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“On Economic Stupidity”: How Little Many People Who Would Be President Have Learned From The Past

Bill Clinton’s 1992 campaign famously focused on “the economy, stupid.” But macroeconomic policy — what to do about recessions — has been largely absent from this year’s election discussion.

Yet economic risks have by no means been banished from the world. And you should be frightened by how little many of the people who would be president have learned from the past eight years.

If you’ve been following the financial news, you know that there’s a lot of market turmoil out there. It’s nothing like 2008, at least so far, but it’s worrisome.

Once again we have a substantial amount of troubled debt, this time not home mortgages but loans to energy companies, hit hard by plunging oil prices. Meanwhile, formerly trendy emerging economies like Brazil are suddenly doing very badly, and China is stumbling. And while the U.S. economy is doing better than almost anyone else’s, we’re definitely not immune to contagion.

Nobody really knows how bad it will be, but financial markets are flashing warnings. Bond markets, in particular, are behaving as if investors expect many years of extreme economic weakness. Long-term U.S. rates are near record lows, but that’s nothing compared with what’s happening overseas, where many interest rates have gone negative.

And super-low interest rates, which mainly reflect market forces, not policy, are creating problems for banks, whose profits depend on being able to lend money for substantially more than they pay on deposits. European banks are in the biggest trouble, but U.S. bank stocks have fallen a lot, too.

It looks, in other words, as if we’re still living in the economic era we entered in 2008 — an era of persistent weakness, in which deflation and depression, not inflation and deficits, are the key challenges. So how well do we think the various presidential wannabes would deal with those challenges?

Well, on the Republican side, the answer is basically, God help us. Economic views on that side of the aisle range from fairly crazy to utterly crazy.

Leading the charge of the utterly crazy is, you won’t be surprised to hear, Donald Trump, who has accused the Fed of being in the tank for Democrats. A few months ago he asserted that Janet Yellen, chairwoman of the Fed, hadn’t raised rates “because Obama told her not to.” Never mind the fact that inflation remains below the Fed’s target and that in the light of current events even the Fed’s small December rate hike now looks like a mistake, as a number of us warned it was.

Yet the truth is that Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan, the speaker of the House, not only berated Ben Bernanke, Ms. Yellen’s predecessor, for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”

And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.

On the Democratic side, both contenders talk sensibly about macroeconomic policy, with Mr. Sanders rightly declaring that the recent rate hike was a bad move. But Mr. Sanders has also attacked the Federal Reserve in a way Mrs. Clinton has not — and that difference illustrates in miniature both the reasons for his appeal and the reasons to be very worried about his approach.

You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. (In case you’re wondering, the Fed is already audited regularly in the normal sense of the word.)

Now, the idea of making the Fed accountable sounds good. But Wall Street isn’t the only source of malign pressure on the Fed, and in the actually existing U.S. political situation, such a bill would essentially empower the cranks — the gold-standard-loving, hyperinflation-is-coming types who dominate the modern G.O.P., and have spent the past five or six years trying to bully monetary policy makers into ceasing and desisting from their efforts to prevent economic disaster. Given the economic risks we face, it’s a very good thing that Mr. Sanders’s support wasn’t enough to push the bill over the top.

But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, February 12, 2016

February 13, 2016 Posted by | Economic Growth, Economic Policy, Federal Reserve, Recession | , , , , , , , , | 1 Comment

“Money Makes Crazy”: The GOP Consensus On Money Is Crazy, Full-On Conspiracy-Theory Crazy

Monetary policy probably won’t be a major issue in the 2016 campaign, but it should be. It is, after all, extremely important, and the Republican base and many leading politicians have strong views about the Federal Reserve and its conduct. And the eventual presidential nominee will surely have to endorse the party line.

So it matters that the emerging G.O.P. consensus on money is crazy — full-on conspiracy-theory crazy.

Right now, the most obvious manifestation of money madness is Senator Rand Paul’s “Audit the Fed” campaign. Mr. Paul likes to warn that the Fed’s efforts to bolster the economy may lead to hyperinflation; he loves talking about the wheelbarrows of cash that people carted around in Weimar Germany. But he’s been saying that since 2009, and it keeps not happening. So now he has a new line: The Fed is an overleveraged bank, just as Lehman Brothers was, and could experience a disastrous collapse of confidence any day now.

This story is wrong on so many levels that reporters are having a hard time keeping up, but let’s simply note that the Fed’s “liabilities” consist of cash, and those who hold that cash have the option of converting it into, well, cash. No, the Fed can’t fall victim to a bank run. But is Mr. Paul being ostracized for his views? Not at all.

Moreover, while Mr. Paul may currently be the poster child for off-the-wall monetary views, he’s far from alone. A lot has been written about the 2010 open letter from leading Republicans to Ben Bernanke, then the Fed chairman, demanding that he cease efforts to support the economy, warning that such efforts would lead to inflation and “currency debasement.” Less has been written about the simultaneous turn of seemingly respectable figures to conspiracy theories.

There was, for example, the 2010 op-ed article by Representative Paul Ryan, who remains the G.O.P.’s de facto intellectual leader, and John Taylor, the party’s favorite monetary economist. Fed policy, they declared, “looks an awful lot like an attempt to bail out fiscal policy, and such attempts call the Fed’s independence into question.” That statement looks an awful lot like a claim that Mr. Bernanke and colleagues were betraying their trust in order to help out the Obama administration — a claim for which there is no evidence whatsoever.

Oh, and suppose you believe that the Fed’s actions did help avert what would otherwise have been a fiscal crisis. This is supposed to be a bad thing?

You may think that at least some of the current presidential aspirants are staying well clear of the fever swamps, but don’t be so sure. Jeb Bush appears to be getting his economic agenda, such as it is, from the George W. Bush Institute’s 4% Growth Project. And the head of that project, Amity Shlaes, is a prominent “inflation truther,” someone who claims that the government is greatly understating the true rate of inflation.

So monetary crazy is pervasive in today’s G.O.P. But why? Class interests no doubt play a role — the wealthy tend to be lenders rather than borrowers, and they benefit at least in relative terms from deflationary policies. But I also suspect that conservatives have a deep psychological problem with modern monetary systems.

You see, in the conservative worldview, markets aren’t just a useful way to organize the economy; they’re a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society. You could say that to the free-market true believer, to know the price of everything is also to know the value of everything.

Modern money — consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs — is an affront to that worldview. Mr. Ryan is on record declaring that his views on monetary policy come from a speech given by one of Ayn Rand’s fictional characters. And what the speaker declares is that money is “the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. … Paper is a check drawn by legal looters.”

Once you understand that this is how many conservatives really think, it all falls into place. Of course they predict disaster from monetary expansion, no matter the circumstances. Of course they are undaunted in their views no matter how wrong their predictions have been in the past. Of course they are quick to accuse the Fed of vile motives. From their point of view, monetary policy isn’t really a technical issue, a question of what works; it’s a matter of theology: Printing money is evil.

So as I said, monetary policy should be an issue in 2016. Because there’s a pretty good chance that someone who either gets his monetary economics from Ayn Rand, or at any rate feels the need to defer to such views, will get to appoint the next head of the Federal Reserve.

 

By: Paul Krugman, Op-Ed Contributor, The New York Times, February 13, 2015

February 15, 2015 Posted by | Federal Reserve, Fiscal Policy, GOP Presidential Candidates | , , , , , , , | 2 Comments

“An Incredible Ignorance About The Economy”: Rand Paul Has The Most Dangerous Economic Views Of Any 2016 Candidate

Kentucky Senator Rand Paul has had better weeks. On Monday, he suggested there could be a link between vaccines and autism in a CNBC interview. Later on in that interview, he actually shushedas in, pressed one finger to his lipsthe female CNBC anchor. On Tuesday, a New York Times article linked him to a medical group that promotes anti-vaccine theories. But Paul’s dumbest comments came in Iowa on Friday nightand they show why Paul has the most dangerous economic views of any presidential candidate.

Speaking in front of more than 150 Iowa activists, Paul ripped into the Federal Reserve and promoted his “Audit the Fed” bill, which he introduced earlier this week. “I think there needs to be some sunshine,” he said, according to reports of the event. “I’m going to fight ’em, and we’re going to get a vote on audit the Fed.” I’m not sure if Paul will get that voteultimately, that’s up to Senate Majority Leader Mitch McConnell. But I do know that “Audit the Fed” is a terrible idea. First, the Fed already is extensively audited by the Government Accountability Office (GAO), the Office of the Inspector General (OIG) and even private sector auditors like Deloitte. Each week, the central bank also releases its balance sheet and even has an interactive guide of its balance sheet available for further explanation.

However, the GAO and OIG audits exclude a few parts of the Fed’s policymaking, including transactions by the Federal Open Market Committee. Paul’s bill removes those exclusions and requires “recommendations for legislative or administrative action” from the Comptroller General. Sounds innocuous, right? It’s not. That would significantly damage the Fed’s independence, which exists so that politicians cannot influence the central bank for their own political purposes. In other words, “Audit the Fed” would lead legislators to interfere with monetary policy matters and put the entire economy at risk. For further explanations why the legislation is so dangerous, see the Roosevelt Institute’s Mike Konczal and the Washington Post’s Catherine Rampell.

With President Barack Obama in office, Paul’s legislation stands no chance of becoming law. It’s hard to imagine it overcoming a filibuster in the Senate, and even if it did, the president would veto it. If Paul were to win the presidency, “Audit the Fed” would still face long odds in the Senate since, even in the best case scenario, Republicans likely won’t have a filibuster-proof majority in the next Congress. So while “Audit the Fed” is theoretically dangerous, it’s not much of an actual threat to Fed independence.

But a Paul presidency would still have disastrous effects on the U.S. economy, for other reasons that were on wide display in Iowa on Friday night.

“Once upon a time, your dollar was as good as gold,” he said. “Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.” Paul’s comments make very little sense. When Paul asks what backs the U.S. dollar now, he’s effectively asking what makes it valuable. When the U.S. used a gold standard, it meant that a dollar was worth a certain amount of gold. Economists overwhelmingly agree that that was a terrible idea, but the connection seemed to explain why dollars had value. The real reason dollars had value is the same today as it was back then: It’s the only currency the government accepts to pay taxes. Businesses and consumers thus have an incentive to carry out transactions using dollars. Paul’s quip about dollars being backed by “used car loans, bad home loans, distressed assets and derivatives” may sound good to Iowa conservatives but it betrays an incredible ignorance about the economy.

What Paul and his followers are concerned about is the purchasing power of the dollar. They want to return the U.S. to the gold standard to ensure that inflation doesn’t undermine the actual purchasing power of the dollar. Over the long run, a gold standard would guarantee that price stability. But over the short run, prices would still fluctuate violently, as happened when the U.S. used the gold standard.

In terms of current policy, goldbugs, as they are often called, think the Fed’s recent decisionsits zero interest rate policy and bond-buying programwill cause skyrocketing inflation and reduce what you can buy with dollars. Those warnings look more foolish by the day. Inflation over the past year was just 0.7 percent, 1.3 percent if you remove volatile food and energy prices. Inflation expectations for the next 10 years are also very low. You would think that these low inflation rates would convince Paul and his followers to rethink their economic theory.

Paul’s economic ignorance doesn’t end there. “[The Fed’s] liabilities are $4.5 trillion; their assets are $57 billion. Do the math,” he said in Iowa. “They are leveraged 80-1. They are leveraged three times greater than Lehman Brothers was when Lehman Brothers went bankrupt. Why do we give ‘em a pass? Because they’ve got a printing press, and they can print up some more money.” Paul apparently can’t read the Fed’s balance sheets, because as of November, its assets were $4.487 trillion and its liabilities were $4.430 trillion. Where did the $57 billion figure come from? That’s its total capital. But as Cullen Roche, the founder of financial services firm Orcam Financial Group, points out, Paul also ignores the fact that the Fed remits most of its profits to the Treasury Department. In 2013, they gave Treasury nearly $80 billion. “The Federal Reserve isn’t just a profitable entity,” Roche writes. “It is perhaps the most profitable entity on the face of the planet.”

As all this shows, Paul’s views on monetary policy are profoundly misguided. As long as he’s in the Senate, that doesn’t really matter. He can spout his nonsense without having any effect on the Federal Reserve. But if he became president, he would be responsible for choosing the next Fed Chair when Janet Yellen’s term expires in 2018 and for nominating board members to the FOMC. That doesn’t give Paul unlimited power, since the Senate would still have to confirm his nominees. But as president, Paul would be the leader of the GOP, with an even greater ability to dictate its position on monetary policy and convince Republican senators to support his nominees.

Of course, the Republican Party itself has an incredibly misguided position on monetary policy. In 2012, its platform included returning to the gold standard. That’s a good reason why just about any Republican nominee would be a dangerous president. But Paul is far more open about his disdain for the Fed, and given his ideological bent, he’s far less likely to listen to conservative economists who reject his monetary policy views. At least on the economy, that makes Rand Paul by far the most dangerous candidate in the 2016 field.

 

By: Danny Vinik, The New Republic, February 8, 2015

February 9, 2015 Posted by | Economic Policy, Federal Reserve, Rand Paul | , , , , , , , | Leave a comment

“The Inflation Cult”: The Broad Appeal Of Prophets Whose Prophecies Keep Failing

Wish I’d said that! Earlier this week, Jesse Eisinger of ProPublica, writing on The Times’s DealBook blog, compared people who keep predicting runaway inflation to “true believers whose faith in a predicted apocalypse persists even after it fails to materialize.” Indeed.

Economic forecasters are often wrong. Me, too! If an economist never makes an incorrect prediction, he or she isn’t taking enough risks. But it’s less common for supposed experts to keep making the same wrong prediction year after year, never admitting or trying to explain their past errors. And the remarkable thing is that these always-wrong, never-in-doubt pundits continue to have large public and political influence.

There’s something happening here. What it is ain’t exactly clear. But as regular readers know, I’ve been trying to figure it out, because I think it’s important to understand the persistence and power of the inflation cult.

Whom are we talking about? Not just the shouting heads on CNBC, although they’re certainly part of it. Rick Santelli, famous for his 2009 Tea Party rant, also spent much of that year yelling that runaway inflation was coming. It wasn’t, but his line never changed. Just two months ago, he told viewers that the Federal Reserve is “preparing for hyperinflation.”

You might dismiss the likes of Mr. Santelli, saying that they’re basically in the entertainment business. But many investors didn’t get that memo. I’ve had money managers — that is, professional investors — tell me that the quiescence of inflation surprised them, because “all the experts” predicted that it would surge.

And it’s not as easy to dismiss the phenomenon of obsessive attachment to a failed economic doctrine when you see it in major political figures. In 2009, Representative Paul Ryan warned about “inflation’s looming shadow.” Did he reconsider when inflation stayed low? No, he kept warning, year after year, about the coming “debasement” of the dollar.

Wait, there’s more: You find the same Groundhog Day story when you look at the pronouncements of seemingly reputable economists. In May 2009, Allan Meltzer, a well-known monetary economist and historian of the Federal Reserve, had an Op-Ed article published in The Times warning that a sharp rise in inflation was imminent unless the Fed changed course. Over the next five years, Mr. Meltzer’s preferred measure of prices rose at an annual rate of only 1.6 percent, and his response was published in another op-ed article, this time in The Wall Street Journal. The title? “How the Fed Fuels the Coming Inflation.”

So what’s going on here?

I’ve written before about how the wealthy tend to oppose easy money, perceiving it as being against their interests. But that doesn’t explain the broad appeal of prophets whose prophecies keep failing.

Part of that appeal is clearly political; there’s a reason why Mr. Santelli yells about both inflation and how President Obama is giving money away to “losers,” why Mr. Ryan warns about both a debased currency and a government that redistributes from “makers” to “takers.” Inflation cultists almost always link the Fed’s policies to complaints about government spending. They’re completely wrong about the details — no, the Fed isn’t printing money to cover the budget deficit — but it’s true that governments whose debt is denominated in a currency they can issue have more fiscal flexibility, and hence more ability to maintain aid to those in need, than governments that don’t.

And anger against “takers” — anger that is very much tied up with ethnic and cultural divisions — runs deep. Many people, therefore, feel an affinity with those who rant about looming inflation; Mr. Santelli is their kind of guy. In an important sense, I’d argue, the persistence of the inflation cult is an example of the “affinity fraud” crucial to many swindles, in which investors trust a con man because he seems to be part of their tribe. In this case, the con men may be conning themselves as well as their followers, but that hardly matters.

This tribal interpretation of the inflation cult helps explain the sheer rage you encounter when pointing out that the promised hyperinflation is nowhere to be seen. It’s comparable to the reaction you get when pointing out that Obamacare seems to be working, and probably has the same roots.

But what about the economists who go along with the cult? They’re all conservatives, but aren’t they also professionals who put evidence above political convenience? Apparently not.

The persistence of the inflation cult is, therefore, an indicator of just how polarized our society has become, of how everything is political, even among those who are supposed to rise above such things. And that reality, unlike the supposed risk of runaway inflation, is something that should scare you.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, September 12, 2014

September 15, 2014 Posted by | Economic Policy, Federal Reserve, Inflation | , , , , , | Leave a comment

“Hawks Crying Wolf”: The Usual Republican Inflation Suspects Are Saying The Usual Things

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. And this debate, we are told, is likely to dominate the big economic symposium currently underway in Jackson Hole, Wyo.

That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things.

Before I try to explain the inflation obsession, let’s talk about how striking that obsession really is.

The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again.

And this record isn’t unusual. With very few exceptions, officials and economists who issued dire warnings about inflation years ago are still issuing more or less identical warnings today. Narayana Kocherlakota, president of the Minneapolis Fed, is the only prominent counterexample I can think of.

Now, everyone who has been in the economics business any length of time, myself very much included, has made some incorrect predictions. If you haven’t, you’re playing it too safe. The inflation hawks, however, show no sign of learning from their mistakes. Where is the soul-searching, the attempt to understand how they could have been so wrong?

The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again?

Well, when economic myths persist, the explanation usually lies in politics — and, in particular, in class interests. There is not a shred of evidence that cutting tax rates on the wealthy boosts the economy, but there’s no mystery about why leading Republicans like Representative Paul Ryan keep claiming that lower taxes on the rich are the secret to growth. Claims that we face an imminent fiscal crisis, that America will turn into Greece any day now, similarly serve a useful purpose for those seeking to dismantle social programs.

At first sight, claims that easy money will cause disaster even in a depressed economy seem different, because the class interests are far less clear. Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.

But while easy money may in principle have mixed effects on the fortunes (literally) of the wealthy, in practice demands for tighter money despite high unemployment always come from the right. Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.

It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy — “Government is always the problem, not the solution, unless we’re talking about the Fed cutting interest rates to fight unemployment” — may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.

Which brings me back to the Fed, and the question of when to end easy-money policies.

Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off — official unemployment has fallen sharply, although wages are still going nowhere and inflation is still subdued.

But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, August 21, 2014

August 23, 2014 Posted by | Federal Reserve, Inflation, Janet Yellen | , , , , , , , | Leave a comment

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