Alan Blinder gets it
I caught this statement from Alan Blinder in a debate on the New York Times about teaching economics:
Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do.
25 years ago, when I was taking my intro macro economics course in college, we used the then famous Baumol and Blinder economics textbook. It’s in it’s 11th edition now! As I wrote my last post on money and banking, I consulted this book along with my B-school money and banking textbook to see what they were saying about the banking system. It was nothing like what Alan Blinder tells us today. I say "Bravo, Alan Blinder."
Clearly, Blinder sees a huge financial crisis and reflexively understands changes must be made. That’s what you want to see, 25 year-old textbooks be damned!
Love it
Source: Rethinking How We Teach Economics – NYTimes
P.S – Also see my 2010 post Why economists failed to anticipate the financial crisis.
“Clearly, Blinder sees a huge financial crisis and reflexively understands changes must be made.”
BCG recently put out a report that outlines the magnitude of “Credit Writedowns” (*) required in the EU and U.S. to get to a sustainable total nonfinancial debt/gdp of 180% :
https://www.scribd.com/fullscreen/87856673
For the U.S. , for example , it would require a one-time 26% wealth tax on household financial assets. For Greece , Spain , and Portugal , it’s more like 50-55%. For Ireland , even a 100% tax wouldn’t cover the tab.
Write it down quickly and start fresh , or go the Japan route and stagnate indefinitely.
(*)My term , not theirs. I’m not sure where I picked it up.
Thanks, Marko. I think you know where i stand. My blog is called Credit Writedowns for a reason. Let’s see how this plays out over the next business cycle. My point of context right now is the US in 1937 and Japan in 1997. The Japan 1997 experience suggests that having not written down debt means fragile financial institutions continue to fail when the economy turns down again. I would expect the same to happen in the US.
From my perspective I think the US is still at 1930. The stockmarket rebounded and asset recovery has started but the banks are still about to collapse. Extend and pretend has not shortened the cycle but lengthened it considerably. By 1937 the banks were more stable, that does not apply now, since the watering down of Dodd-Frank and the Volker Rule.
The only real problem facing the US in 1937 was aggregate demand being curtailed by the deficit hawks in Congress.
My sense is that we may be in uncharted waters. The debt/gdp burdens – total and across sectors – are very high in the countries that have been providing the bulk of global demand , so there’s simply no room for continuation of that demand based on more credit. On the other hand , to transition countries like China into demand-based economies will take years , if not decades.
I think we need a global reset of some kind – sort of a massive Ch. 11 reorganization. Otherwise , I fear a long , hard slog. The use of financial repression to reduce debt burdens over the next few decades would not be as benign as it was in the post-WWII era.
This sort of suggestion has been mentioned since the start of the crisis. Though this would mean the end of the big banks and while would create short term problems it would free up balance sheets. The problem is that it would mean that the politicians would lose their backers as banks collapse. With politics as corrupt as it is there is no way that politicians could allow such backers to fail.
I think that a one off wealth tax will have problems with collection. Don’t forget that the rich have multitudes of lawyers to get them through the loopholes. I would combine it with a higher capital gains tax collected at the marginal income tax rate. I would scrap carried interest and treat it as income. Eliminate exclusions such as homes from capital gains tax, and that will reduce bubbles.
Ever since the crisis started I have looked back at what happened in the thirties and realised that they did the right things. Many economists such as Bernanke have looked back and learnt the wrong lesson from the Depression. While the expression “liquidate, liquidate, liquidate” has been reevaluated as wrong. It did clear the economy of mal-investment and while it then relied on government spending to keep the economy moving, we have that now though at a much higher level and misguided approach . What we have now is over valued assets which hinder new start ups because it raises costs and only favours incumbent businesses. New businesses are the driver for employment so things need to be done to help them and lower start up costs would be one. Raise taxes then investment becomes tax efficient. Impose capital controls so that regulation and tax arbitrage becomes pointless. Without the write-downs debts hinder growth prospects.
The U.S. doesn’t have a Federal Reserve System, it has the Commercial Banker’s System. We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association – with its well funded lobbyists.
The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.
The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives – those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.