Bullet-Pointing the Big Bank Bamboozlement

By Dan Kervick

Brad DeLong has taper anxiety, and is wondering what the Fed is thinking.  He notes that, “real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.”

He then reminds the Fed to attend to its responsibilities, given the current political environment:

… when fiscal policy and financial policy are suboptimal it is the responsibility of the Federal Reserve to take proper steps to offset them. Potential harms from accelerating the Federal Reserve’s quantitative-easing asset-purchase policies do not appear major. The actual harm from the disaster of a depressed economy is immediate and dire.

But at this point, does anybody really know what central bank policy would actually be most conducive to getting back to trend growth? Let’s run it down, PowerPoint style, shall we?

  • Are Fed asset purchases holding long-term interest rates down? Certainly.
  • Are those low rates leading to a healthy situation in the housing market, or to another dangerous bubble?  An open question.
  • Are asset purchases injecting money into the bank accounts of the affluent and large financial institutions? Yes.
  • Are asset purchases also draining interest income from the economy? Yes.
  • Are asset purchases contributing to a wealth effect by boosting the prices of equities? Possibly.
  • Are asset purchases contributing to a negative wealth effect by suppressing the interest earnings of retirement savings and other long-term assets? Possibly.
  • Is unconventional monetary policy the “only game in town” given that both parties are run by corrupt plutocrats determined to stab non-wealthy Americans in the back? Possibly.
  • Is unconventional monetary policy creating an illusory distraction that takes the pressure off of the political branches of government and our plutocratic parties, and gives them more political space to stab non-wealthy Americans in the back? Possibly.
  • Is the media and punditry obsession with unconventional monetary policy creating dangerous volatility and distortions due to exaggerated fixation on the policy comments of the Fed Chairman, and speculation on the possible impacts of economic indicators on Fed policy decisions?  Very possibly, yes.
  • Is unconventional monetary policy, to the extent that it is even effective at all, a plutocracy-favoring trickle-down policy that does its work by offering the wealthiest firms and individuals in America a profitable swap of liquidity for their financial assets?  Yes.
  • Do Mom and Pop on Main Street have any financial assets to sell to the Fed for a profit? No.
  • Do unemployed Americans have any financial assets to sell to the Fed? No.
  • Do heavily indebted young people have any financial assets to sell to the Fed? No.
  • Have professional economists done anything of note in the past five years to help disrupt the plutocracy and bring about significant, transformative change in America. With rare exceptions, no.
  • Does an extreme reliance on monetary policy in achieving macroeconomic outcomes empower and strengthen our democracy, or does it shift power to technocrats and elites? Without doubt, the latter.

Oh, and one other random point to note:

  • Is Lawrence Summers, a crony capitalist insider and a virtual poster boys for everything we have done wrong in America over the past 30 years, a leading candidate to take over the central bank? Yes.

Cross-posted from Rugged Egalitarianism

Follow @DanMKervick

15 responses to “Bullet-Pointing the Big Bank Bamboozlement

  1. well said.

  2. Sunflowerbio

    I have real difficulty understanding how supply side anything can ever be considered as effective, let alone more effective, than creating demand. No farmer would consider trying to push an implement out of a ditch with a chain; just hook it up and pull.

    • Ah, so that’s what I’ve been doing wrong all these years!

    • Sunflower,
      I certainly don’t agree with the right wingers who think supply side deficiencies are the sole cause of current economic problems. However, getting the supply side right does help. E.g. spending the right amount in education and training helps.

      • Getting the supply right helps if there is a demand for the supply. If there is no demand, the supply is just surplus and drives down the value of everything (one).

  3. ◾Are asset purchases also draining interest income from the economy? Yes
    Long term yes, short term no. Most would agree the Fed drove interest rates down and inversely the price up. The subsequent Fed purchase at the higher price was effectively paying some of the interest before it was due (short term the interest income is greater). However long term, the public lost interest by not holding through maturity. Also, as you noted, most of this interest income would have gone to the wealthy anyway so the effect on aggregate demand was probably minimal. They probably enjoyed getting the money early even if it was a long term loss.
    ◾Are asset purchases contributing to a negative wealth effect by suppressing the interest earnings of retirement savings and other long-term assets? Possibly
    I think one overlooked effect was the desired increased savings rate due to lower interest rates. Many soon to be retirees wanted a certain income level at retirement. Lower interest rates means a greater principle (savings) is required to achieve the same income level (not to mention threats of cuts to SS). That increased savings is a demand leakage (not that anyone but MMTers understands demand leakage).

    • Well yes, in the short-term people lost interest income on the actual assets that were sold which was compensated for by the cash they received. But what I’m wondering about is the effect on all financial assets in the economy caused by suppressing interest rates. Those assets earn at variable rates that are tied to the rates earned by other assets.

      • Other assets are a net zero. If one private sector entity is receiving less interest, another is paying less interest. Only the govt (federal) can be a net payer of interest. What I don’t know is the break even point. The Fed paid a higher price for those assets (including MBS) which is like advancing the interest payment. But calculating when the private sector starts realizing a net loss is way too complicated for me. Don’t get me wrong Dan, I agree with your points. Just fine tuning.

  4. Dan,

    I quite agree with your criticisms of monetary policy, QE in particular. Strikes me your criticisms all boil down to a very simple point, namely that monetary policy is DISTORTIONARY.

    The distortions caused by QE are obvious: asset price bubbles, enriching the rich, etc. But interest rate adjustments are also distortionary in that they work only via investment spending.

    In contrast, fiscal policy CAN BE distortionary: e.g. where the relevant spending is concentrated on just a few areas of the economy. But fiscal adjustments can be more or less distortion free: e.g. where a fiscal boost consists of increased spending by ALL government departments, plus boosting household spending via tax cuts.

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  6. financial matters

    Great post! I think David Graeber is a kindred spirit…

    I’ve been putting off reading ‘Debt: The First 5000 Years’ because of the imposing title but people keep posting intriguing excerpts from it and I’ve come to like posts from the author David Graeber.

    He’s against much economic globalization policy including those of the IMF (International Monetary Fund) which it took me reading 4 of Michael Hudson’s major works to understand and agree with.

    He’s also what may loosely be called an ‘anarchist’ which means he is in favor of more decentralized power and lack of authoritarian type rule. He was a leader of Occupy Wall Street and other occupy movements which are working on this concept. It was also interestingly explored in a book I just read by Ursula K. le Guin ‘The Dispossessed’

    It’ interesting how ‘debt’ has so many moral implications as well as economic ones…

    some excerpts from the intro to Graeber’s book

    This book is a history of debt, then, but it also uses that history as a way to ask fundamental questions about what human beings and human society are or could be like – what we actually do owe each other, what it even means to ask that question.

    The one thing that all these misconceptions have in common, we will find, is that they tend to reduce all human relations to exchange, as if our ties to society, even to the cosmos itself, can be imagined in the same terms as a business deal. This leads to another question: If not exchange, then what?

    For a very long time, the intellectual consensus has been that we can no longer ask Great Questions. Interestingly, it’s looking like we have no other choice.

  7. Joe Firestone

    Great piece, Dan. You’re on a roll!