You knocked it out of the park with this one, Piezoe, out of the park. Well done.Quote from piezoe:
I have a little time right now. Reached my target already in the S&P this am. [edit: when I started this post it was mid morning now it's late afternoon.]
That's a perfectly reasonable question you've asked. I am not an economist, though I have studied economics and may be able to contribute something that makes sense. First let me state that I believe Keynes was correct and has been proven so. In my opinion, Friedman and the Chicago School and Hayek and the Austrian School economists have been discredited, and their ideas are incorrect, though certainly not entirely so.
Keynes has been criticized on a number of grounds. One such criticism is that he was not successful in formalizing his theories in rigorous mathematical models. [Others later tried to!] Because I don't believe economics is a science, I find these criticisms absurd. I am firmly in the Soros camp. I believe that neither the "Efficient Markets Theorem" nor "Market Equilibrium Theory" correctly describe real markets. Real markets don't go spontaneously toward equilibrium. Real markets are virtually always distorted. Real markets are not efficient, at least not in the textbook sense.
I bring this up, because it is market equilibrium theory that the "free market" advocates such as Greenspan, Friedman, etc. have been so disastrously wrong about. When markets are left alone without government interference they don't self-correct harmlessly! Instead, they move very far from equilibrium and then crash and move far from equilibrium in the opposite direction, creating economic chaos! So yes, of course, markets left alone will "self-correct." But the result isn't pretty.
If you're interested in this topic, then I can't recommend too highly "The Soros Lectures at the Central European University."
So back to QE and how is it helping with the recovery. QE is easing, depressing interest rates or keeping them from rising, by buying bonds using newly created money, though earnings from Fed assets might also be used. Bond buying with created money expands the Fed's balance sheet. This has the effect, several months down the road, of expanding the amount of money circulating in the economy, while holding interest rates down. The opposite effects occur when the Fed shrinks its balance sheet by selling bonds. The Fed may also cause the yield curve to adjust by choosing which maturities to buy, and which to sell. For example, in operation twist the fed sold short term bonds and bought long bonds. As mortgage rates are tied to long bond interest, operation twist had the effect of reducing mortgage rates, or holding them at low levels. So these are just some of the many operations the Fed can engage in to control long and short term interest rates, and the "ease" with which money can be borrowed.
QE is part of a Keynesian approach the U.S. Treasury is taking to assist recovery from the deepest U.S. recession and worst financial crisis since the great depression of the 1930's. Money is being pumped into the economy to create jobs, build infrastructure, and provide unemployment compensation.
Considering that the U.S. was already running sizable deficits before the crisis hit, additional money needed to "stimulate the economy," according to Keynesian principles, has to be borrowed. But it was desirable that interest rates not be pushed up in a time of recession, as they normally would be in the face of greatly increased Treasury borrowing. Thus the Fed embarked, rather cleverly in my opinion, on its various rounds of Qualitative Easing by which means money could be provided to the Treasury without interest rates rising. Normally such an expansion of money supply circulating in the economy would cause unacceptable inflation. Because of the recession and high unemployment, however, real inflation, though by no means as insignificant as the government's figures indicate, has been held in check. All in all, I would say, a rather brilliant job of juggling by the U.S. central bank in the face of a serious economic disruption.
Now here is where to read about Keynes and Keynesian economics.
This article is beautifully written, and as with the Soros Lectures, I can't recommend it too highly. (I don't think I have ever read a better written article in Wikipedia!) http://en.wikipedia.org/wiki/John_Maynard_Keynes
At the risk of losing you because I really am rambling here, beyond what I had intended when I started this, let's explore further. And I ask you to accept for the moment that Keynes, Soros, Galbraith, Samuelson, Bernanke, Krugman, Blinder, Romer, Stiglitz, etc., are all correct, and that Hayek, Friedman, von Mises, Greenspan, etc., are all wrong. Allow me then please to make a few observations.
First and most importantly, if modern equilibrium theory is correct, then the Hayek Friedman group has a chance of being right; if it is wrong, then all the theories of these "free market" economists must be looked at askance. (And I use here the classical definition, not mine, of free markets.) It would be better if instead of "free markets" the French term laissez faire was used, because that's what is usually meant by "free markets".
Clearly, equilibrium theory is wrong! Numerous real life examples prove it to be. To name just two: The Great Depression and the 2008 Financial Crisis. Markets don't spontaneously correct when they get out of whack and then move back harmlessly toward balance. Instead, they get even more out of whack. In fact they tend to accelerate their whackiness and then overcorrect, sometimes violently, and often not harmlessly.
When Greenspan recognized "irrational exuberance" he was actually observing an acceleration of market whackiness. He was waiting patiently for a "harmless" self-correction. When told about liar loans, he was being informed of extreme market whackiness, and this time the "self-correction" was much worse, and emergency intervention was needed.
The free market economists put their faith in equilibrium theory. If equilibrium theory is wrong, and I say it is, then the free market economists are wrong, and therefore government regulation is essential to orderly markets. Naturally, there are good regulations and bad regulations.
Now lets look at what can happen when these incorrect economic theories hold sway. We have three very good, fairly recent examples: The Reagan and two Bush presidencies. Look at this chart from the St. Louis Fed.
Reagan was in office 1981-1989, Bush I 1989-93, Clinton 1993-2001,G.W. Bush 2001-2009, Obama 2009-
Those Reagan and Bush years were years in which "supply side" laissez faire economics held sway. The deficits look all the world like a recession with Keynesian economics being applied, i.e. major deficits. But ironically there were only mild recessions during those presidencies, and much of the time the economy boomed. Mostly boom years in other words; yet big deficits! It is as though the economy was 180 degrees out of phase with what Keynes would have thought we should be doing.
What on earth is going on during those Reagan Bush periods? Apparently the increased government spending was on top of a healthy economy. Tax rates were cut due to belief in supply-side economics --the opposite of what Keynes advocated during boom times-- and military and war spending ballooned. The economy looked exceptionally healthy until one realized that it was being "goosed" by massive debt and government spending. These are periods in which Keynes would have recommended either decreasing government outlays, raising tax rates, or both. We did none of these things. WE DID THE EXACT OPPOSITE.
Now look at the Clinton years. The economy thrived and Clinton raised taxes on top earners and made modest spending cuts. The deficit graph looks more like what it should look like if Keynesian economics are being followed.
We are currently emerging from a deep recession. But, in stark contrast to the Reagan-Bush years, the large deficits are now in sync with what Keynes would have advocated.
When full employment returns, and it will if we stay the course -- more deficit spending might be needed-- then it will be time to start shrinking the Fed balance sheet, raise interest rates, reduce federal spending and raise tax rates. (I don't see the highly focused, and very modest tax rate increases that have been proposed as being at all harmful to the recovery). If we do those things, and I am confident we will, we will be just fine. As long as Bernanke, or someone of similar economic philosophy, is still in charge at the Fed and the council of economic advisers does not change significantly, we should do all the right things once good times return. Our deficits will return to the horizontal line where they should have been during the Reagan-Bush boom years.
We have already fixed one thing. We're no longer subscribing to failed economic theory, though the tea party folks are fusing about it. Going forward we will have to fix two more things: medical and military spending. To restore confidence in the dollar, we need to develop, as rapidly as possible, a comprehensive, long range plan to do just that. We do that, and we avoid getting entangled in any more absurd wars, and we'll be just fine. And dollar will remain the "go to" currency for the world.
The danger our country faces at this very moment is coming from that faction that does not understand the Keynesian economic course we are embarked on and might even succeed in throwing a monkey wrench into the works. We must not let that happen.
Paul Krugman economics: Deny, deny, deny!
- Thread starter Max E.
- Start date
You remind me of a kitten instantly seized with excitement chasing the red dot of a laser pointer.
At best pie fouled out, so far he fails to explain his primary assertion.
I really am trying to see the magical logic of toothfairy economics and I defy anybody from you to paul krugman,mike norman or any other leftist luminary to invalidate my common sense approach.
I'm going to address your argument piece by piece, sans the first paragraph where you go on about efficient markets outside of the topic of QE. If you would like to discuss this unrelated issue somewhere else, start a thread on it and I'll join in. But until we first argue the topic on whether QE helps recovery, it will only cloud the issue.
Let's pause right here, because it's important to realize that you just described what QE is, and what it is intended to do in theory. I'll not argue the theory of QE, as I think you've stated it accurately. However, much like the academics at the Fed who you defend, your statement is nothing more than reading from an Econ article on Japanese Monetary Policy in the last decade (let's remember that Japan has been doing this for a lot longer than we have. If it worked, it would have worked for them long ago).
What you are so conveniently ignoring is the fact that the Federal Reserve cannot force money into the economy like you said. It has no direct delivery method. It can only provide this expanded money supply to primary dealers through it's purchase of treasuries from these said big banks. That's it. It has no forceful method to make these dealers then go ahead and issue loans to small businesses or individuals, and even less ability to make these businesses and individuals take out a loan in the first place. So in periods of significant deleveraging, like we have now, the attempt to make businesses and individuals "releverage" is spotty, at best. All one has to do is look at the amount of reserves the banks have parked at the Federal Reserve. That's where the trillions of dollars that have been printed sit.
Banks have taken it and used it to shore up embattled balance sheets, protect against future housing losses (which have been given reprieve for the time being by a suspension of Mark to Market accounting by FASB), and used it to speculate in asset markets, driving up stocks, commodities, land - anything with perceived return. About the only thing banks have done to drive money into the economy is to buy stocks, which has given some of that money to the companies issuing that stock, and allowed them to turn that cash into other economic uses - equipment purchases, margin compression, etc. QE has largely remained in reserves and not in the economy. It has failed. If you dispute this, explain those trillions of dollars resting at the Fed, owned by banks. Where did that come from and how is it helping the economy sitting there?
Yes, clever. Artificially keeping interest rates low, and becoming 75% of the bond market, the Fed has essentially done three main things that will have massive repercussions in the very near future.
1. The Fed has enabled politicians to spend without any concept of worrying about debt, or making that spending efficient. Congress doesn't care about debt because congress doesn't understand what is going on. All they know is rates are quite low and they believe this is because the bond market is OK with them borrowing forever. They don't get that the bond market is actually not ok at all (see point #2) and that the Federal Reserve is cornering the market, giving the impression all is well.
2. Indirect bidders on debt have all but bailed on the treasury markets (see my references earlier in this thread regarding record low indirect interest). If the Fed wasn't buying 75-80% of debt, rates would be much, much higher. But the lifeblood of the international market appetite for debt is rapidly disintegrating.
3. The exit plan for getting out of crisis mode is next to impossible, as the first whisper of hint that the Fed will reverse it's purchases, or even end them, will send investors fleeing to the exits and markets crashing. So unless the Fed agrees for permanent QE, all they've done is to buy time. What's worse, everyone knows there will be an eventual exit, and everyone is waiting for that shoe to drop. Thus companies are not believing in the smoke and mirrors economy, and everyone knows the Emperor has No Clothes.
Please stay on topic. I am not here for a lecture. I am here for a debate. The topic is not the Great Depression, it is QE. And equilibrium theory - and your extension of argument to "Free market" economies has nothing to do with the crash in 2008, since that crash was due to meddling by the government and the Fed in the first place. Want to discuss that stuff? Wait until we're done with QE or start another thread.
In relation to QE, you might also want to explain how QE brings about lower unemployment, as even the Fed has likened this to "pushing on a string". The short answer is, it can't. The Fed has no control over unemployment, which is why every single other central bank in the world does not have that as part of their mandate (even the socialist country ones). Congress got it in it's head during the 70s to make the Fed responsible for unemployment so THEY wouldn't have to be. But there's just no way. And tying employment goals to the end of QE is just another way of saying "We're going to do it until we want to stop."
Worthless political partisan commentary, not related to the argument.
Medical and Military spending are irrelevant to the discussion. You're not going to succeed with distracting me, so please stop trying. QE is the topic. The dollar is a relevant segue, as it is directly related to QE. Restoring confidence in the dollar while at the same time openly abandoning sound dollar policy is absurd.
Thanks for the editorial closing. I would counter that the danger our country faces is people like yourself that believe that the only reason Keynesian policy hasn't worked yet is because it was not big enough. Always increase spending, always increase QE. Get the government to do everything and the private sector to suck it up. I'll end with two comments. First, Japan has been doing this for a lot longer and is still in the same place they were when it began. And now they're going to do the mother of all QE's, so we'll get to watch as idiots across the ocean do "it's not big enough" before idiots here that think like you bring it home.
My second point is that you have - in absolutely no way in all that text you wrote - proven anything about how QE helps a recovery.
Please feel free to try again or debate my counter points.
Let's pause right here, because it's important to realize that you just described what QE is, and what it is intended to do in theory. I'll not argue the theory of QE, as I think you've stated it accurately. However, much like the academics at the Fed who you defend, your statement is nothing more than reading from an Econ article on Japanese Monetary Policy in the last decade (let's remember that Japan has been doing this for a lot longer than we have. If it worked, it would have worked for them long ago).
What you are so conveniently ignoring is the fact that the Federal Reserve cannot force money into the economy like you said. It has no direct delivery method. It can only provide this expanded money supply to primary dealers through it's purchase of treasuries from these said big banks. That's it. It has no forceful method to make these dealers then go ahead and issue loans to small businesses or individuals, and even less ability to make these businesses and individuals take out a loan in the first place. So in periods of significant deleveraging, like we have now, the attempt to make businesses and individuals "releverage" is spotty, at best. All one has to do is look at the amount of reserves the banks have parked at the Federal Reserve. That's where the trillions of dollars that have been printed sit.
Banks have taken it and used it to shore up embattled balance sheets, protect against future housing losses (which have been given reprieve for the time being by a suspension of Mark to Market accounting by FASB), and used it to speculate in asset markets, driving up stocks, commodities, land - anything with perceived return. About the only thing banks have done to drive money into the economy is to buy stocks, which has given some of that money to the companies issuing that stock, and allowed them to turn that cash into other economic uses - equipment purchases, margin compression, etc. QE has largely remained in reserves and not in the economy. It has failed. If you dispute this, explain those trillions of dollars resting at the Fed, owned by banks. Where did that come from and how is it helping the economy sitting there?
Yes, clever. Artificially keeping interest rates low, and becoming 75% of the bond market, the Fed has essentially done three main things that will have massive repercussions in the very near future.
1. The Fed has enabled politicians to spend without any concept of worrying about debt, or making that spending efficient. Congress doesn't care about debt because congress doesn't understand what is going on. All they know is rates are quite low and they believe this is because the bond market is OK with them borrowing forever. They don't get that the bond market is actually not ok at all (see point #2) and that the Federal Reserve is cornering the market, giving the impression all is well.
2. Indirect bidders on debt have all but bailed on the treasury markets (see my references earlier in this thread regarding record low indirect interest). If the Fed wasn't buying 75-80% of debt, rates would be much, much higher. But the lifeblood of the international market appetite for debt is rapidly disintegrating.
3. The exit plan for getting out of crisis mode is next to impossible, as the first whisper of hint that the Fed will reverse it's purchases, or even end them, will send investors fleeing to the exits and markets crashing. So unless the Fed agrees for permanent QE, all they've done is to buy time. What's worse, everyone knows there will be an eventual exit, and everyone is waiting for that shoe to drop. Thus companies are not believing in the smoke and mirrors economy, and everyone knows the Emperor has No Clothes.
Please stay on topic. I am not here for a lecture. I am here for a debate. The topic is not the Great Depression, it is QE. And equilibrium theory - and your extension of argument to "Free market" economies has nothing to do with the crash in 2008, since that crash was due to meddling by the government and the Fed in the first place. Want to discuss that stuff? Wait until we're done with QE or start another thread.
In relation to QE, you might also want to explain how QE brings about lower unemployment, as even the Fed has likened this to "pushing on a string". The short answer is, it can't. The Fed has no control over unemployment, which is why every single other central bank in the world does not have that as part of their mandate (even the socialist country ones). Congress got it in it's head during the 70s to make the Fed responsible for unemployment so THEY wouldn't have to be. But there's just no way. And tying employment goals to the end of QE is just another way of saying "We're going to do it until we want to stop."
Worthless political partisan commentary, not related to the argument.
Medical and Military spending are irrelevant to the discussion. You're not going to succeed with distracting me, so please stop trying. QE is the topic. The dollar is a relevant segue, as it is directly related to QE. Restoring confidence in the dollar while at the same time openly abandoning sound dollar policy is absurd.
Thanks for the editorial closing. I would counter that the danger our country faces is people like yourself that believe that the only reason Keynesian policy hasn't worked yet is because it was not big enough. Always increase spending, always increase QE. Get the government to do everything and the private sector to suck it up. I'll end with two comments. First, Japan has been doing this for a lot longer and is still in the same place they were when it began. And now they're going to do the mother of all QE's, so we'll get to watch as idiots across the ocean do "it's not big enough" before idiots here that think like you bring it home.
My second point is that you have - in absolutely no way in all that text you wrote - proven anything about how QE helps a recovery.
Please feel free to try again or debate my counter points.
Thank you, Tsing Tao, for reading my long post in its entirety. And I especially thank you for making well-considered responses and reasonable counterarguments. Something too often missing from this particular forum.
I'll try this time to be brief. I agree with your general assessment of what can go wrong with QE and the general path the Fed has decided to follow. In particular, your comments regarding how difficult it is to get the money "created" moving into the economy. The Fed has commented on the problem of excess bank reserves. But nevertheless much of the money does, in fact, find its way into the economy via government spending.
I also agree in general with your comments regarding the difficulties faced by the Fed in creating full employment. I agree that that responsibility is misplaced. The Fed can only help by creating favorable economic conditions. Congress must play the equally important role of providing a favorable business climate and employment opportunities through intelligent legislation.
I think I made it clear with regard to equilibrium theory that we both can't possibly be right. Either you and Friedman and Greenspan are right, or Soros and I are correct. I think I made a fairly strong case for equilibrium theory being wrong, but we can agree to disagree on that.
And much of the correctness of your additional comments hinge on that one issue. And that's why it is important. Either the supply-side laissez faire ("Free Market" to you) economists are
right, and equilibrium theory is correct, or they are wrong, and equilibrium theory is not correct. That makes all the difference. I am satisfied that the data has proven equilibrium theory to be wrong.
I can't comment intelligently Re Japan. I need to do much more reading re the Japanese economy. I know only this really, and that is that in Japan the debt is held to a very large extent internally whereas the U.S. debt, while held mostly internally, is held to a significant extent externally, and surely the distribution of debt must play a role in determining how much inflation can be tolerated and the desirability of monetizing. But that is as far as I can go on that issue. You seem to be much better informed in that regard than I.
All in all I want to thank you again for reading my long post and an intelligent counter argument, but one which I nevertheless believe is faulty.
I'll try this time to be brief. I agree with your general assessment of what can go wrong with QE and the general path the Fed has decided to follow. In particular, your comments regarding how difficult it is to get the money "created" moving into the economy. The Fed has commented on the problem of excess bank reserves. But nevertheless much of the money does, in fact, find its way into the economy via government spending.
I also agree in general with your comments regarding the difficulties faced by the Fed in creating full employment. I agree that that responsibility is misplaced. The Fed can only help by creating favorable economic conditions. Congress must play the equally important role of providing a favorable business climate and employment opportunities through intelligent legislation.
I think I made it clear with regard to equilibrium theory that we both can't possibly be right. Either you and Friedman and Greenspan are right, or Soros and I are correct. I think I made a fairly strong case for equilibrium theory being wrong, but we can agree to disagree on that.
And much of the correctness of your additional comments hinge on that one issue. And that's why it is important. Either the supply-side laissez faire ("Free Market" to you) economists are
right, and equilibrium theory is correct, or they are wrong, and equilibrium theory is not correct. That makes all the difference. I am satisfied that the data has proven equilibrium theory to be wrong.
I can't comment intelligently Re Japan. I need to do much more reading re the Japanese economy. I know only this really, and that is that in Japan the debt is held to a very large extent internally whereas the U.S. debt, while held mostly internally, is held to a significant extent externally, and surely the distribution of debt must play a role in determining how much inflation can be tolerated and the desirability of monetizing. But that is as far as I can go on that issue. You seem to be much better informed in that regard than I.
All in all I want to thank you again for reading my long post and an intelligent counter argument, but one which I nevertheless believe is faulty.
There can be no argument here, it does indeed make it's way into the economy via government spending (funded by the Fed as previously mentioned.) However, unless you can argue that the government is more efficient at driving economical growth than the private sector, then all you're really talking about is more spending - which can be done without QE. So again, QE is not responsible for recovery.
We agree.
The issue of supply-side, etc. has nothing to do with your statement that QE drives recovery. This is the issue I put in question, and the one issue you still have not proven. I have pointed out the flaws in your QE argument, and you even agreed to my commentary. So unless you rescind your statement, there is still a point that must be debated.
You really need to look into Japan, as they have done all that we are doing, and have nothing to show for it.
You are welcome. I don't mind good debate, and it's obvious that both of us believe that the other's point of view is faulty. But the point of the debate is to show how that view is faulty. Thus far, I posed you a question, and you tried to answer it. I gave you counter points as to why the information you posted is incorrect. It is now your turn to answer these counter points and show why they are incorrect. If you cannot, then you can bow out and say you disagree. But believing someone's view to be faulty and actually proving it is two different things.
A well-reasoned basically-polite debate on the merits of policy.
Who ever thought it would happen in the P&R forum of ET. (This is ET right? I did not get an url re-direct to an alternative universe, eh?).
Who ever thought it would happen in the P&R forum of ET. (This is ET right? I did not get an url re-direct to an alternative universe, eh?).