Sunday, Jul 19, 2009
Fed chief may offer an expansion plan rather than an exit strategy
MarketWatch: Will Bernanke make case for more asset purchases?
Dean Baker, co-director of the liberal Center for Economic Policy Research, said he would support more asset purchases... The move wouldn't be inflationary because the U.S. has massive untapped resources.
"When Zimbabwe prints money, they don't have retail stores filled with goods or factories so more money chases few goods. We have the ability to produce in accordance with the money," Baker said.
Posted by devo @ 07:56 PM (418 views) Add Comment
13 Comments
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1. flashman said...
The Fed is getting itself onto a terrible pickle. Bernanke has boasted for years that he has the policy responses to handle any economic situation. In a world without traders he would be right but like many a government official before him, he is finding out that he cant take a dump without the markets approval.
The Fed has a mandate for stable prices and also for controlling unemployment. Their own projections are for steeply rising unemployment and below target inflation. They therefore need to reduce interest rates and/or buy more treasuries. Bernakes little book of economic theories is telling him that he could go ahead and buy more treasuries/monetise the debt without risk of sparking inflation. His play book tells him to shock everyone with the sheer scale of his asset purchase/monetisation/QE. His problem is that he has been made aware that if he did this, the market would increase their expectations for inflation. This increased expectation for inflation would send a broad spectrum of interest rates through the roof, thus destroying his game plan.
Bernake is having a temper tantrum because these silly traders don't understand his brilliance. It's quite ironic that the traders who are quite rightly blamed for contributing to the crisis, are the only thing saving us from the crazy abuses of this academic Demigod. I still think he'll do it, but he'll wait until there is a bit more pessimism floating around. Fed officials are projecting that it will take between 4 to 6 years before they achieve sustainable growth, so there will be a window of pessimism coming along soon.
2. icarus said...
"We won't monetise the debt" Bernanke said recently. The govt will have to move toward fiscal balance, he said, noting that deficits were driving up IRs on Treasury bonds and mortgages.
But what's wrong with monetising the debt? Most people take the view that instead of paying what it has borrowed the government monetises - simply prints money to repay the loans and thereby lowers everybody's purchasing power.
But US money supply isn't increasing. In the first six months of this year M1 and M2 are more or less unchanged and it's likely that the same applies to M3, the figures for which aren't published. Total net borrowing of the US dropped by over $250 billion in the Jan-March quarter. That's because the drop in private borrowing is more than offsetting any rise in public borrowing, meaning that financing the debt currently isn't a problem.
And what's so wrong about the govt creating money anyway? That's what private banks do all the time - creating credit/debt/money. Except they are doing too litle of that now, so there's too little credit. Governments are throwing money at banks but still there's too little credit, leading to unemployment and recession (and rich bankers). When banks cannot create enough credit why shouldn't the govt step in and "monetise the debt" - i.e. create the credit? When private banks create credit out of thin air they charge interest to governments and individuals, which leads to the building up of debt by both.
There are many historical examples of countries or states or provinces having all the resources required to get the economy moving - except sufficient money/credit (like an airlinewith fuelled planes being grounded because it hasn't printed the passenger tickets). How did Germany become a force in the thirties after reparations and speculation against the mark killed the economy in the 20s and people lost their homes and farms to bankers - all this followed by the depression. Hitler did what Lincoln did. Lincoln funded the government's side in the Civil War with greenbacks (government-, not bank-created money), much to the chagrin of Anglo-American banking establishment, and Hitler funded a massive public works programme with freely tradeable Treasury Certificates, much to the chagrin of the same banking establishment.. Soon Germany had high employment and a stable currency when Britain and the US and others were still mired in depression. It's quite likely that the decision to stop Hitler was taken before he went on the rampage - because of his assault on bankers' privilege.
3. flashman said...
We are in no position to follow Hitlers example by embarking on a massive public works programme. More government spending (no matter how the spending money is created or acquired), would have the opposite efect to his stable currency state and would send interest rates soaring. Any recovery would be killed stone dead by soaring interest rates.
4. rotten tomato said...
I agree with Icarus. Hitler and Lincoln created a "trickle up" effect. The reason why many western economies, starting with britain cannot begin a huge public works and infrastructure programme is, I presume, because they have blown all the cash already on feeding the banksters, who are using it again to gamble. They should have followed Roosevelt's example instead and declared a bank holiday closing all the bankrupt banks on that day, and creating new banks with less public money, nicely solvent, ready for business. Obviously with different management. Government guarantees should have been provided only for the ordinary people's savings and pensions and other stuff necessary for the day to day running of things.
Oh let's not forget a Ferdinand Pecora type of commission too to not only grill the top execs, but put quite a few of them behind bars for a considerable time too, based on clear fraud charges.
@ Flashman
I dunno, Germany when Hitler took over was in far worse shape than the UK now, so why not try? Why do we all have to go down the slavery road for 20 years or more while we watch the banksters laugh behind our backs?
5. flashman said...
rotten tomato: The banks are not using the money to gamble. They are using it to repair their balance sheets and to boost their profits. More QE or monetising of debt will help the 'banksters' make even more profits. Suggesting that we embark on yey more government spending would collapse our credit rating and send interest rates soaring. Soaring interest rates would cause far more unemployment which would undo the benefits of any public works program. We need to take our medicine. Printing and spending money is not the answer. Hitler lived in a very different world. Eventually he put everyone to work ramping up his weapon and war plans. He then needed to invade countries because he could only sustain his efforts with a better supply of commodities and slave labour. Great haircut but I'm not sure he is much admired as an economist
6. icarus said...
We shouldn't get too bogged down in the Hitler example. There are others. Early American colonists, the present state Bank of North Dakota, started to make the state independent of NY bankers in 1919 - it now has some of the functions of a central bank and is one of only two or three states with a budget surplus. Then there was Guernsey. Troops returned there from the Napoleonic wars to find a place racked by debt, poor infrastructure and austerity. Loans from English banks were recalled, borrowing costs were consuming most of the island's revenues. The Guersey states responded by printing their own currency to fund infrastructure projects - no need to borrow from English banks, no interest to pay. The banknotes had a date due, when the bearer was paid in gold. The money came from rents on the finished infrastructure and a tax on alcohol. Result - new roads, sea defences, public buildings (much still functioning) full employment, no deficits and no interest paid to bankers for creating money as credit. This is why many wonder why California doesn't create a state bank to get itself out of trouble.
Of course you have to cut out the banksters from such schemes. And their power has meant that the schemes have been sporadic and short-lived. Flashman's objections are based on the problems of doing this sort of thing in a bankster-dominated world. The reason govt money is going down the black hole of repairing balance sheets is that much of the credit-creation system is broken - the bond markets and investors who took the loans off the books of the banks to make room for more loans have fled the scene, not only leaving the banks with nobody to pass their old loans to in order to create more loans, but with old loans known to be toxic. If the banksters didnt have power they would have been left to their own devices. Even Martin Wolf in the FT the other day wrote that 'The right policy is to ensure that the costs imposed by the failings of finance are properly internalised within the sector. Then let the market forces we are supposed to believe in decide how big the sector should be....wind up institutions when they get into difficulty...' With regard to the policy of maintaining 'UK's pre-eminence in international financial services markets' he says 'a competitive advantage in the supply of global 'bads' is really a disadvantage.
7. flashman said...
"Flashman's objections are based on the problems of doing this sort of thing in a bankster-dominated world".
You are right about that. I worry that it can’t be done in a large modern economy. How do we extricate ourselves from the current system without some kind of "ground zero" annialation? My favourite textbook example of a successful radical policy was the economic miracle that took place in the old Rhodesia. They overcame a trade embargo by manufacturing everything themselves. It took massive feats of ingenuity and guts but they boomed like crazy. I would rather we took something from this example because it is more practical but just as revolutionary
8. icarus said...
We can't solve problems by using the kind of thinking we used when we created them - but ground zero annihilation? Look at the Bank of North Dakota. As I mentioned, it's one of very few states with a budget surplus. It avoided the credit squeeze created by Wall Street derivatives by creating its own credit. At the time it was created (1919) it was bankers and railroad men that it wanted independence from. The state deposits all its funds in the bank and guarantees all deposits. Its purpose is to deliver sound financial services that promote farming, commerce and industry in the state. It partners with private banks to deliver those services. Like other banks the BND can create credit - but it doesn't have to worry about shareholders or profits. It can lend at low interest, including to the state itself or municipalities - loans that can easily be rolled over. It's not inflationary because loans generally are used to create goods and services.
All state and local agencies are required to place their revenues in the bank. As the wiki article on the bank makes clear, it has some central bank functions like cheque clearing that you might expect a branch office of the Fed Reserve to undertake. In other states the state,together with cities, universities and public utilities, county airports etc. can pay $1 billion a year interest on long-term debt, money that goes to Wall Street. Often that $1 billion is equivalent to the state budget deficit.
9. flashman said...
The Bank of North Dakota can only function because North Dakota is a 'surplus' state. Of course I may have defeated any argument against it because it is probably only a surplus state because it has ploughed its deposits into strategic production assets for 90 years. One of the problems with the major banks worldwide is that they have a preference for ploughing their deposits into liquid assets. Production assets tend to be illiquid so they avoid them wherever possible. It has to be said that all is not rosy in North Dakota. 15 % of the people live beneath the official US poverty line (it is well known that it takes almost double the official poverty line income to live comfortably). Another problem regularly faced by North Dakota is that a poor crop year can all but wipe them out. It is quite ironic that despite their much touted financial independence, they rely heavily on the Wall Street derivatives market to hedge against crop failures.
Many areas of the UK (and maybe the UK itself) are pretty far from 'surplus states' and if they created their own banks they would effectively prevent themselves from receiving aid from our areas or countries.
It sounds like I am disagreeing with the idea of a more sensible allocation of assets. I really am not but I think it has to be achieved differently in a large modern deficit state. I think we should legally command the banks to allocate a healthy proportion of their deposits into productive assets. All the problems with the banks would be solved at stroke because the instability they cause by trading in liquid assets would be wiped out. They make all their obscene profits from trading in these illiquid assets and in doing so they slowly strangle our productive base. Basically this is a long winded way of saying there is more than one way to skin a cat
10. flashman said...
sorry, I meant " they make all their obscene profits from trading in these LIQUID assets"
11. icarus said...
flashman - governments can do a lot with the tax system to get investment flowing into productive purposes rather see it diverted to assets and income streams already in place. This tended to happen in the US Progressive Era (1890s - 1920s) in the US, a period which saw the US reach industrial dominance - and sow the seeds of its own demise (Bretton Woods, Reserve currency, deficits, rule by banksters). The Martin Wolf article I referred to has the following "The arguments for imposing heavy taxes on site values are very strong. We have just seen...the dire results of turning a nation's population into property speculators. If necessary, let the cash-poor but land-rich borrow their tax payments from the government (which could) demand repayment on death".
btw - not saying BND is a panacea, but people in other states are saying "we're paying a billion a year to Wall Street in interest on credit it created on its computers while North Dakota has short-circuited that little scam".
12. flashman said...
icarus: If I were the PM, I'd default on our national debt and launch a zealous campaign to produce everything ourselves. I wouldn't forgive private or company debt. Other countries would grumble and threaten... and then copy us.
Years ago, I realised that I had pushed pragmatism so far that it had turned to nihilism. I long to get behind some sort of crusade but I fear we'll just bumble on. My teapot has a beautiful 60's style floral design with the words revolution written on it. It always makes me smile because it reminds me that my militant rants are usually followed by a nice cup of tea
13. icarus said...
flashman - a good note on which to end, especially since hardly anyone else is following this thread.