The Time Bernanke Got It Wrong by Floyd Norris

The Fed chairman conceded that “one cannot look back at the Great Moderation today without asking whether the sustained economic stability of the period somehow promoted the excessive risk-taking that followed. The idea that this long period of calm lulled investors, financial firms and financial regulators into paying insufficient attention to building risks must have some truth in it.” 

One economist who would have expected that development was Hyman Minsky. In 1995, the year before Minsky died, Steve Keen, an Australian economist, used his ideas to set forth a possibility that now seems prescient. It was published in The Journal of Post Keynesian Economics. 

He suggested that lending standards would be gradually reduced, and asset prices would rise, as confidence grew that “the future is assured, and therefore that most investments will succeed.” Eventually, the income-earning ability of an asset would seem less important than the expected capital gains. Buyers would pay high prices and finance their purchases with ever-rising amounts of debt. 

When something went wrong, an immediate need for liquidity would cause financiers to try to sell assets immediately. “The asset market becomes flooded,” Mr. Keen wrote, “and the euphoria becomes a panic, the boom becomes a slump.” Minsky argued that could end without disaster, if inflation bailed everyone out. But if it happened in a period of low inflation, it could feed upon itself and lead to depression. 

“The chaotic dynamics explored in this paper,” Mr. Keen concluded, “should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm.” 

When I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.” 

They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.” In a footnote, he added, “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.” 

It seems to me that he had both Minsky and Kindleberger wrong. Their insight was that behavior that seems perfectly rational at the time can turn out to be destructive. As Robert J. Barbera, now the co-director of the Center for Financial Economics at Johns Hopkins University, wrote in his 2009 book, “The Cost of Capitalism,” “One of Minsky’s great insights was his anticipation of the ‘Paradox of Goldilocks.’ Because rising conviction about a benign future, in turn, evokes rising commitment to risk, the system becomes increasingly vulnerable to retrenchment, notwithstanding the fact that consensus expectations remain reasonable relative to recent history.”

Copperhead isolationists

http://en.wikipedia.org/wiki/Copperhead_(politics)

The Copperheads were a vocal group of Democrats located in the Northern United States of the Union who opposed the American Civil War, wanting an immediate peace settlement with the Confederates. Republicans started calling antiwar Democrats "Copperheads", likening them to the venomous snake. The Peace Democrats accepted the label, reinterpreting the copper "head" as the likeness of Liberty, which they cut from copper pennies and proudly wore as badges. 

They comprised the more extreme wing of the "Peace Democrats" and were often informally called "Butternuts" (for the color of the Confederate uniforms). The most famous Copperhead was Ohio's Clement L. Vallandigham, a Congressman and leader of the Democratic Party. Republican prosecutors accused some leaders of treason in a series of trials in 1864. 

Copperheadism was a highly contentious, grassroots movement, strongest in the area just north of the Ohio River, as well as some urban ethnic wards. Some historians have argued it represented a traditionalistic element alarmed at the rapid modernization of society sponsored by the Republican Party, and looked back to Jacksonian Democracy for inspiration. Weber (2006) argues that the Copperheads damaged the Union war effort by fighting the draft, encouraging desertion, and forming conspiracies, but other historians say the draft was in disrepute and that the Republicans greatly exaggerated the conspiracies for partisan reasons. 

Some historians argue the Copperheads' goal of negotiating a peace and restoring the Union with slavery was naive and impractical, for the Confederates refused to consider giving up their independence.[citation needed] Copperheadism was a major issue in the 1864 presidential election; its strength increased when Union armies were doing poorly, and decreased when they won great victories. After the fall of Atlanta in September 1864, military success seemed assured, and Copperheadism collapsed.

When the Fight Came Home: In ‘Copperhead,’ Opposing the Civil War Brings Trouble by Neil Genzlinger

It was, apparently, a war to end all subtlety. Ron Maxwell, director of the Civil War drama “Copperhead,” renders everything in capital letters in this story of dissent and repression on the home front. Though the tale, based on a novel by Harold Frederic, remains relevant to our time, the film is too self-conscious and tedious for the message it delivers. 

Billy Campbell is Abner Beech, a New York dairy farmer who was no fan of slavery but was opposed to the war —a Copperhead, in the political labeling of the day. An overzealous antislavery firebrand (Angus Macfadyen) turns the town against him, and principles of free speech and the right to dissent are put to the test. 

Abner’s son (Casey Thomas Brown) falls for the daughter of his father’s tormentor (Lucy Boynton) and enlists to impress her. Practically every scene runs too long, as if intent on documenting exactly how a country dance was done or a courtship conducted, and an oppressive musical score makes sure you don’t miss a single emotion or point.

Greatest Show That Ever Was Or Will Be

AV Club on Emmy nominations.

No Tatiana Maslany, nor The Americans, nor New Girl, but Game of Thrones received many nominations. Outstanding Drama Series, Supporting Actor: Peter Dinklage, Supporting Actress: Emilia Clarke, Writing for Drama Series: David Benioff and D.B. Weiss, “The Rains Of Castamere." I also like Homeland which received nominations for Outstanding Drama Series and for Damien Lewis, Claire Danes, Mandy Patinkin, and Morena Baccarin.

Bernanke blames Congress again, notes deflation

Fed Chief Reaffirms Fervor for Stimulus by Binyamin Appelbaum

The Federal Reserve’s chairman, Ben S. Bernanke, emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights. 

Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth. 

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee....

Analysts said that the strongest new signal Mr. Bernanke delivered in recent weeks concerned the sluggish pace of inflation. Prices rose just 1 percent during the 12 months ending in May, well below the 2 percent pace that the Fed considers healthy. Fed officials insisted for much of the year that inflation would rebound from the lowest pace on record.In recent weeks, the Fed has emphasized that it will take action if inflation does not. On Wednesday, Mr. Bernanke put inflation alongside unemployment as the justification for the Fed’s continuing efforts. 

“Our intention is to keep monetary policy highly accommodative for the foreseeable future, and the reason that’s necessary is because inflation is below our target and unemployment is still quite high,” Mr. Bernanke told the committee. 

Michael Feroli, chief United States economist at JPMorgan Chase, noted that Mr. Bernanke also cited the risk of deflation, something he had not done for several years. “The mention of deflation risks, rather than just low inflation, is a fairly strong statement coming from a sitting central bank chief,” Mr. Feroli wrote. 

Mr. Bernanke also emphasized that the Fed would not be satisfied with a decline in the unemployment rate if it was driven by people giving up the search for work rather than people finding new jobs. Importantly, he described this as a reason the Fed might extend its policy of low interest rates but not asset purchases.

DeLong's Tour d'horizon

WHAT I WISH THAT I HAD SAID ON THE DELONG-POSEN-ROSE "FOREIGN AFFAIRS" MONETARY POLICY CONFERENCE CALL by DeLong

Now, one of the risks that Jeremy Stein, Esther George, and company fear is that if the Federal Reserve buys up all the safe, long-term paper that banks needing to report profits so their CEOs can keep their jobs will have a hard time making the three cents per dollar of liabilities, and they will do things we won't understand and take risks we don't understand until it's too late, and then they will get into big trouble. And, this time, the political political climate will besuch that we cannot bail out the banks again. And then we have Great Depression II. That is the risk that the Stein wing is trying to insure against.

Or such is my inference. But I don't know whether that's the tail risk that is driving Federal Reserve decisions right now or not--they aren't being terribly communicative. And if that is not the risk that is driving their decision-making, I don't see what significant tail risk from the Federal Reserve having a larger balance sheet is. If people get sick of holding cash, it can always raise the interest rate on the reserves by a little bit. I the prices of the bonds it holds fall, it can always hold them to maturity--it is the ultimate, patient, long-term investor.

EZRA KLEIN ON JANET YELLEN, SEXISM, AND THE FEDERAL RESERVE SUCCESSION by DeLong

As somebody who had an office next to Janet Yellen's in the period between when the Clinton administration ended and she was installed as president of the San Francisco Fed, let me say that she is plenty smart.

since crisis labor share redistributed to capital

Before crisis, it was going to high income workers.

Is Productivity Being Translated Into Pay Increases? by Dean Baker

...
I had made these points myself a few years back. My conclusion was that we were really looking at a story of upward redistribution from middle and lower income workers to those at the top, doctors, lawyers, and especially Wall Street types and CEOs. Distribution from wages to profits was not a big part of the picture. 

But that was back in 2007. The picture looks a bit different today. The graph below shows the labor share of net income in the corporate sector. This is a bit simpler than constructing productivity and pay data, but it should get at the same issue. I have pulled out depreciation and also indirect taxes, so the division is simply between labor income and capital income. I also show the share of labor compensation in after-tax income in the corporate sector.
...

In the data in the graph it certainly looks like we are seeing a redistribution from labor to capital at least in the years since the crash. For the last three years the labor share of before-tax income was lower that at any point hit in the 1980s and 1990s. The labor share of after-tax income is more than two percentage points lower than at any point in the 1980s and 1990s. That looks like a fairly serious redistribution.

We can throw in the usual qualifications about the data being erratic and cyclical, but it's pretty hard to find a way to make this redistribution disappear. It may prove to be the case that if the unemployment rate falls back to more normal levels then workers will get increased bargaining power and will be able to recapture more of the gains from productivity growth, but that is not happening now.

In the late 90s, Greenspan allowed unemployment to reach 4 percent as he was fighting international financial crises and the stock market bubbled. There is no structural decline because of techology or globalization or oil, etc. It's politics all the way down. The Great Clusterfuck wasn't planned in advance - it dealt the ideology of the system a body blow - but it was a crisis that wasn't wasted.

Andy Harless comments on Japan and the liquidity trap:

These fancy-schmancy DSGE models just lead to confusion. I have a pretty good intuitive idea of what's happening in Japan. There is a hypothetical bad equilibrium -- essentially a speculative bubble with money as the bubble asset, although, since money is the unit of account, most people think of the bubble as a "loss of confidence" in everything except money -- but you never really get to the bad equilibrium (we kind of did in 1929-1933, until devaluation popped the bubble), because central banks (which either won't or can't do what's needed to pop the bubble) stir up the water as much as possible to avoid moving toward equilibrium, and also because nominal wages are sticky downward, which slows down the progress of the bubble, and also probably because, if the bubble were allowed to progress, people would eventually realize that it's silly to hoard an asset without intrinsic value. (The 1929-1933 contraction was essentially a bubble in monetary gold. I imagine that bubble would eventually have ended on its own, as people realized how ridiculous the value of gold was getting relative to everything else, but it might have taken a whole lot of deflation to get to that point.) The ability to capture my intuition in an DSGE model is limited, because we're always far away from the actual bad equilibrium. Maybe a DSGD model, but that's even more confusing.

Krugman vs. Noah Smith: the first rule of macro is that it's folly to disagree with Krugthulhu

Japan and the liquidity trap by Noah Smith (July 16, 2013)

Wage-Price Flexibility in a Liquidity Trap, Again Again Again by Krugman

Japan's stagnation: demand-side or supply-side? by Noah Smith (July 15, 2013)

QE is self-financing

JOE GAGNON: YES, QUANTITATIVE EASING IS SELF FINANCING by DeLong

A Quote from Samuelson and Solow, 1960 by Robert Waldmann

(via DeLong & Thoma)

Policy is designed of, by, and for the powerful, end of story.

Why On Earth Does Anyone Pay Economists for Their Work? by Dean Baker

That is what readers of this interview by Binyamin Appelbaum with Stephen King must be wondering. King's main point is that growth is grinding to a halt and we are facing an era of prolonged stagnation. Okay, how does this fit with the story that we will see mass unemployment because robots will do all the work? 

The answer is that it doesn't fit at all. The weather person on channel 5 told just told us that it will 95 degrees and sunny, while the weather person on channel 9 told us to expect blizzards and sub-zero weather. 

This is the state of economic debate in the United States. If either of these views are right, then the people arguing the other one are out of their gourds. Yet in this great country, both views are exposed side by side in elite circles, probably even by the same people. 

This says everything anyone needs to know about the quality of economic debate. It is complete nonsense. Policy is designed of, by, and for the powerful, end of story. If we can't do anything about policy, why don't we just save a few bucks and fire all the damn economists. 

Let's shut down the econ departments in universities, the Fed's research department, the I.M.F., the OECD. Let's get real, no one cares about economics, they are just going to pursue the policies they want to follow. 

(Yes, I'm happy to go too. If we get rid of the rest of the bastards, I would gladly spend the rest of my days shoveling poop in dog shelters.)