Wolf and Rogoff

Ken Rogoff reviews Martin Wolf's The Shifts and Shocks


Darryl FKA Ron's history:

[BIG TIME!

The end of Bretton-Woods is generally considered to have been the end of US dollar convertibility (into precious metals) and the establishment of the US dollar as the global reserve currency upon which to anchor exchange rates, trade reserves, and trading prices. Even OPEC nationalization tipped its hat to the US dollar as the global price tag.]

http://en.wikipedia.org/wiki/Bretton_Woods_system

...On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling, for example), also became free-floating...

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[Meantime you had commercial banks going inter-state which broke up some of the relationships between local banks and traditional constituents in agriculture and small business when those local banks were bought. MOstly though it just positioned commercial banking for the post Glass-Steagal world of the current century, a lamb being fattened for later slaughter.

My story of the new finger on the scale of capital gains preference in 1954 is one of corporate and private equity leverage upon which investment banks grew their more speculative bond markets for buyouts and takeover financing. Schumpeter's argument against competition won the day for firm consolidation AND investment banks. Fast forwards to the end of first Bretton Woods and then the Cold War and the hegemony of multi-national corporations allied with major investment banks all resting on the shoulders of Uncle Sam's imperial dollar is a feat of global conquest that would have made Ghenghis Khan blush.]

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http://en.wikipedia.org/wiki/Nationalization_of_oil_supplies

Early nationalizations

Prior to 1970, there were ten countries that nationalized oil production: the Soviet Union in 1918, Bolivia in 1937 and 1969, Mexico in 1938, Iran in 1951, Iraq in 1961, Burma and Egypt in 1962, Argentina in 1963, Indonesia in 1963, and Peru in 1968. Although these countries were nationalized by 1971, all of the “important” industries that existed in developing countries were still held by foreign firms. In addition, only Mexico and Iran were significant exporters at the time of nationalization...

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[And then all hell broke loose. Oil shortages got us rising oil prices and by the time it all settled out global finance had its claws deep into crude. What Reagan and Thatcher did is make a narrative of all this or maybe just the backup band to Milton Fridman's narrative of all this that blame it on public spending and deficits instead of an imperialistic dollar in the hands of multinational corporations and investment banks taking advantage of financialization and globalization. Autos and steel were among the first to fall in the US because their managements were the most over-confident and unprepared to deal with change. BOth failed modernize, both in production and in marktet focus.]

The reason it is so difficult to accept that our problems originate from Ike and Nixon instead of Ronnie Rayguns is that such a narrative would not give our feeling of intellectual superiority and moral self-righteous a leg to stand on.

Rayguns was so blatantly contemptuous of liberalism that it must have been his fault. THat is like thinking that a psychopath has no guile and can easily be picked out of a crowd. It is not the guy that spits in your face that catches you unawares, but the one that puts the knife in your back while patting you on the shoulder.

Clinton probably did more to roll back the New Deal than Reagan did what with Welfare "reform" (or was that deform) and financial deregulation. Reagan screwed unions, but he was not their first time, and his recession ushered in the Great Moderation, which fathered contemporary secular stagnation. Mergers accelerated under Reagan era anti-trust "enforcement." But Reagans foulest contribution and legacy was less about legislation or administration than it was the Alfred E. Newman "Whot, me worry" attitude of the people regarding their own economic affairs. THe tonic he sold to ward off the nanny state was the individualistic patriarchal state. The public bought it and ate it up. "I got mine and screw everyone else" became the new pledge of disallegiance. Ronnie's start was as a PR man and a pitch man and he had gotten pretty good at it.

Krugman on Wolf

Why Weren’t Alarm Bells Ringing? by Paul Krugman

AIG bailout

The A.I.G. Trial Is A Comedy by John Cassidy

Rather than hauling those three musketeers into Judge Thomas Wheeler’s court, which his lawyers will do next week, Greenberg should be taking them out to dinner. The only mystery about the lawsuit is why Wheeler allowed it to proceed this far. In 2012, Judge Paul Engelmayer, a federal judge in New York, tossed out a similar case, noting that A.I.G.’s board had voluntarily agreed to the terms of the September, 2008, bailout, seeing it as the only option to avoid bankruptcy. For whatever reason, Wheeler, whom George W. Bush appointed to the bench in 2005, decided that the case raises sufficient legal issues to proceed. 

Perhaps he is taking seriously Boies’s contention that the bailout violated the Fifth Amendment, which prevents the federal government from seizing private property without proper compensation. But, of course, this wasn’t a seizure—it was a bailout. Or perhaps Wheeler wants to explore whether the Fed overreached the lending authorities that Section 13.3 of the 1932 Federal Reserve Act grants it. There’s no doubt that this statute was drawn up vaguely, but that was deliberate. During the Great Depression, as in September, 2008, the Fed faced a potential cataclysm, and it needed some freedom to maneuver, which Congress granted it.

Adam Posen on the Old Normal

(via DeLong)

Baker on Geithner

Stress Test: The Indictment of Timothy Geithner by Dean Baker

Geithner

Tim Geithner is wrong about FDR by Matt O'Brien

I saw Geithner on the Daily Show and he said the turn to austerity was too abrupt, but in reality he led the charge towards deficit reduction and famously said fiscal stimulus is like "sugar."

Geithner

HOW TIMOTHY GEITHNER FAILED HIS STRESS TEST by Mike Konczal

debt loads

The Nonexistent Rise in Household Consumption by JW Mason

In our "Fisher dynamics" paper, Arjun Jayadev and I showed that the rise in debt-income ratios for the household sector is not due to any increase in household borrowing, but can be entirely explained by higher interest rates relative to income growth and inflation.

Pace Dean Baker and House of Debt. Or maybe not.

Diagnoses and Prescriptions: The Great Recession by Jared Bernstein

Great Clusterfuck

Reviewing Ryan Avent’s Review of Amir Sufi and Atif Mian’s House of Debt: Friday Focus: May 16, 2014 by DeLong

macro, pollution, inequality and capitalism

"Like pollution, inequality may be necessary correlate of important and valuable processes, and so should be tolerated to a degree. But like pollution, inequality without bound is inconsistent with the efficient functioning of free markets. If you are a lover of markets, you ought wish to limit inequality in order to preserve markets."

Should markets clear? by Steve Randy Waldman

REBELLIOUS ECONOMICS STUDENTS HAVE A POINT by John Cassidy

The Great Clusterfuck

What Caused Great Recession? Household Deleveraging or ZLB? by David Beckworth

Geithner

AND DAN DAVIES DELIVERS TIM GEITHNER'S SOLILOQUY AS THE EARL OF KENT IN "KING BARACK": MONDAY REAL-TIME SMACKDOWN WATCH by DeLong

Why Tim Geithner is wrong on homeowner debt relief by Atif Mian and Amir Sufi

Tim Geithner: More Banker Than the Bankers by Noam Scheiber

A problem: "New" Democrats, Clintonoids, Rubinites, et al.

What Timothy Geithner Really Thinks

Obama’s Top Economist Has Some Problems With Piketty’s Book

Global Lessons for Inclusive Growth by Jason Furman

housing bubble

Nope, Robert Samuelson Is Wrong Again, the Housing Bubble Did Cause the Recession by Dean Baker

The Fed and the Financial Crisis by Yglesias

Baker on Krugman

Paul Krugman and the Economics Fringe by Dean Baker

Krugman on 2008

 Frustrations of the Heterodox

It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis. 

What about the lousy policy response — austerity and all that? The key point here was that policymakers weren’t basing their decisions on conventional economics. On the contrary, they decided to blow off textbook macroeconomics and embrace exotic doctrines like expansionary austerity and a mysterious growth cliff at 90 percent debt relative to GDP. The disastrous policy responses that have perpetuated the slump are the result of mainstream economics having too little influence, not too much.

Baker and DeLong

DeLong responds to Krugman and others below:

A Dialogue on the Resolution of the Financial Crisis of 1989 and the Non-Resolution of the Financial Crisis of 2007: Tuesday Focus: March 25, 2014

and Dean Baker again (he commented at DeLong's blog)

Krugman and DeLong on Avoiding Secular Stagnation

Demand Management, DeLong and the Great Clusterfuck

What Krugman is reacting to in the post below is this post from DeLong.

DeLong post a chart he has used often which shows government purchases declining significantly.

If I had the time and energy I would make a chart that includes how the Fed reacted in 2007 onwards. It would also show how the 50 little Hoovers of state government offset Obama's stimulus. It would show how the sequester screwed us but the sequester is ending.

Krugman

What It Would Have Taken by Krugman 

Brad DeLong is wrong. He thinks we have a disagreement, but he’s misinterpreting what I said when I argued that the Fed’s 2008 inflation phobia wasn’t responsible for the Great Recession and the Lesser Depression that have followed and continue to this day. 

What Brad says — and I agree with — is that there is no economic necessity behind our ongoing employment and output disaster. We could and should have moved the resources employed in the housing boom to other uses, and needn’t have paid this immense cost. 

But what would it have taken — what would it take now — to have maintained or restored full employment? My argument is that it would have required more radical, aggressive policies than anyone close to the levers of power has been willing to contemplate, at any point along the way. So the fact that the Fed was wrongly obsessed with inflation for most of 2008, the original subject of my post, was just a contributing factor; things would have been a bit better, but nowhere near OK, if the Fed had stayed focused on underlying inflation and ignored the effects of the commodity-price blip. 

Think of it this way: what would a really effective set of policies be right now? First of all, we should aggressively reverse the fiscal austerity of the last few years, getting government at all levels spending several points of GDP more to boost demand. 

Monetary policy should accommodate that boost; interest rates should not go up even if inflation goes somewhat above 2 percent. In fact, there’s an overwhelming prudential case for raising the inflation target — even if we’re not sure about secula(r) stagnation, it might be true, and we definitely know that the risk of hitting the zero lower bound is much higher than Fed officials imagined when they settled on 2 percent as the magic number. 

I’m not totally wedded to these particular numbers, but let’s say for the sake of argument that the right policy is two years of fiscal expansion amounting to 3 percent of GDP each year, plus a permanent rise in the inflation target to 4 percent. These wouldn’t be radical moves in terms of Econ 101 — they are in fact pretty much what textbook models would suggest make sense given what we have learned about macroeconomic vulnerabilities. But they are completely outside the bounds of respectable discussion. 

That’s the sense in which we are “doomed” to long-term stagnation. We have met the enemy, and it’s not the economic fundamentals, it’s us.