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Wednesday January 19th 2011
Financial markets
Buttonwood's notebook
Fin de siecle
Nov 16th 2010, 15:46 by Buttonwood
SOMETIMES events seem to develop their own momentum. In Europe, we have the spectacle of countries in the euro-zone, which was set up with a "no bailout clause", appearing to insist on a fiscal rescue for Ireland, which insists it doesn't want to be rescued!
Everybody has their own agenda in this battle, with the Europeans worried about the contagion effect, the Irish government concerned about electoral humiliation, a potential battle over the low Irish corporate tax rate, not to mention the close links between the British banks and the Irish economy. 
But we are talking about cobbling together a temproary solution to the sovereign debt problem and I get the feeling that events may overwhelm the authorities.
Meanwhile, in the US, we have some public opposition to the Fed's QE programme, in the form of an open letter to Ben Bernanke. Some will see this as a purely right-wing attack, based on signatories such as William Kristol and Amity Shlaes. But there are some interesting thinkers in the group, including Niall Ferguson, James Grant and the hedge fund managers, Cliff Asness and Jim Chanos. Paul Krugman is dismissive of the group as an anti-Obama, anti-government cabal which seems a little too sweeping.
But I think it's important to put this in a historical context. There is a very long-standing anti-central bank sentiment in the US, dating back to Thomas Jefferson and Andrew Jackson. Both Jefferson and Jackson were worried about the ability of a central bank to act as a rival to government power. In terms of economic policy, however, they were not in agreement; Jefferson was a serial debtor but Jackson was more of a sound money man. J K Galbraith wrote in Money that:
Had Andrew Jackson succeeded in establishing the hard money that he believed himself to want, his name would have been reviled by the small, energetic and aspiring folk of the frontier.
The farmers who rallied behind William Jennings Bryan in 1896 were suspicious of the money power and might have shared the religious attitudes of the tea partiers, but they wanted loose money in the form of silver coinage. Now we have a popular movement against the loose money policies of a central bank, an interesting development.
Again, I get the feeling that we are approaching the end of an era. Independent central banks appeared to solve the problem of defeating inflation, but there was always a democratic issue. We have now reached the stage when central banks are being asked to do things that politicians know that the electrorate would not be willing to support, a trend that arguably goes back to the Mexican bailout of the mid-1990s. It does not seem sustainable.
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Doug Pascover wrote:
Nov 16th 2010 5:45 GMT
I wonder if we will feel any less alienated from a democratically controlled central bank than we feel from the independent central bank.
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hedgefundguy wrote:
Nov 16th 2010 6:33 GMT
Both Jefferson and Jackson were worried about the ability of a central bank to act as a rival to government power.
They were worried of the bankers - ie., Wall Street - acheiving more power than the central government.
With CEOs earning over 500x the average guy (that was in 2001), they were correct.
Now, it's sorta like:
"Everything is about Marcia!"
except insert Wall Street for Marcia.
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hedgefundguy wrote:
Nov 16th 2010 6:36 GMT
It's been a few years since I've seen the Brady Bunch.
It's Marsha, not Marcia.
Sorry, but you know where I was going
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jim_r wrote:
Nov 16th 2010 6:37 GMT
Grant may be the interesting thinker, Ferguson & Asness fit comfortably in the right-wing group. Wasn't Asness featured at a recent Koch brothers conference? Invictus (Ritholtz's blog) boils it all down:
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HighestandBest wrote:
Nov 16th 2010 7:16 GMT
I think it's mainly down to lower zero bound nuttiness. The operations of QE2 are not very different than those of its normal operations except that the cover of targeting a short term rate is gone. The Fed would do better to explicitly target inflation expectations at around 2% or nominal GDP.
Simply printing money with no stated goal is unsettling for understandable reasons. With the short term interest rate goal off the table some other target should be announced in order to allow political and market actors to have some anchor to judge the policy's effect.
Note, I think there is a typo in the post. You include Niall Fergusson as an 'interesting thinker.' He is neither of those things.
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K Wilson wrote:
Nov 16th 2010 7:52 GMT
" . . .central banks are being asked to do things that politicians know that the electrorate would not be willing to support. It does not seem sustainable."
Nothing is "sustainable"; in the long run we're all dead, and eventually even the continents drift . Much of the electorate is upset right now because the economy is in such bad shape, and they're not happy with much of anything. They also don't understand economics. This should not prevent central banks from doing the right thing. Afterwards, when prosperity returns, the electorate will support policies that have worked.
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Pacer wrote:
Nov 16th 2010 8:12 GMT
It's all sustainable until--very suddenly--it's not.
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Pacer wrote:
Nov 16th 2010 8:15 GMT
Highestandbest - If you're in favor of an explicit inflation target, are you also in favor of honest criteria for measuring inflation? Shadow statistics peg our real rate of inflation (including factors that are still working their way through the value chain) at closer to 10% right now. Today.
So if we used honest criteria, and found that inflation was over the target, would you be in favor of monetary tightening by the Fed?
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bampbs wrote:
Nov 17th 2010 1:22 GMT
What conceivable excuse has there ever been for an independent central bank besides the political impossibility of doing its job otherwise ? It's hard enough as it is to get appropriately counter-cyclical policy; can you imagine what it would be like with the pols completely in charge ? Remember that Arthur Burns did just as he was told by Nixon. Do you think the Fed did a good job in the '70s ?
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Hedgehog58 wrote:
Nov 17th 2010 6:46 GMT
Please remember that the term in current use is "banksters", not "bankers".
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jomiku wrote:
Nov 17th 2010 10:35 GMT
I disagree but then we're all entitled to our maundering.
There is indeed a trend to force independent institutions to submit to the popular will. Cultural conservatives want judges to apply a specific morality to their laws. The definition of "activist" judge changes depending on whether the GOP is in power or not*, but the idea is that judges should do what the people want, meaning specifically what this group of people wants.
The will of the people is dangerous. The GOP has just spent 2 years arguing that the Senate was set up to prevent enacting the will of the people; the Democrats had a clear majority in both houses and thus had the right to enact legislation which reflected the platform on which these majorities were elected. The Republicans in the Senate prevented the majority's will from becoming law in a large number of instances and otherwise, as with financial reform, reduced its impact tremendously. The GOP specifically argued that the Senate was intended to prevent legislation, meaning to make it less politically responsive.
So some people want to put the independent Fed under their thumb. The key word is "their" because they would "refudiate" the notion that the Fed might be under someone else's thumb, responsive perhaps to the notion that the Fed should be doing much more to reduce unemployment. Imagine that the Fed was politically managed: why believe that then it would be stand-offish and restrained about policy when the government could then use it?
In blunt terms, people propose this kind of foolish takeover because they see only their advantage. When someone then points out that the Democrats controlled Congress and that the Fed would have been under their thumb for the past few years, the ardor for control passes.
You speak about an alternative. What would it be? The US is not the EU with a bunch of sovereign states balancing interests but is a 2 party system in which individual states matter very little at the federal level. An EU parliament controlling the ECB is not the same as temporary majorities in Congress, often split by house, often then further divided by the Presidency.
*When they're in power, activist means judges who overturn laws and when the Democrats are in power it means judges who won't overturn laws because the extent of Congressional power apparently depends on who passes the laws, not who judges them.
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joangrau wrote:
Nov 17th 2010 10:43 GMT
I think we are approaching to the end of an era as well. From my point of view an era that started with the Industrial Revolution
For the new one we need:
a)An independent global economic diagnose, a matter of the economists
b)Politicians with the guts and leadership to make the peoples swallow the pill.
Both things not in the near future.
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HonestInjun wrote:
Nov 17th 2010 11:44 GMT
My hope is that we are ending the era characterized by hoping that our regulatory paradigms will support our desire to believe in the simply holy grail of free markets. Aren't cigarette taxes working? Last I heard they were. So why don't we tax complex derivatives so that only the simple ones directly connected to real economy needs are worth any attention by market-makers and traders and insurers?
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Number1skeptic wrote:
Nov 18th 2010 12:39 GMT
The most profound thinking often isn't the most complex thinking.
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SJWF7 wrote:
Nov 18th 2010 2:08 GMT
Perhaps reinstating the Glass-Seagall act of 1933 would help improve confidence. Why on earth it was repealed in 1999 I really do not understand as it clearly had served its purpose well and the reason for its initial introduction is clear to see when you look at the almighty mess that it caused by letting the banks loose again as they clearly lack any real common sense when it comes to taking risks with other peoples money. I am an independant arm-chair economist from Britain but I find myself wondering exactly what your government was thinking when thsy repealed this, even an idiot can see what would have happened, and if that is the case what was their motivation? Bringing China into line, making them loosen their hold on their economy? If it was that then they made a HUGE error as China will not bend to foreign pressure, it doesn't take a genius to figure that one out does it.
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pdmikk wrote:
Nov 18th 2010 3:40 GMT
I believe the changing sentiment explored here is a result of the two sides (hard money, government support of the macro economy) each believing their's is the sole truth. Similarly, this explains the intense umbrage each side feels in the battle between Friedman's monetarism and "Keynesianism."
History has shown us that each of these perspectives has circumstantial validity.
The important issue is whether political leaders will correctly recognize the circumstances and then act to apply the appropriate tactics--despite the cacophony of the wrong-headed and ill-informed.
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balasrini wrote:
Nov 18th 2010 9:47 GMT
'We have now reached the stage when central banks are being asked to do things that politicians know that the electrorate would not be willing to support'.
whatever gives u the idea that qe2 lacks electoral support. the case against is far from proven.
qe per se is not inflationary unless it leads to bank credit expansion. if instead as has happened after qe1 it is sterilised with the fed, there will be no rise in prices.
what the fed hopes is a rise in inflationary expectations or an actual rise in inflation will propel consumer investment spending and asset prices upward. (keynes' animal spirits have a big role here). they have no choice as the repubs are stalling fiscal stimulus which is far better more effective than any qe.
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Pacer wrote:
Nov 19th 2010 1:36 GMT
balasrini - I think there are several problems with manipulating inflation--actual or expected--to influence investment behavior.
First, aside from whatever messages it may send to cash-flush investors allegedly waiting on the sidelines for fear of deflation, has a pernicious effect on retirement savings, pension plans, and people on fixed incomes. And there are obvious and significant long term economy-wide implications for how much those folks will lean on various unfunded federal programs.
Second, the investing public is not fooled. Concepts like real return and real growth are not secrets. So that leaves the logic of "scaring" investors into shedding cash. OK, maybe a depreciating dollar has some upsides to go with its downsides--rising energy costs for one--but scared investors can hardly be expected to flock to invest in the consumption-serving sectors of an economy whose people are experienced decreased purchasing power for many key imported raw materials. Exporting industries depend on those same materials by the way.
Lastly, are we forgetting one of the consensus causes of our current predicament: an excessively-prolonged period of low U.S. interest rates? Cheap credit desperately in search of returns--too often in all the wrong places? A commodity bubble that ate into private discretionary spending that was already predicated on near-zero aggregate personal savings rates and historic real estate valuation ratios?
All to accomplish what? Drive investment abroad (not necessarily a bad thing), depreciate median wages faster than labor can demand inflation adjustment, and save our current banking paradigm rather than letting the chips fall and allow new competitors to enter and compete to provide those banking services that are actually wanted these days?
Now, if QE2 open market purchases could somehow be pre-directed solely at infrastructure and a 40 hr/week, 11 month school year with increased compensation and competition for public teaching jobs...
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balasrini wrote:
Nov 19th 2010 3:54 GMT
pacer, your last para makes enormous sense, but i guess most would think it nonsense.
the issue clearly how to get job growth, not so much growth as such. i think the fed is focused more on reviving asset prices. if the values of collateral improve, banks might not fear lending so much.the other effect might be a compression of non-treasury spreads, although if that will make difference to a cash rich corporate sector is an issue. still i admit i don't have a clue if qe2 will work or end up achieving nothing.
btw, those who think a job-led recovery will spring on its own are way too optimistic. what if not? mass shelters and soup kitchens? is it then deficits for a worthy cause!?
i also think blaming china is silly. first set one's own house in order. the basic problem is the u s is living well beyond means. not sustainable from any angle - fiscal, bop, resource consumption, global warming - u name it and the u s is right at the top of the charts.
obama is trying to make the intellectual case for radical change and looking for new sustainable growth paths necessarily involving government shaping direction, paths. but the americans don't get it. how do u argue with people who don't believe nobel prize winning scientists - many americans?
the bottom line : qe2, deficits, the whole debate on 'right' economics, policies misses the big picture totally.
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Nirvana-bound wrote:
Nov 19th 2010 4:02 GMT
The future - if there is one - for the West, looks sombre, bleak & tumultuous. Dark & threatening clouds, crowd western skies as the economic storm continues to devastate the land, relentlessly & remorselessly, with no likelyhood of waning, any time soon.
The only comfort the people have, is one of numbers, where every European nation & the once mighty US, all face the scourge of their wanton & imbecellic profligacies, insatiable greed & mindless hubris. Cold comfort in numbers, is all that's left!
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