy. Putting borrowing on sale is attractive to speculators, but not to real economy types who don’t see opportunity and/or have legitimate worries re repayment.

The post below is a longer-form treatment of what passes for policy thinking at the Fed. Oh, and it roughs up on Matt Yglesias too.

Philip Pilkington: Market Monetarism Or An Attempt to Speed Up the Decline in Real Wages

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

The so-called ‘market monetarists’ – that is, a growing pack of neoclassical economists who are advocating that central banks should try to generate inflation – are not as strange a breed as many think. Recently we compared classic deflationary monetarism with contemporary QE policies and found that they were based on the same underlying theoretical framework. We also found that the high priest of classical monetarism himself, Milton Friedman, strongly advocated inflationary monetary policies for both Japan after 1991 and the US after the stock market crash of 1929. So, it is by no means surprising that when one monetarist policy fails (I refer to QE), another will quickly be cooked up by Friedman devotees.

That is precisely the role of the market monetarists in the current policy and economic debates. They have introduced the banal notion that central banks should no longer target inflation or unemployment but instead they should focus on Nominal Gross Domestic Product (NGDP) – that is, a measure of GDP that has not been adjusted for inflation.

Libor Scandal Apologist Avinash Persaud Displays Inability to Do Math

Nothing like putting your foot in mouth in public and chewing.

Philip Pilkington: The New Monetarism Part III – Critique of Economic Reason

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

During the Great Depression and the war years monetary policy in Britain had proved largely ineffective. In the meantime it was shown that government spending could cure economic depressions and return the economy to full or even super-full employment. After the war most political parties in Britain were thus interested in using fiscal policy to generate full employment rather than rely on the vagaries of monetary policy. (This, it should be said, is the polar opposite of our rather more desperate situation today).

Wily conservatives, however, recognised that such policies would mean the expansion of government – which they didn’t like at all. So they tried to resurrect monetary policy as the government’s tool of choice.

Richard Alford: Why Economists Have No Shame – Undue Confidence, False Precision, Risk and Monetary Policy

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

In theory, there is no difference between theory and practice. In practice, there is. – Yogi Berra

Economic policymakers, pundits and academics continue to forecast the future course of the economy and predict the effects of possible policy initiatives with an air of scientific certainty. The high degree of confidence expressed in their forecasts, predictions and commentary continues unabated despite:

1. Only a small minority of economists and none of the central banks and treasury/finance ministries anticipated the financial crisis and the recession, and

2. At most only one of the currently competing macroeconomic models (which embody significantly different structures and implications for economic policy) can serve as a sound basis for policy.

The confidence and false precision in these forecasts and policy prescriptions reflect a continuing unwarranted faith in the models.

Philip Pilkington: The New Monetarism Part II – Holes in the Theory

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

In the first part of this piece we looked at the Thatcher government’s monetarist experiment in the early 1980s. It did not end well. So we must ask: did the Thatcher government and the monetarists believe in what they were doing or were they cynically using monetarist policy as a device to destroy large parts of British industry in order to destroy the trade union movement?

Philip Pilkington: The New Monetarism Part I – The British Experience

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

While there are pretty stark dissimilarities between the current quantitative easing (QE) policies of many governments and the old monetarism that prevailed in the late-70s and early-80s, the reason that these both policies were ineffective is because they were based on the same flawed ideas. The key difference between the two is that where monetarism was implemented as a deflationary and contractionary policy, QE is currently being implemented as an inflationary and expansionary policy. As a result, examining the failure of monetarist policies thirty years ago provides important lessons considering QE and its offshoots.

Before looking at the similarities between these two doctrines, we will explore the actual historical trial of monetarism.