Cecchetti & Schoenholtz against people's QE

Learning from Japan: It's Hard to End a Deflation by Cecchetti & Schoenholtz

Krugman on Neel Kashkari the new Minneapolis Fed President

Supply, Demand, and Neel Kashkari by Krugman

So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLong isn’t happy, and this Twitter exchange suggests that he has good reason to worry.

I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination. 

This is confusing demand with supply.

We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.
What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.

But now we are about to have a Fed president who says:

How’s this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile.

In the words of Charlie Brown, AAUGH!

That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

So, great: we now have a liquidationist in a senior position in the Fed system.

Washintong Post editorial board is against People's QE

Big surprise.

The Washington Post is Confused About Central Banks and Democracy by Dean Baker

In an editorial railing against the Republican Congress for reducing the Fed's reserve fund (which is needed in case they forget how to print money), the Washington Post told readers:

"Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves."

Apparently memory isn't serving the Post's editorial writers very well. The Bank of England did not independently set its monetary policy until 1997. Nonetheless, it somehow it managed to avoid hyperinflation and most people probably would still describe the U.K. as a democracy. There are many other examples of central banks, including the Fed during World War II and for six years afterwards, which were not independent of the elected government. In almost none of these cases did countries suffer from hyperinflation.

On the other side, independent central banks in the United States and Europe somehow managed to overlook enormous housing bubbles, the collapse of which sank their economies. In Europe, the collapse has actually caused more economic damage than the Great Depression. Incredibly, none of the bank officials responsible lost their jobs for their extraordinary incompetence.

Unlike dishwashers, truck drivers, or school teachers, independent central bankers are not held responsible for the quality of their performance. In fact, virtually all of the bankers responsible for this disaster will retire with pensions that are an order of magnitude larger than the Social Security checks that so enrage the Post's editorial writers.

how World War I ended

How did the first world war actually end? by  Paul Mason

...
The sailors’ organisation met in in the dark, kneeling between the stones of a war cemetery. This was no Potemkin-style, spontaneous outburst. With extreme order they took over the bridges, ran up red flags and pointed the guns of rebel ships at the hulls of those that did not rebel.
Mutinous sailors

On 4 November 1918 they armed themselves and set off, in their thousands, for the industrial centres of northern Germany. Jan Valtin, a participant, remembered: “That night I saw the mutinous sailors roll into Bremen on caravans of commandeered trucks – from all sides masses of humanity, a sea of swinging, pushing bodies and distorted faces were moving toward the centre of town. Many of the workers were armed with guns, with bayonets and with hammers.”

By 9 November, with workers swarming into the streets of Berlin, the Kaiser abdicated: only the declaration of a republic, with a Labour government and the promised “socialisation of industry”, prevented outright Soviet-style revolution.

For Hitler, the German workers’ role in ending the war became the “stab in the back”: it was his ultimate justification for eradicating the German labour movement after 1933. In the British imperialist version of events the Kiel sailors become useful ancillaries: Yanks and tanks turn the western front and, naturally, the Germans throw the towel in once their front starts to crumble.

But to social historians the German workers’ role in ending the war is no surprise. Because exactly 100 years ago this week, they had also turned out in their hundreds of thousands to try and prevent it starting. The German socialist party was a massive social institution – with libraries, schools, choirs, nurseries – and during the fatal slide to war they called their members onto the streets in every major city.

Then, under the pressure of war fever and fearing their institutions would be outlawed, the socialist leaders swung behind the war effort.

We know now, thanks to the publication of records and memoirs, that it was entirely possible to have stopped the first world war. Key members of the British cabinet were against it; large parts of the social elite in most countries, including Germany, were stunned and appalled by the unstoppable process of mobilisation.

But within 18 months of its outbreak, dissident German socialist MPs were leading mass strikes, demonstrations and riots against the war. Despite censorship, mobilisation and the natural moral solidarity people have with troops sent to the front, the German arms industry was repeatedly hit by strikes after 1916.

When they reached Berlin, the first thing the insurgent sailors did was try to seize its radio tower: their aim was to send a message of solidarity to Russian sailors at Kronstadt in the eastern Baltic Sea, who they had been fighting until a year before.