I spoke to Kai Ryssdal of Marketplace about the debt crisis in the first installment of a new series of extended interviews “Taking Stock”. You can listen to the broadcast interview here, including an extended version. It was broadcast Thursday evening in the US.
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Paul Mason economics editor of the BBC’s Newsnight hosted an interesting event at the Frontline Club on Thursday 7th November. In attendance: Gillian Tett of the Financial Times, Michael Blastland, a freelance writer, Paul Lashmar, and yours truly. The theme was, and I paraphrase: “Why did the media fail to predict the crash? And what can editors do to prevent such myopia in the future?” Self-flagellation was in evidence all evening to the credit of the journalists present.
Paul Lashmar is undertaking research into the stories that were or were not written, and comparing these to What Was Not Written about Weapons of Mass Destruction. Gillian Tett gave a fascinating insight into her struggle to get the FT to investigate that large chunk of the financial iceberg obscured from everyone’s view – the credit and debt markets. The paper she argued, focussed on just the tip of the iceberg – the equity and M&A markets. I urged editors not to patronise their readers. People are hungry for a conceptual understanding of economics. Economists I argued were like those tourists on Phuket Beach. Only they were using complex mathematical modelling to measure perturbations on the surface of the water, instead of trying to understand the movement of tectonic plates beneath the waves…No wonder they could not predict the financial tsunami. . . Watch the debate here.
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Yesterday’s dramatic Bank of England 1.5% rate cut was an extraordinary admission of analytical failure. The Monetary Policy Committee of orthodox economists (with Danny Blanchflower the honourable exception) is well behind the curve. While it is tiresome to beat one’s own drum, I am obliged to point out that on the 12th July I wrote a short piece for the Guardian beseeching the Bank of England not to “sacrifice the economy on the cross of inflation targeting”. Today’s numbers from the Insolvency Service reveal that more than 4,000 companies have been sacrificed. Company insolvencies have risen by 26.3% over a year ago, and by 10% over the last quarter. This represents the loss of a great deal of productive activity, and of thousands of jobs.
I do not have an army of economists undertaking research for me. Nor do I have the ample resources enjoyed by the Bank of England and the Treasury. And yet common sense, a cursory review of the direction of commodity prices, as well as a refusal to play the game of baiting workers demanding pay rises with threats of non-existent inflation - made the progress of prices perfectly clear. Inflation rises in the Spring were not caused by wage demands, but instead by a spike in internationally-fixed commodity prices. The coming financial meltdown was soon going to dampen demand for oil and other commodities, and force those prices down again. In the meantime high oil and commodity prices were exacerbated by high real rates of interest. The combination was threatening the solvency of companies, households and individuals.That much was obvious to me. Why was it not obvious to the Bank of England and the Treasury?
But perhaps the most disturbing aspect of yesterday’s rate cut was the fact that it may not have any real impact on other rates within the economy. Private and nationalised banks are cocking a snoop at both the Bank of England and the Treasury, and both appear impotent. This is worrying. When governments appear to lose control over the economy, people look elsewhere for leaders that will exercise some control over the economic forces that impact so detrimentally on their lives and livelihoods.
The Bank of England and the Treasury’s ideological fixations and fetishes continue to worsen this crisis. Is yesterday’s dramatic rate cut a sign that Old Lady of Threadneedle St. might be catching up? For the sake of us all, I sincerely hope so. But I fear it may be too late.
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Speigel Online: 5th November 2008
My hope is that the next US president will help build a new, more just, stable and sustainable global financial architecture, vital for balance and stability in the world economy, but also for the eco-system…
Read More (scroll halfway down)
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Open Democracy: 27th October 2008
It is a small measure of the dramatic financial meltdown of 2007-08 that leading representatives of western liberal capitalism ransacked the past for reference-points to convey its scale…
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Thanks to Graham Turner of GFC Economics, I have been following the rise in the “prices” that corporates pay on their long-term loans; the yield on bonds issued in the capital markets. These corporates do not enjoy AAA status, but they badly need finance for investment. Over the last few days, the rise in the yields on their bond issues has been so sharp and so steep, that it is bound to bankrupt many, many businesses - no matter how skiful their entrepreneurship, how vital their products and services, how cautious their financial management.
Graham Turner’s graph, below, tells the whole story. The spike in this graph is a dagger aimed at the heart of hundreds, perhaps thousands of companies, large and small. Where, oh where are our central bank governors? What action are they taking to keep bond yields low? To protect the corporate sector from huge borrowing costs? Or financial turbulence? To protect the finance sector from another round of defaults -corporate debt defaults - that will make the sub-prime crisis look like ‘a walk in the park’?
I’ll tell you where our central bank governors are. They are trapped inside an ideological corset called, bizarrely, “inflation targeting”. They are trapped inside an ideological box that insists that the private sector alone should influence rates of interest and bond yields. That government and the central banks should adopt a do-nothing approach to the direction of long-term interest rates and bond yields. Central bankers are trapped inside an ideological framework that regards capital controls - vital if central banks are to influence all rates of interest, short and long, real, safe and risky - as a form of unspeakable heresy.
Until they start thinking outside of this box, there can be little hope for recovery from this frightening crisis.
Appropos the debate about Keynes below Graham Turner of GFC Economics and author of The Credit Crunch, submitted a fascinating article to the FT on this subject. In it he cites the experience of Japan’s failed attempt to kick-start the economy with public works expenditure in the 1990s.
” Between 1992 and 2002, eleven supplementary budgets were unveiled in a desperate bid to stimulate economic growth. These fiscal initiatives alone cost the taxpayer Y132.6tr. The budget deficit, using the OECD general government measure, soared to a peak of 8.0% of GDP by 2002. Between 1990 and 2005, the debt to GDP ratio climbed from 64.7% to an unthinkable 175.3%.
“And yet the policy failed, because it did not adhere to the prescription set out by Keynes. He was quite clear that the priority of any government or central bank should be to lower interest rates. Monetary policy should be the first line of attack during the onset of a depression.
” Furthermore, it might not be enough to get short term interest rates down. By 1933, short term interest rates had fallen sharply, but long term borrowing costs remained elevated. This was a major concern and strong area of disagreement at the time with classical economists. There was a problem with bond markets, Keynes argued. Investors might find it difficult to accept lower yields even as short term interest rates fell. This liquidity preference lies at the heart of Keynes’s most important and relevant lesson for today. But it is being ignored.
“Keynes succeeded in shifting the debate, and a deliberate policy to drive long term interest rates was
embraced in both the US and UK. The tide began to turn. The recovery was at times patchy. But there can be
no disputing the impact of this more radical monetary policy in providing some relief for economies scarred
by the stock market crash of 1929,and an intensifying depression. Furthermore, one can safely assume that
the policy would have been a good deal more beneficial if it had been implemented sooner. This policy of
quantitative easing can be a powerful antidote, but it has a limited shelf life. Leave it too late, and the impact
will inevitably be diluted, as deflation intensifies.
“Japan’s troubled experience highlights the perils of ramping up government borrowing before the full
range of monetary options has been exhausted.
“Every time the government announced more fiscal spending, the bond market would tumble and yields
would rise. That would drive up private sector borrowing costs, because lending rates were indirectly priced
off government bond yields. Within six to twelve months, corporate bankruptcies would start to rise again.
“This was a classic case of ‘crowding out’. The looser fiscal policy was accelerating the slide into deflation, as more and more companies defaulted. “
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I wrote a piece on Keynes and monetary policy for the Standard, which appeared on Thursday, 23rd October, 2008. You can read it below. Today a group of monetarist economists , supported by a range of bankers, have written to the Telegraph objecting to a public works programme to help economic recovery. They are right that excessive liabilities on the government’s balance sheet could cause interest rates to rise, but government spending has a multiplier effect, and very quickly pays for itself. They seem unaware of this economic fact. There is some overlap between our views on monetary policy as an effective tool, but I disagree with their view that UK government spending has been excessive.
Nor do I share their complacent view that: “Occasional slowdowns are natural and necessary features of a market economy”. First, this is not a slowdown. This is a hugely destructive and likely to be prolonged global economic failure, unprecedented in history. Second, there is nothing at all “natural” or God-given about this failure. It is man-made and these letter-writers are largely to blame for the economic policies of financial de-regulation that have led to the biggest financial meltdown “since the First World War” to quote Mervyn King of the Bank of England.
From the Evening Standard, by Ann Pettifor
“JohnMaynard Keynes suddenly finds himself in favour with all those enamoured of fiscal policy. These range from governments and central banks trapped in economic orthodoxy to free marketeers in the private banking sector benefiting from taxpayers’ largesse. However, bail-outs will not prevent individuals, households, small and big businesses going bust because of onerous borrowing costs.Keynes’ advice would first and foremost be to cut interest rates to the bone; that is all rates, short and long, real, safe and risky.
Keynes laid far greater store by monetary policy than fiscal policy.He believed it is both sustainable and cost-effective to manage financial crises by sharply lowering borrowing costs.This remedy involves neither tax payers’ funds nor burdening the balance sheets of central banks or governments.Today the governors of the Bank of England and the European Central Bank stand firmly in defiance of this key pillar of Keynesianism. Contrary to his advice they prefer to keep interest rates high and periodically lose control over the Libor rate set by the private banking sector.
Keynes did not believe that the burden of economic renewal should be carried overwhelmingly by the public sector.Indeed he was against excessive public spending primarily because it caused long-term interest rates to rise.Instead he wanted to diversify the process of economic renewal by ensuring the private sector played a full part.For the private sector to be able to do that, requires extremely low rates of interest.Only by easing monetary policies will Alistair Darling and Mervyn King be said to be reflecting Keynes’ true priorities.”
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24th October, 2008
The NS has published a short piece this week: “Economists simply would not accept that their model could fail“. An introductory sentence is not mine: “Who would have predicted..that prudent Gordon Brown (would) breach the EU cap on government spending?” Am writing to the NS to ask for a correction to be published.
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