A keynote talk at the FGV EPGE (Brazilian School of Economics and Finance) 60th anniversary conference, program here. Direct link to my talk here (YouTube). (I start at about 4:00 if you're impatient). I plan to turn these thoughts in to an essay at some point. All the conference videos here
The theme: Central banks, and especially the US Fed, are spinning out of control. I trace the history of this expansion, and how little steps taken here and there mushroomed. The decision in 2008 to regulate assets rather than pursue equity-financed banking, and buying huge amounts of assets, are small steps that mushroomed. They are the moment that central banks became the proverbial two year old with a hammer. The end, the natural meaning of "whole of government" approaches, must be the end of central bank independence and their complete politicization.
John,
ReplyDelete"The decision in 2008 to regulate assets rather than pursue equity-financed banking, and buying huge amounts of assets, are small steps that mushroomed."
Nope. The decision to stick with debt financed government can be seen as the root cause of the issues. That decision can be traced all the way back to Andrew Melon (US Treasury Secretary, 1921-32).
The central bank is but a secondary player. Available choices to be made post 2008 are as follows:
Option #1. By government decree - banks MUST fund the purchase of risky assets through either retained earnings or the sale of equity shares (The Chicago Plan - rejected by Congress back in the 1930's).
Option #2. By government choice - the US Treasury Secretary (Hank Paulson at the time) will begin selling equity level claims against future tax revenue to any American taxpayer that wants to purchase them.
Option #3 - The federal government will swap it's own debt for banking debt - the option that was ultimately chosen by Hank Paulson with central bankers (Ben Bernanke / Tim Geithner) acting as buyers of last resort.
This basically set into motion everything that has taken place since.
Do you honestly believe that Bernie Sanders or the other "progressive" members of Congress have forgotten about the socialist bank bailouts?
When he was interviewed by Larry Kudlow on TV, Senator Sanders actually welcomed Kudlow to the socialist club.
The decision for the US federal government to rely exclusively on debt financing rests on it's proclivity to be at war or preparing for the next war throughout it's history.
Will there be inflation? Nominal inflation will be as persistent as budget deficits, in the long run. Politically, this is an almost certainty.
ReplyDeleteFish,
Delete"Nominal inflation will be as persistent as budget deficits..."
Nope, nominal inflation will be as persistent as government bonds. Once you realize that deficits can be financed with equity in lieu of debt, then everything changes.
Sounds like you'd like a market-coin. A crypto security that you can spend like money, so you can be perpetually invested in the economy without sacrificing liquidity. Let me know if you're interested in this.
ReplyDeleteFish,
Delete"A crypto security that you can spend like money, so you can be perpetually invested in the economy without sacrificing liquidity."
Nope, I am willing to sacrifice liquidity for utility.
As the old saying goes, you can't have your cake and eat it too.
Yes, "Central banks, and especially the US Fed, are spinning out of control". The whole federal system is likewise spinning out of control.
ReplyDeleteEven my local government her in Montana is seeking ever more power.
Our American culture continues to move toward aceeding our personal responsibilities to the governments in a voluntary exchange for what?
Benjamin Franklin once said: "Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety."
The Fed has been tasked with problems it really cannot take on with the dual mandate they have to adhere to, along with their available tools. I thought sterilization during rounds of QE was clever because it did keep a lid on inflation from spinning out of control.
ReplyDeleteBut that won't work this time. The Fed can't do or won't do helicopter money. That's a fiscal decision and there's warring camps on each side.
But even throwing a bunch of liquidity at the problem won't rinse the sand out of the gears.
Alternatives? 1. Let the zombies die. They've proven their incompetence. Why reward it and enable it over and over? Is it a stealth mechanism to ensure full employment? I don't know. But companies need to learn to adjust.
Jared Diamond's "Collapse" is a great read on how socities/cultures die because they refused to adapt and change.
Mykel,
Delete"The Fed has been tasked with problems it really cannot take on with the dual mandate they have to adhere to, along with their available tools."
To get a stable economy, you need three methods of government financing (no two) - taxes, debt, and equity.
Equity allows individuals to take risk of their own choosing rather than it being forced down their throat through devaluation, inflation, and / or monetization.
There was an Israeli Prime politician named Abba Eban who made the following statement in 1967:
"Men and nations behave wisely when they have exhausted all other possibilities."
It was true back in 1967 and is just as true today.
Interesting side note - current Utah Senator Mitt Romney's dad George Romney and Abba Eban new each other quite well. The following photo depicts them both:
https://commons.wikimedia.org/wiki/File:George_Romney_and_Abba_Eban.jpg
Hi, John. Thanks again for the talk. Instructive, fun, very enjoyable.
ReplyDeleteIf you are formalizing the ideas in the future like you say, I believe you should dedicate a few more lines/time to explain just how an equity-financed banking would work in practice. Would my bank account become the same as City bank equity shares? After a bad day in the market, will my account balance decline? If that is the case, wouldn't I run to the ATM three times faster to withdraw my money if I see dark clouds on the horizon? If I can keep my short-term lending, then who is on the other side of the deal if not financial institutions? Short-term lending by me requires short-term borrowing by someone, right?
I am probably missing a few things here, but probably other people are as well. In any case, the discussion is very interesting, I watched the talk again earlier this week.