Time to end the Keynesian pretense about fiscal stimulus

Sep 19, 2011 17:06 UTC

“The U.S. can pay any debt because we can always print more money.”

–Alan Greenspan
Meet the Press

August 7, 2011

Last week, Nouriel Roubini released a paper, “A Radical Policy Response to the Rising Risks of a Depression and Financial Crisis.” He writes: “Data suggest that developed and emerging markets alike are heading for a massive slowdown in growth, with advanced economies already slumping to stall speed.” Roubini is right, but for the wrong reasons.

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

First, when Roubini, Posen et al call for additional fiscal stimulus, we need to ask them why. The vast fiscal stimulus already attempted in the US failed miserably in terms of creating permanent jobs. More fiscal stimulus funded with debt will not generate real growth. Remember the idea of public deficits “crowding out” private investment? Huge public deficits actually kill private investment and increase inflation, but you will never hear the neo-Keynesians admit to it.

Second, when Roubini and Posen call for the Fed and the ECB to run the monetary printing presses, what they are saying implicitly is that the excessive debt currently killing growth in the industrial nations cannot be repudiated. To the point made in my earlier post on Roubini, we should no longer speak of “capitalism,” but instead of the tyranny of the fascist creditor-technocrats and their captive economists. While Greece faces seemingly inevitable default, many economists continue to believe that avoiding deflation in the larger industrial nations is the chief policy goal. Here again they are wrong.

Years ago, as an earnest young staffer for Congressman Jack Kemp, I expressed worry to my father Richard J. Whalen over the mounting federal debt. An adviser to several presidents and Fed chairman, he looked at me and smiled. “The duty of this generation is to pass the bubble onto the next generation, intact,” he quipped, reflecting the mainstream view in the US today. But as the quote from Alan Greenspan suggests, inflation is the sure result of this strategy. And deflation is the cure.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

Printing money and deficit spending hampers private credit creation. Higher inflation scares private investors and business leaders who refuse to hire new employees and invest in new capital stock. Fear of inflation is driving private capital flight into gold and other non-dollar assets. If the Fed wants to boost the US economy, then it should swear-off further monetary ease, raise interest rates gently, and provide ample volumes of credit to solvent banks.

Roubini is entirely right to focus on providing capital and liquidity to solvent banks, but he does not go far enough. Try this instead: restructure Bank of America and other insolvent US and EU banks and government agencies; Sell bad assets to solvent banks and private investors; Raise new private and public capital to create new, private financial vehicles to support leverage and new credit creation. Think of US Bancorp becoming the largest lender in the US as the zombie banks wither away.

The citizens of the US and EU states need to reject the siren songs of economists who wrongly advocate more debt-funded spending and inflationary monetary expansion. Only by restructuring bad debt, cutting public deficits and limiting the monetary policy caprice of the Fed and ECB can we create a sustainable environment for economic growth. Indeed, the one sure way to ensure the collapse of the fiat dollar system and the return of the gold standard is to follow the advice of Roubini, Posen and Krugman when it comes to monetary and fiscal policy.


Knowing and speaking the truth is only the first step in acting upon that truth . . . which WILL set you free.

Posted by rbblum | Report as abusive

Geithner and the delicacy of Euro-Dollar diplomacy

Sep 16, 2011 15:57 UTC

The departure of US Treasury Secretary Timothy Geithner to Europe to rescue our allies from themselves marks a change in the economic relations among the NATO countries that bears scrutiny. In the past, the loosely-connected federation we call the European Union has managed to muddle along. But now we see overt funding subsidies for the EU via the Fed and the active involvement of Geithner in what ought to be a purely domestic fiscal discussion.

I suppose that kudos are in order for Geithner and Fed Chairman Ben Bernanke for finally responding to the EU funding crisis. Bernanke has been sound asleep at the liquidity nipple, not realizing it seems that the Fed supervisory personnel were instructing US institutions to sever credit lines with their EU counterparts. Since most of these banks are now effectively nationalized, the behavior of US regulators in New York seems especially self-injurious. Now we have replaced private funding for EU banks with central bank swap lines. Hoo-rah. This is not so much a rescue as it is a temporary subsidy.

Geithner has his work cut out for him. Having worked in the Federal Reserve Bank of New York in the currency area during the Plaza Accord, this author has some ideas on the financial and psychological efficacy of central bank intervention. The key thing for any central bank trading desk is not to pretend that you are the market, but instead to support market activity and to slowly help restore the flow of private credit in the markets. Unfortunately this lesson still seems lost on central bankers on both sides of the Atlantic.

My friend Achim Dübel of Finpolconsult in Berlin, is critical of the handling of the intervention by the European Central Bank. Referring to a recent research note by Goldman Sachs on the outlook for the EU, he asks:

Does GS have on its radar how distortive and damaging are the ECB interventions into periphery debt at 80 or 90 cents? The ECB bought Greek debt at those levels a year ago – average portfolio cost is estimated at 70-80 cents, where market prices are now 30 cents. Why are market prices now at 30 cents? Because the ECB had to stop buying. After looking into the abyss of Greek default, the ECB simply ran away.

In the case of Greece and now Italy, Dübel notes very aptly, the ECB has been buying bonds well above the true market. “Now they are doing the same with Italian debt as they did with Greece, and of course the ECB will run away again,” Dübel adds. “With the banks the intervention levels were far too high (haircuts too low), with the worst example of all being Ireland. In all these cases, ECB became an obstructionist force against restructuring, i.e. solving the problem.”

Now, it seems, we know why Axel Weber, the ECB’s German board member, resigned from the board in protest last year. Geithner needs to quickly figure out whether the core EU nations can begin to act in a more rational and purposeful way when attacking issues of solvency, both of banks and nations.

Lagarde recently warned that the egos of world leaders are putting the global economy at risk. This is a nice way of saying that none of the leaders of the G-20, elected or not, are in the mood to take the risk themselves of publicly confessing to the true scale of the problem of excess debt and shrinking demand facing each nation. But as Geithner goes to the EU to preach tough love to his European counterparts, he leaves a lot of unfinished business at home.

Geithner ignored President Barack Obama’s order to consider dissolving Citigroup, a new book by Pulitzer Prize-winning author Ron Suskind claims. The top four banks in the US remain on the critical list, even with bulging deposits and capital levels. So when Geithner lectures his EU peers on the need for prompt and purposeful action, he will need to season his advice with humility and an appreciation that the war against global deflation is far from won.


Astuga, I beg to differ. The way the EU has behaved over the last 2 years as each crisis comes and goes shows that member states are a very loose federation indeed. Given that they cannot agree amongst themselves or with the ECB or with Geithner shows that too.

Given the lack of any suitable solution on the table at the EU ministers meeting last week, Geithner merely put forward an idea that might cover middle ground. It seems that Geithner realises the gravity of the situation unlike our fellow Europeans. It does look like the EU is not going to listen to the markets (quote from Manual Barroso) until it is too late.

Merkel and Sarkozy pushed Europe into the Euro and now they have it they do not know what to do. They are responsible for 500m people in Europe and they all deserve better leadership than all of the EU bureaucrats have shown so far. Whilst the US has trouble too, at least they have a plan which is one thing that we sadly do not have.

Posted by SCSCSCSC | Report as abusive

Ben Bernanke: The ‘Repo Man’ goes global

Feb 7, 2011 17:56 UTC

Back in October, after the meeting of the Federal Open Market Committee, the Associated Press reported that “The Federal Reserve is likely to take additional action to rejuvenate the economy and lower unemployment, an influential member of the central bank’s policymaking group said.”

Of course the Fed neither rejuvenates economies nor creates jobs.  For some reason members of the media attribute magical powers to the US central bank and its employees.

Part of the reason for this divine veneration is that there is little in the way of ideas or resources elsewhere in the federal government, thus the holy printing press is now well and truly the only game in town.

Since October the Fed has purchased hundreds of billions of dollars in US Treasury debt in an effort to force liquidity into private assets.  But while the U.S. central bank is able to float the Treasury’s red ink on a sea of new fiat paper dollars, overseas the great deflation has left global central banks largely emasculated.  Unable to create their own money with the ease of the Fed, even the largest central banks in Europe have gone begging for alms in the form of dollar swap lines from Chairman Bernanke.

Other global central banks are chronically short dollars and the Fed is the proverbial tail wagging the global doggie.  Treasury Secretary Timothy Geithner brags about collecting hundreds of billions in nominal greenbacks recovered from the TARP, Ally Financial and AIG bailouts, among others, but it is Fed Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee who are playing the big game with trillions of new fiat paper dollars.

The Daily Bail asks: “Will Bernanke Scoop Up $50 Billion Of Ireland’s Toxic Assets? Fine Gael Seeks MASSIVE Loan From U.S. Fed” This is a very good question since the Irish government likely to be elected in a week or so is going to face an assortment of very unpleasant choices.  If Ireland’s new political coalition goes hat in hand to the American central bank, the new regime is not likely to last very long, especially with the IRA now talking of great conspiracies among private business.

Neither are Chairman Bernanke and the Fed likely to endure if they continue to play the role of de facto global central planning agency without explicit legal authority from Congress.  The trouble here is both one of legal authority and the deleterious effects of current Fed policies.  The more the Fed tries to help the domestic economy with low rates and explicit bailouts, the worse our collective predicament.  Recall the advice of Martin Mayer, who always taught that the Fed (and government generally) should emulate the physician and “first do no harm.”

The Fed keeps interest rates artificially low to “help” the current situation, but in doing so only stokes inflation and bubbles in sectors such as food, energy and strategic commodities — and also market sectors such as equities.  In the past, the central bank has attempted to fine tune the national economy, most recently in the period a decade ago when then-Chairman Alan Greenspan stepped on the monetary gas.  Not only did the resulting surge in cheap credit stoke a domestic housing boom in the US, but it created booms in global financial assets and also internationally traded goods that impacted investment and asset allocation decisions around the world.

With the 30-plus percentage decline in US housing prices so far and another 10-20% in prospect this year and in 2012 before we hit the bottom, the Fed faces continued asset price deflation at home even as the impact of its accommodative policies are already boosting global inflation.  The combination of volatile weather and poor logistical planning in terms of stockpiles could make the global food supply situation acute in 2011-2012.  The Fed, not hedge funds, is making the situation worse in markets for energy, commodities and food.

The Fed’s extreme monetary policies used to bail out the largest banks are creating bubbles with cheap credit.  Look at the bull market in commercial real estate assets, for example, an entirely speculative financial phenomenon.   Prices for well-located assets are driven up by speculative interest among investors who prefer CRE risk to zero yields on Treasury paper.  But is there sufficient cash flow under these assets to support these valuations?

With yields on longer maturities climbing, it seems that the greatest risk facing the Fed is the transition from life support to something that resembles a sustainable run rate.  Trouble is, Bernanke and a majority on the FOMC still seem to be making policy decisions based upon domestic criteria, this even as the extreme easy money policies of the Greenspan/Bernanke era have already achieved the implicit policy goal of asset price reflation.  It’s all relative, you understand.  When an election-focused White House calls for economic recovery, Bernanke, like Greenspan before him, dutifully steps on the gas, seemingly heedless of the risks.

Of course, classical reflationists argue that the Fed is doing precisely the right thing by using low interest rates to force liquidity into private assets.  One reader of my work rebukes those who argue for monetary restraint and invokes Irving Fisher in his famous 1931 “Econometrica” article.  By lowering rates on Treasury bonds below where they might otherwise be, he argues, Bernanke “is likely to push investors into corporate bonds and lower spreads–which, in the end, are the ONLY real engines of growth in the financial markets.”

The trouble with this argument, like the neo-Keynesian corollary about the use of debt to fund fiscal stimulus, is that expedients such as low interest rates and deficit spending are meant to stimulate economic growth on the margins, not to replace private sector demand and economic activity that does not exist.  Bernanke and his fellow travelers on the FOMC, it seems, have entirely embraced the world view of Paul Krugman and Robert Reich, and echoed among the inflationati in the EU led by Martin Wolf, that new monetary emissions are an apt replacement for fiscal spending.

The problem with living in a world where relativity is the operative standard is that there is no truth in an objective sense.  Political survival, not civil society, is the first priority, so members of the FOMC will say and do anything to get through the day, no matter how internally inconsistent or reckless.  Until Bernanke and the FOMC start to recognize that their well-intentioned efforts to help the domestic US economy are creating the precursor for future global economic collapse, we cannot truly bring the Fed under effective public control and begin the process of national restructuring in America.


Wow, you’re totally clueless.

Printing money?

You do realize that the Bureau of Engraving and Printing, which is part of Treasury, physically prints the money (along with the Mint, also part of Treasury, which coins physical money too)?

Now, just when these amateurs claim they know that, let’s talk about the money supply: There has not been any big change in the money supply (M2). I mean, have you even taken the 10 seconds necessary to create a graph from FRED?

Clearly, you screwed up excess reserves with money. Good job hombre. Do you need a lesson in channel-corridor economics too?

So, please tell me how monetary policy neither rejuvenates the economy nor creates jobs using the principle of monetary nonneutrality given price stickiness.

And I dare you to find empirical evidence that monetary policy created the housing bubble. Here’s a hint, it ain’t out there, no matter what phony coefficients John Taylor uses.

You know damn well that Wall Street pumped up the bubble with financial innovation, and so do good economists who have done more rigorous work than you have with your watered down MBA classes.

Finally, commodity prices are very volatile and have generally foreshadowed neither major inflation nor major deflation.

Why weren’t you and your ilk whining about deflation back in late 2007/early 2008 when commodity prices plunged?

And, by the way, those very volatile commodity prices I just mentioned have now pushed the overall commodity index back to where it was before it plunged back in December 2007, when, you know, output also plunged.

So there you have it. An investment manager and blogger who cannot even understand that commodity prices have been driven by growth and not monetary policy.


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