The 2008 financial crisis, China's now developing and Japan before us are examples of excessive private debt accumulation leading to a collapse in lending and decline in economic activity. If the economy were a sink, the taps wherein new money flowed in suddenly shut off while the drain of debt repayments remains. For the economy to grow the taps need to be turned back on. This is the premise behind Fed policy and narrative held by politicians, the media and public. But its only half the story and has particularly nasty side effects that lead inevitably to financial crisis.
Realistically both sovereign currency issuing states and banks as money creators are capable of using that power to stabilize the economy. How best to do this has become the proverbial question. Until the crisis, the assumption was those people supposedly in the know, Central Banks like the Federal Reserve, would handle things end of story and governments job was to get out of the way. At least that was the narrative they fostered with backing directed to political campaigns from the financial sector. This isn't mere hyperbole or conjecture but rather fairly established and visible in the plethora of campaigns funded by financiers like Pete Peterson fostering falsehoods about the long term viability of popular and important programs like Social Security. The unspoken objective to privatize these programs not for public benefit or efficiency rather personal gain.
This narratives overarching theme, government(democracy) bad, market good produced the skewed solutions now producing new concerns and public scrutiny. Public discussion surrounding the nature and role of income inequality with ramifications on not only the social fabric and democracy. Clear eyed recognition of the advantages money can buy and devolution of our democracy.
Quite naturally these are producing hybrid movements. Many like the Tea Party, UKIP, Occupy and other more socially minded provide few practical results but to vent dissent. Those keen on viable policy solutions have rationally attempted to recapture the privilege placed with the financial sector. Politicians, like Bernie Sanders and Jeremy Corbyn, even take up the language of finance with proposals termed Quantitative Easing (QE) for the people in an attempt to capture the narratives lifeline, free money, back for the public good. Others use more biblical language highlighting debt jubilees.
These hybrids are great consciousness raisers and may yet produce useful, actionable policy but as Krugman highlights below there really is no requirement to reinvent the wheel when simply recapturing the narrative the narrative and elevating those who can articulate the issue best will do.
Krugman;
"Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”
Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.
But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.
Why?
One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.
Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.
Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.
But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.
And those low interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions. There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.
What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.
In other words, the great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.
Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.
And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility."
Link here to nytimes column and comments
While voices inside the financial system like Mr. Kocherlakota are important in highlighting the limitations of central bank policy he is a departing fish swimming against the current in a still fast moving tide. Hopefully we can help make it turn.
Realistically both sovereign currency issuing states and banks as money creators are capable of using that power to stabilize the economy. How best to do this has become the proverbial question. Until the crisis, the assumption was those people supposedly in the know, Central Banks like the Federal Reserve, would handle things end of story and governments job was to get out of the way. At least that was the narrative they fostered with backing directed to political campaigns from the financial sector. This isn't mere hyperbole or conjecture but rather fairly established and visible in the plethora of campaigns funded by financiers like Pete Peterson fostering falsehoods about the long term viability of popular and important programs like Social Security. The unspoken objective to privatize these programs not for public benefit or efficiency rather personal gain.
This narratives overarching theme, government(democracy) bad, market good produced the skewed solutions now producing new concerns and public scrutiny. Public discussion surrounding the nature and role of income inequality with ramifications on not only the social fabric and democracy. Clear eyed recognition of the advantages money can buy and devolution of our democracy.
Quite naturally these are producing hybrid movements. Many like the Tea Party, UKIP, Occupy and other more socially minded provide few practical results but to vent dissent. Those keen on viable policy solutions have rationally attempted to recapture the privilege placed with the financial sector. Politicians, like Bernie Sanders and Jeremy Corbyn, even take up the language of finance with proposals termed Quantitative Easing (QE) for the people in an attempt to capture the narratives lifeline, free money, back for the public good. Others use more biblical language highlighting debt jubilees.
These hybrids are great consciousness raisers and may yet produce useful, actionable policy but as Krugman highlights below there really is no requirement to reinvent the wheel when simply recapturing the narrative the narrative and elevating those who can articulate the issue best will do.
Krugman;
"Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”
Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.
But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.
Why?
One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.
Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.
Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.
But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.
What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.
In other words, the great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.
Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.
Link here to nytimes column and comments
While voices inside the financial system like Mr. Kocherlakota are important in highlighting the limitations of central bank policy he is a departing fish swimming against the current in a still fast moving tide. Hopefully we can help make it turn.
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