Opinion

The Great Debate

Why conservatives spin fairytales about the gold standard

ILLUSTRATION: Matt Mahurin

The Federal Reserve is celebrating its 100th birthday trapped in a political bunker.

At few points since the Fed’s founding in 1913 has it taken such sustained fire. It’s taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.

Conservative or Tea Party Republicans have a different kind of criticism. They reject the notion that the Fed should even have the power to regulate the money supply and “debase” the dollar. They believe in hard money and a return to the gold standard.

These Republicans have taken a page from the book of conservative orthodoxies of the late 19th century. Conservatives are again fervently pushing gold as a means to protect the wealth and power of Wall Street financiers and the corporate elite. Conservatives are demanding hard money as part of the policy mix that enriches the top 1 percent. Now, as in the Gilded Age, the United States is a nation of savage inequality.

Hard money has often been linked to the conservative cause. But it has been more than 100 years since gold fever has so afflicted American politics.

It’s too soon to taper

The chatter has it this week that the U.S. Federal Reserve Bank will allow its $85 billion a month bond buying program to wane, with the eventual death of quantitative easing and a return to economic normalcy. Not only is it too soon for the Fed to back off, it’s too soon to even be discussing it. The global economy is extraordinarily fragile. We need solutions that are more radical than QE, not a retreat into orthodoxy.

The global economy is threatened by conditions in both developed and emerging markets. In the U.S. and Europe, debt has been transferred from the private to the public sectors and debt levels have climbed faster than economic growth has been able to keep pace. The G7 nations borrowed $18 trillion since the financial crisis and have only $1 trillion in economic growth to show for it.

Meanwhile, both private and public borrowers in the emerging markets have larded up on cheap debt, much of it denominated in dollars and euros. They are borrowing in other currencies and paying with their own, leaving corporate and government treasuries vulnerable to currency shocks, just like we saw during the Asia Crisis of the 1990s.

‘Democratic wing’ of Democratic Party takes on Wall Street

The chattering classes are fascinated by the Republicans’ internecine battle to redefine the party in the wake of the George W. Bush calamity and the Mitt Romney defeat — from Senator Rand Paul’s revolt against the neoconservative foreign policy, to intellectuals flirting with “libertarian populism.” Less attention has been paid, however, to the stirrings of what Senator Paul Wellstone dubbed “the Democratic wing of the Democratic Party” — now beginning to challenge the Wall Street wing of the party.

Perhaps the strongest demonstration of this was the barrage of “friendly fire” that greeted the White House’s trial balloon on nominating Lawrence Summers to head the Federal Reserve Bank. More than one-third of Democrats in the Senate signed a letter supporting Janet Yellen, now vice chairwoman of the Fed. More than half of the elected Democratic women in the House of Representatives signed a similar letter. Many were appalled at the notion of passing over the superbly qualified Yellen for Summers, with his notorious record of denigrating and dismissing women.

But, as Katrina vanden Heuvel, editor of the Nation wrote in the Washington Post, Summers also drew opposition because he was the “poster boy for the Wall Street wing of the party — literally.” (Summers joined then-Treasury Secretary Robert Rubin and then-Federal Reserve Chairman Alan Greenspan on the now risible 1999 Time magazine cover celebrating the “Committee to Save the World” — before the global financial collapse exposed the folly of their policies).

GOP and the blue state budget time bomb

Many economists and analysts are concerned that the next candidate for a federal bailout is not still-too-big-to-fail banks but financially irresponsible states. We have written about the threat that failed states such as California, Illinois, Connecticut, Maryland and New York pose to the fiscal health of the nation.

But the problem is bigger. In coming years, University of Chicago economics professor Brian Barry predicts, “Both parties are likely to clash over state-budget issues at the national level, no matter what happens to federal taxes or healthcare spending.”

Skyrocketing unfunded state pension liabilities, up to $4 trillion according to some estimates, are driving already financially troubled states down the path to insolvency,  and there appears to be no political will to address the problem. States in the most dire fiscal situations are high-tax, left-leaning and Democratic-controlled, and according to Barry pose a “long-term threat to the permanent national majority that many Democrats believe they see emerging from the past two presidential elections.”

Why public debt is not like credit card debt

One big part of the well-financed campaign for economic austerity is the contention that the public debt is like a national credit card. If we keep charging on it, the argument goes, we’ll get overwhelmed with interest costs, suffer a reduced standard of living and, pretty soon, go bankrupt.

As David Walker, a prominent budget hawk and the former head of the billion-dollar Peter G. Peterson Foundation, has contended, “Both Republicans and Democrats in Washington have charged everything to the nation’s credit card, including tax cuts and spending increases, without paying for them.”

The Peterson Foundation is the leading sponsor of this brand of bogus economics. It is a spurious metaphor on so many levels that it’s hard to know where to begin.

from David Cay Johnston:

The hidden dangers of low interest rates

The Fed's campaign to hold short-term interest rates near zero is a loser for taxpayers. A rise in rates would also burden taxpayers, but it would come with a benefit for those who save.

Low rates keep alive the banks that the government considers too big to fail and reduce the cost of servicing the burgeoning federal debt. Low rates also come at a cost, cutting income to older Americans and to pension funds. This forces retirees to eat into principal, may put more pressure on welfare programs for the elderly, and will probably require the government to spend money to fulfill pension guarantees.

Raising interest rates shifts the costs and benefits, increasing the risks that mismanaged banks will collapse and diverting more taxpayers' money to service federal debt. On the other hand, higher interest rates mean that savers, both individual and in pension funds, enjoy the fruits of their prudence.

Fed up with Bernanke

By Nicholas Wapshott
The views expressed are his own.

There is one thing every Republican candidate agrees on. Once in the White House, the first thing they’d do is fire Ben Bernanke. His crime is to follow the legal brief of the Federal Reserve to maximize jobs and keep prices stable. To this end he has been printing money to keep interest rates low to boost business confidence to invest and thereby create more American jobs. For many conservatives and libertarians, who dominate the early GOP caucuses and primaries, Bernanke’s cheap money policy has dangerously devalued the dollar’s worth.

Guaranteeing cheap money is a Keynesian way of restoring health to an economy in recession, though Keynes himself was aware that low interest rates do not automatically lead to jobs. However cheap money is, you can’t force people to invest. Or, as he put it, “You can’t push on a string.” He compared it to buying a bigger belt to gain weight. The fact that Keynes backed easy credit is enough to make the policy treacherous in the eyes of many con-libs. (They are far more tolerant of another Keynesian remedy–slashing taxes.)

Bernanke, however, owes his allegiance not to Keynes but to Milton Friedman. To encourage growth without hyper-inflation, Friedman prescribed gradually increasing the money supply. That way, prices would rise slowly and predictably. Bernanke is also an expert on the 1929 Crash and the Great Depression, catastrophes he, like Friedman, attribute to the 1920′s Fed keeping money too tight for too long. As Bernanke told Friedman on the father of monetarism’s 90th birthday, “You’re right. We did it. We’re very sorry. But, thanks to you, we won’t do it again.”

How Citi sank itself on the Fed’s watch

By Nicholas Dunbar
The opinions expressed are his own.

Much of the financial crisis can be blamed on bankers who created complex products that allowed them to exploit and monetize less sophisticated investors, borrowers and bank shareholders. However, no account of the financial crisis is complete without an account of the inept regulators who permitted these activities to flourish, causing the crisis to become much worse than it might have been. Among these regulators, most surprising is the story of the New York Fed, supposedly the most sophisticated in its approach to risk. As I recount in this excerpt from my book, The Devil’s Derivatives and as staff at the Federal Reserve Board in Washington DC discovered, the New York Fed was in thrall to what in 2007 was the largest US bank – Citigroup – with disastrous results. -Nicholas Dunbar

The Federal Reserve may have been at the top of the U.S. regulatory pecking order, but within the Fed itself, the New York branch was top dog when it came to regulating banks. This was hardly surprising given the dual importance of Wall Street as the engine room of the bond markets and as the base for the largest multinational U.S. banks. It was only natural that industry risk-management innovations like VAR were first identified by staff in the New York Fed’s markets divi- sion, such as Peter Fisher, who transmitted the ideas to the rest of the regulatory community.

Ever since the regulatory blessing of VAR in the mid-1990s, the New York–based multinational banks had been growing rapidly. By 2003, when William McDonough retired as New York Fed president and was replaced by Timothy Geithner, an ambitious former Treasury and International Monetary Fund bureaucrat, bank supervision was equally important to markets.

from Jeremy Gaunt:

Twisted Sister and the Federal Reserve

The Federal Reserve's "Operation Twist" has set the literary- and musical-allusion juices flowing.  It is all about the Fed selling or not rolling over short-term debt and buying long-term bonds instead in order to keep borrowing costs low.

But that is frightfully dull for economists, analysts and reporters trying to get attention for their work. So, so far we have heard:

-- "Let's Twist Again", a reference to the 1960's Chubby Checker record about the dance craze . Problem is that the second line is "Like we did last summer", and the Fed did nothing of the sort, launching plain old quantative easing instead.

The Fed must print money to head off a global crash

By Adam Posen
The opinions expressed are his own

It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies.

Too much attention has been paid, however, to the failings of fiscal policies and to the shortfall from effects of earlier quantitative easing. Further asset purchases by the G7 central banks are needed to check not just a downturn, but the lasting erosion of productive capacity and of debt sustainability — especially when even justified fiscal and financial consolidation is undercutting short-term recovery. Easier monetary policy will increase the odds of other policies improving, and those policies’ effectiveness when they do.

It is also past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action. The rate of wage growth is tepid and compatible with price stability, at most, even in Germany; the inability of wages to keep up with recent real price shocks underscores the ongoing downward pressure from labour market slack. Consumption was driven down by fiscal tightening and household retrenchment as much as oil prices, and those forces will be ongoing. Had consumer confidence not been weakly footed to begin with, the oil shock would not have had such an impact.

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