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Confusion reigns

from Peter Radford

What on earth were they doing?

Rocked but undaunted by the great financial crisis the orthodoxy of our central banks survived to fight another day.  The system had been saved.  That no one saw the onrushing crisis is still being debated.  Of course some people saw it coming.  Anyone with a scintilla of understanding of Minsky for instance.  But those folk are hard to find in the top seats of central banks.

The objective of the so-called independent central bank is to preserve the system.  To make it safe for markets to continue undisturbed by the intrusions of political whims.  To save, that is, capitalism from the depraved intrusions of democracy.  The idea is to separate as firmly as possible the political and the economic realms.  After all as economists seem to believe: people are astonishingly rational when they participate as market members, but are hopelessly self-indulgent and irrational when they participate as voters.  We all suffer from split personalities in economic orthodoxy.  Rational one minute, mindlessly mixed up the next.  It’s an interesting view of human behavior.  It undergirds, in rather more formal guise, orthodoxy and its resolute defense of central bank independence.

This independence is supposed to maintain a wall between these two halves of our personalities.  Making the system safe for markets means guarding vigilantly against the inevitable weaknesses of politicians who might fall victim to the democratic urge to look after the majority of voters. That would be awful.  Inflation would surely surge as money flooded throughout the corrupted economic machinery.  That surge would be inevitable.  Politicians are notorious for acting on incentives.  Like getting re-elected.  That makes them very bad custodians of an economy which must always follow a sober and self-denying path.  Sobriety and self-denial are, as we all know, the hallmarks of solid market activity.  Markets, thus unencumbered by political mischief, can go about their perfect work allocating resources in the most efficient manner possible and distributing the consequent rewards according to the blindingly objective rules that economists have identified as the natural doings of market processes.

So what just happened?  What on earth were they doing?

Central banks the world over, with very few exceptions, have clearly forgotten or buried that sober and self-denying impulse.

They’ve been monetizing the debt.

How horrid.

And not just on a small or limited scale.  They’ve been going all in.  They’re not supposed to do this.  Not at all.

The objective of this heterodox outburst was to save the system.  That’s the same objective, you will note, that previously drove them to deny monetization of debt at all costs.  So what was once apostasy is now good faith.  And what was good faith is apostasy.  It’s hard to keep up.

Does this mean that all those years of relentless near puritanical denial and mean-spirited policy were incorrect?  In a related vein does this mean that unemployment was not always and everywhere voluntary?  Where did this great flip-flop come from?

Was orthodoxy wrong?  Or was it just a special case to be tossed overboard when the system really needed saving and manifestly couldn’t save itself? We have been told for decades that printing money for politically motivated reasons such as bolstering social programs is destabilizing and flat out wrong.  Only a fool would advocate printing tons of money and flooding it into the economy.  As for monitoring the debt: well, that’s beyond the pale.

Until.

Until it isn’t.

So let me get this right.

Printing money for political reasons is just bad.  Printing money to save the system is wonderful.

The ease with which orthodoxy has been bent in order to save the system seems to indicate a certain — how do I say this delicately? — lack of principle.  Surely printing money is printing money.  Monetizing debt is monetizing debt.  In the wonderful world of economics the ends surely don’t justify the means.  I thought economies behaved according to smoothly unfolding laws.  Are the central banks telling us that those laws are simply contextual?  Or, worse, ideologically constructed?

Surely not!

Perhaps, more likely, all economics is contextual.  Circumstances drive what is appropriate.  There are multiple orthodoxies depending on the state of play, history, and the urgencies of the moment.  By and large the central banks have done a decent job steering their respectivpe economies through the disruption of the pandemic.  What they have done is to upend what they held as true previously.  They have demonstrated the relativity of economics.

Now the danger is passing, a great debate is under way: will the central banks revert to what they did before?  Or will they, having broken the old orthodoxy in order to save the system, develop some new orthodoxy?  Old habits die hard.  I think the smart money will be on a convenient forgetting of the efficacy of what was just done.  The banks will revert.  It’s the safe thing to do.

Which raises one last question:  which was out of step with which?  Was it the old orthodoxy that had been made obsolete by developments in the system?  Or was it that the system never really conformed to what the old orthodoxy described?  Had economics stopped being a study of economic activity and become, instead, a design or blueprint for it?  I think the latter.  Having become part of the technocratic milieu of the late twentieth century economics was no longer a study of something.  It was a prescription for something.  The trouble being that the description of capitalism that justified the subsequent prescriptions was not the capitalism found in the real world.  So orthodoxy was always out of step with reality.  It’s just that there was insufficient disruption to show the disjuncture clearly enough.

Now we know.

And so do the central banks.  No wonder confusion reigns.

  1. December 29, 2021 at 11:06 pm

    Looks like inflation arrived “just in time.” No matter that the closer one looks, as the data crunchers at the BIS did according to Adam Tooze’s recent postings, showing no clear pattern across sectors and industries, no uniform rise in inflation…the fear, summarized by Larry Summers, is that still, inflationary “expectations” can be set, and that’s very dangerous, independent of the causes. Krugman has done pretty well in refuting this, but doesn’t seem to be winning in the country or the Congress.

    We needed to make, the orthodoxy of austerity did, in the fable of the ride of bond vigilantes; it wasn’t the central banks pouring too much money into the system, indeed, Krugman said overall consumer spending rose in line with the old trends pre-Covid, about 3.5% between 2020 and 2021…it was that the poor didn’t save like their social betters, and bought goods not services and poor industry, the fabled quickly adjusting markets, the “just in time” inventory folks…could not cope with labor disruptions, changes in consumer spending patterns…and this is my interpretation, were caught between three choices: expand production in the uncertainty that the Covid trends of 2019-2020 would continue – not just towards goods rather than services, but continue spending period – to shift production into higher gear with expanded capital investments or extra shifts or both – or third, not sure of any of this terrain, the safest thing was therefore to raise prices…

    The great irony to me is that – and this supports Peter’s thesis – or part of it at least, is that context: Covid triggered the most egalitarian American fiscal response since the Great Depression: multiple check issuances, small business support of all types, big business supports too for service sectors…but note importantly, all seem to agree that the middle and upper middle classes who didn’t lose their jobs didn’t spend, they saved or paid down debts…so here’s the punch line: it was the lower middle and working classes who spiked the inflation with their ill-disciplined spending…just imagine what would have happened if they got $15 per hour and the rest of the Sanders Green Deal proposals…enough to make James Buchanan jump up and shout out “I told you so.”

    Just shows you cannot be generous at all to the bottom 80%, they’ll wreck the system, the same system which, between 1975-2018, ushered in the greatest transfer of wealth, $53 trillion to the top 10% according to the Rand study from sept of 2020, the study that our good Democrats, egalitarian in at least their fingernails, never cited in the great presidential race of that fall. No bond vigilantes needed: the reckless, careless poor will do. And we didn’t even need the pie in the atmosphere spending of the green’s dreams to wreck the fairest system the world has ever seen. Mercy!

  2. December 30, 2021 at 1:37 am

    Wow! A one two punch. This is great. Now what to do.

    • December 31, 2021 at 2:25 am

      buy beach front property in NJ and get bailed out any number of ways! From the former NJ Coastal Coordinator of the American Littoral Society….

  3. Meta Capitalism
    December 30, 2021 at 3:03 am

    Advancing science one economists funeral at a time

  4. Romar Correa
    December 30, 2021 at 8:59 am

    I would like to contribute no more than a pedestrian delineation of Peter Radford’s spirited outburst. Independence of the central bank is another illustration of the schizophrenia Mr Radford adumbrates: Inflation is a monetary phenomenon. Monetization of the fiscal deficit is a national income identity. It is political arithmetik as the classical had it. The distinction between heterodoxy & orthodoxy might be getting blurred, though. I have been been pleased to recommend Bank of England & IMF Working Papers that are plainspeak at its best.

  5. December 30, 2021 at 2:33 pm

    A confession to dissipate the confusion:
    “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support…home mortgages” Paul Volcker 2018
    https://subprimeregulations.blogspot.com/2018/12/affordable-homes-or-investment-assets.html

  6. Gerald Holtham
    January 1, 2022 at 11:25 pm

    Monetary policy is a confidence trick. Central banks have no capability to fine tune economic activity. And fine tuning economy activity anyway does not have a simple effect on inflation. Monetary policy is like a short length of lead pipe. If the patient is running amok you can’t restrain him by slight taps; you have to hit him hard enough to knock him out. The only way to reduce an established inflation rate is by inducing a recession. Then when the patient is on the floor there is nothing you can do to revive him with a length of lead pipe. Witness the efforts of central banks recently. Without large fiscal deficits they could not have revived the economy. Now they have to accept inflation until they think it is intolerable and then they have to cause a recession to lower it. Changing interest rates by 25 basis points provides fun for gamblers in the secondary debt markets and entertainment for financial journalists. It has no effect whatever on economic activity. The apotheosis of monetary policy and independent central banks is one of the more comical aspects of the contemporary economic scene.
    The little boy was right; the emperor has no clothes. J.K. Galbraith remarked that the Federal Reserve’s history was one of “unrelieved inconsequence”. .Volker changed that by wielding the lead pipe with a will. That was the exception that proves the rule.

  7. Ken Zimmerman
    January 3, 2022 at 9:47 am

    As George Monbiot of the Guardian (April 15, 2016) points out neoliberalism is the ideology that has shaped the US and increasingly the world beginning in the 1980s remains largely invisible and unknown. Largely obscure. He writes, “Its anonymity is both a symptom and cause of its power. It has played a major role in a remarkable variety of crises: the financial meltdown of 2007 8, the offshoring of wealth and power, of which the Panama Papers offer us merely a glimpse, the slow collapse of public health and education, resurgent child poverty, the epidemic of loneliness, the collapse of ecosystems, the rise of Donald Trump. But we respond to these crises as if they emerge in isolation, apparently unaware that they have all been either catalysed or exacerbated by the same coherent philosophy; a philosophy that has – or had – a name. What greater power can there be than to operate namelessly? So pervasive has neoliberalism become that we seldom even recognise it as an ideology. We appear to accept the proposition that this utopian, millenarian faith describes a neutral force; a kind of biological law, like Darwin’s theory of evolution. But the philosophy arose as a conscious attempt to reshape human life and shift the locus of power.”

    Monbiot lays out his overview of neoliberalism. Neoliberalism sees “competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that ‘the market’ delivers benefits that could never be achieved by planning.”
    “Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve. We internalise and reproduce its creeds. The rich persuade themselves that they acquired their wealth through merit, ignoring the advantages – such as education, inheritance and class – that may have helped to secure it. The poor begin to blame themselves for their failures, even when they can do little to change their circumstances.
    Never mind structural unemployment: if you don’t have a job it’s because you are unenterprising. Never mind the impossible costs of housing: if your credit card is maxed out, you’re feckless and improvident. Never mind that your children no longer have a school playing field: if they get fat, it’s your fault. In a world governed by competition, those who fall behind become defined and self-defined as losers.”

    Among the results, as Paul Verhaeghe documents in his book What About Me? are epidemics of self-harm, eating disorders, depression, loneliness, performance anxiety and social phobia. Perhaps it’s unsurprising that Britain, in which neoliberal ideology has been most rigorously applied, is the loneliness capital of Europe. We are all neoliberals now. And, says Verhaeghe, neoliberalism has brought out the worst in us.

    And this worst is killing our species. Charles Derber warns us this way in ‘Sociopathic Society A Peoples sociology of America,’ Anthropologist Colin Turnbull came to describe the Ik (a Ugandan tribe forced into homelessness and famine by the Government) as “the loveless people.” “Each Ik valued only his or her own survival and regarded everyone else as a competitor for food. Ik life had become a grim process of trying to find enough food to stay alive each day. The hunt consumed all of their resources, leaving virtually no reserve for feelings of any kind or for any moral scruples that might interfere with filling their stomachs.” As Margaret Mead wrote, they were “a people who have become monstrous beyond belief.” Scientist Ashley Montagu wrote that the Ik are “a people who are dying because they have abandoned their own humanity.” And regarding America, “Might this be the first time in history that economic elites have abandoned their nation’s own physical and social foundation? In a sense, globalizing elites today are burning their own nests because they have new homes everywhere across the globe. The cost of maintaining the original declining nest has been abandoned in favor of creating new nests everywhere else.”

    Did we notice when Ronald Reagan spoon fed neoliberalism to us a la carte for years? Sold and bought as Mom, apple pie, and defense of America. Neoliberalism is none of these things.

    And what goes well with neoliberalism? Fascism! There are clear links between domestic political repression and the American neoliberal program.

    This tie of neoliberalism to fascism and political repression comes through Italian fascist Benito Mussolini. Mussolini defined fascism, following from Giovanni Gentile, ‘as merger of corporate and state power.’ The ‘War on Drugs’ is a recent US example. “Richard Nixon created the ‘War on Drugs’ to use against his political enemies. Ronald Reagan put teeth into the effort by applying state resources to the War on Drugs. Joe Biden wrote the actual legislation of mass incarceration, turning Nixon’s waking nightmare into social policy.” Source: The Prison Policy Initiative. Clearly, neoliberalism is no stranger in the Democratic Party. And neither is fascism. Mom, apple pie, and defense of America. Just washes right past most of us. Including so called ‘smart’ and ‘democracy’ politicians. Although some committed critics of ‘business as usual’ –left, right, and center—seem to have grown suspicious.

    But since the 2008-2009 crisis, neoliberalism (but not yet fascism) seems to be in trouble. Economists Gerard Dumenil and Dominique Levy describe the situation in, ‘The Crisis of Neoliberalism.’ The crisis that began with the subprime loan crash of August 2007 in the United States will remain a distinctive milestone in the history of capitalism. From its onset, the financial turmoil took unexpected proportions. The shock gradually unsettled the fragile financial structure that had been built during the previous decades and destabilized the real economy. By September 2008, it became evident that capitalism was entering into a deep and lasting crisis, a Great Contraction, reminiscent of the Great Depression.

    “The Crisis of Neoliberalism

    Neoliberalism is a new stage of capitalism that emerged in the wake of the structural crisis of the 1970s. It expresses the strategy of the capitalist classes in alliance with upper management, specifically financial managers, in tending to strengthen their hegemony and to expand it globally. As of 2004, when our book Capital Resurgent: Roots of the Neoliberal Revolution was published by Harvard University Press, this strategy appeared successful, based on its own objectives, the income and wealth of a privileged minority, and the dominance of a country. The contemporary crisis is an out come of the contradictions inherent in that strategy. The crisis revealed the strategy’s unsustainable character, leading to what can be denoted as the “crisis of neoliberalism.” Neoliberal trends ultimately unsettled the foundations of the economy of the “secure base” of the upper classes-the capability of the United States to grow, maintain the leadership of its financial institutions worldwide, and ensure the dominance of its currency-a class and imperial strategy that resulted in a stalemate.

    A New Social Order-A Multipolar World

    T he crisis of neoliberalism is the fourth structural crisis in capitalism since the late nineteenth century. Each of these earthquakes introduced the establishment of a new social order and deeply altered international relations. The contemporary crisis marks the beginning of a similar process of transition. Not only is financial regulation involved, but a new corporate governance, the rebuilding of the financial sector, and new policies are now required. The basic tenets and practices of neoliberal globalization will be questioned, and production has to be “re-territorialized” in the United States to a significant extent. Accordingly, countries such as China, India, or Brazil will become gradually less dependent on their relationship to the United States. It will be, in particular, quite difficult to correct for the macro trajectory of declining trends of accumulation and cumulative disequilibria of the U.S. economy once the present Great Contraction is stopped.

    In any event, the new world order will be more multipolar than at present. Further, if such changes are not realized successfully in the United States, the decline of U.S. international hegemony could be sharp. None of the urgently required tasks in the coming decades to slow down the comparative decline of the U.S. economy can be realized under the same class leadership and unchecked globalizing trends. The unquenchable quest for high income on the part of the upper classes must be halted. Much will depend on the pressure exerted by the popular classes and the peoples of the world, but the “national factor,” that is, the national commitment in favor of the preservation of U.S. preeminence worldwide, could play a crucial role. The necessary adjustment can be realized in the context of a new social arrangement to the Right or to the Left, although, as of the last months of 2009, the chances of a Left alternative appear slim.

    It is important to understand that the contemporary crisis is only the initial step in a longer process of rectification. How long this process will last depends on the severity of the crisis, and national and international political strife. The capability of the U.S. upper classes to perform the much needed adjustment and the willingness of China to collaborate will be crucial factors. A crisis of the dollar could precipitate a sequence of events that would alter the basic features of the process.

    In the coming decades, the new social and global orders will have to confront the emergency situation created by global warming. Stronger government intervention and international cooperation will also be required in these respects that add to the necessity of the establishment of renewed configurations beyond the wild dynamics of neoliberal capitalism.”

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