Laurel & Hardy? No Larry & Paul

As I frequently say, I am not the sharpest knife in the drawer.  In fact I reckon I take prided in how little I actually know.  But every now and then I am able to string together a couple a few thoughts and sentences in such a manner to express what I honestly and truly believe and this is one of those rare times. When it comes to economics, I am no economist but when I read what is proposed and written by many of the “so-called’ experts in this field regarding the present economic standing of the United States, in particular Paul Krugman and Larry Summers, I always think of what Milton Friedman once said: “If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.”

I would not be surprised if a lot of cats consider Paul Krugman and Larry Sumner’s as overly smart and learned men. I would agree and note there are several reason for this, inclusive of their Ivy league educations and their incessant habit of speaking in technical terms employed to make them seem smarter than they are and/or to confuse the listener when they are proven wrong and/or are just guessing about what they think versus what they actually know. I suggest this because both believe economic theory is ALWAYS right which herein my problem with them is. Let us start with Krugman, who clearly has no clue or understanding of middle and lower class Americans.

If you have ever heard Paul Krugman talk or read anything he has penned to paper, one halcyon observation that can be made is that in his astigmatic perspective, he is always right and never wrong. No matter the topic, especially when the subject is rooted in macroeconomics, if you disagree or refute his propositions, you are often accused of having bad data, reconstructing history or just being plane ole illogical. This unceasing proclivity of Krugman’s to be correct in theory but incorrect based on real world standards would be amusing if it were not so dangerous. For example Krugman frequently invents or pretends to have been the economist who predicted the housing bubble. What he forgets to add is that in 2002 he wrote that the Federal Reserve and Alan Greenspan needed to “create a housing bubble to replace the NASDAQ bubble” in order to combat the recession at the time. When this was pointed out, you guessed it, he explained away the unexplainawayable.

He also has a habit of taking credit for stuff that has nothing to do with him or his words like the fact that the U.S. has yet to experience any real increase in price inflation. This although he had stated and predicted that from 2010 on, the U.S. would experience an extended period of unending “process of disinflation.” One could go on and on: the zillion times he has said the Euro would collapse or how negative interest would never ever happen. Regarding the Euro, he even went as far as to put in writing that many of the peripheral countries of Europe would be unable to remain in the Eurozone, even predicting that Greece would be out along with Spain and Italy four years ago.

I won’t just focus on Krugman, for every slap-stick comedy duo has a sidekick and partner and there is no better person I can slot for this role (casting couch aside) than the one and only Larry Summers. Summers, former Treasury Secretary during the Clinton administration and former Director of the National Economic Council for President Obama has blessed the world with the already disjointed and discredited concept of "secular stagnation." Now to provide a little background, when Barack Obama was elected in 2008, he mounted Summers as head of the National Economic Council. This even after he made remarks suggesting that women were biologically and genetically inferiorto men and more so, had not done such a great job while in the Clinton administration with respect to the dotcom bubble and his advocacy for the Commodity Futures Modernization Act of 2000. The CFMA gave us financial derivatives, credit-default swaps and other complex papers which were basically unregulated and brought about the 2008 financial collapse. Although prior to this he regarded these new changes regarding securitization on Wall Street as being positive.

But I digress, back to secular stagnation. Summers believes that the U.S. economy is engaged in a new long-time trend or new normal that he has termed "secular stagnation." In simple terms, he suggests that without the existence of bubbles in any part of the U.S. economy, it is mathematically impossible for the economy to generate enough spending to get to full employment. For him, this is because since interest rates can't go below zero (Krugmanesque) and because the "natural interest rate “has been permanently lowered into negative territory such that real rates can't go low enough to keep the economy out of a protracted slump.

This all sounds good on paper but there are more than a few things wrong with this vision of Summers. The foremost is how one calculates real rates. How do we measure real interest rates or are we measuring real interest rates? When cats like Summers say that inflation-adjusted rates have been falling, most are just subtracting expected inflation from the nominal interest rate. The concern is that the way I see it, real interest rate is entirely different from the natural interest rate, which mean a more tenable explanation other than secular stagnation and the new normal of sub two percentgrowth, could be due to an unusual prolonged business cycle.

My question is how can cats like Krugman and Summers keep getting away with being so wrong so frequently yet venerated as economic Gods by the elite east and west coast press outlets and even many of our current politicians? Until we figure this out, it will be nearly impossible to have intelligent reasoned and fact based discussions or even arguments with such individuals on the topic of economics. I understand completely what Robert Skidelsky meant when he wrote: “Today’s professional economists, by contrast, have studied almost nothing but economics. They don’t even read the classics of their own discipline. Economic history comes, if at all, from data sets. Philosophy, which could teach them about the limits of the economic method, is a closed book. Mathematics, demanding and seductive, has monopolized their mental horizons. The economists are the idiots savants of our time.” 

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Notes on the Greenspan Culture

Most Americans are ignorant to the history and impact of central bank policy in the US on the problems we are experiencing and have experienced before regarding our economy.  The first failure came when Alexander Hamilton introduced the concept of having a Central Bank in America right after the revolutionary war. His idea was to place the US in a positon to be able to get loans or credit from lenders and be able to borrow great sums of money. To get the bank started, he proposal to fund a national debt via several bills in 1790 including the Debt-Assumption and Debt Funding Bills. With this concept would come massive speculation and fractional reserve banking. Many were against this idea. Thomas Jefferson wrote about this when his cousin Chief Justice John Marshall used the views of Hamilton to uphold the constitutionality of a national bank in his McCulloch v Maryland decision, in essence putting the nation on a dependency of credit. Jefferson noted that the constitution had not delegated to the congress to be able to incorporate a bank (10th amendment) nor to borrow or regulate commerce and that the establishment of a national bank was not necessary, merely a convenience and congress had the constitutional duty to do what was necessary only (pps. 502-574).

Failures of Federal Reserve policy since then and over the years have been too numerous to cite.  The issue is that the Federal Reserve and the concept of central banks in general act as if they are independent institutions when the truth is they are never independent. This was understood by both Andrew Jackson and FDR, and to a lesser extent Abraham Lincoln. Central banks seem to operate in a vacuum that is isolated from the public and even worse, the public angst and disdain regarding their policy efforts. 

Central banks are failing and have been failing for a long time since their most recent establishment under the Woodrow Wilson administration under the cloak of darkness. These chronic problems keep rearing their ugly head because the models that they employ are broken for they fail to connect monetary policy with the real economy (aggregate demand). This has become more problematic since the reign on Alan Greenspan. This Greenspan culture operates on constructs that don’t exist in the real world and even seems to suggest central bankers of the current batch have no idea of what is going on in the rest of the world outside of Jackson Hole. No matter what they do it always fails and never accomplishes the goals or objectives that said monetary policy was supposed to accomplish. 

Take the example of quantitative easing and keeping interest rates artificially low and constant.  This was supposed to put more loot into the coffers of business and to some extent the people and spur consumption - the assumption being that if you give folk more loot they will spend it, or at least consume more. But we see just by looking at consumption behavior, business are not spending by either investing or buying equipment and regular folks are saving instead of spending. Even with mortgage rates at 3.5 percent, people are not buying homes.  It begs the question what world are central bankers living in because all they talk about (if Janet Yellen can be taken at her word) is raising interest rates. On the one hand the public is being told the Central bank can control economic outcomes but can’t control inflation – a concept that anyone can see is not only problematic but also ridiculous.

Why would they slow the economy down by raising interest rates when it is growing at a staggering and paltry pace already? This makes no sense in particular when the average citizen is confronting real economic hardship and despair and all the evidence (weak fundamentals) indicates this. If this is the path the US central banks takes, it will only prove what many already believe, that the central bank is for the wealth plutocratic class only and it only implements policy on their behalf that presents modern capitalism as merely socialism for the rich. If this is the case then maybe, just maybe, central banks shouldn’t take on fiscal policy. In all honesty, maybe fiscal policy should be only implemented by folks the citizens vote on, or maybe we should vote for central bankers for that matter.

If I was given the authority first step I would take to destroy this Greenspan culture of hybrid fiscal/monetary policy would be to get rid of the Volcker rule in its entirety.  Maybe this way we won’t have to hear dumb azz Janet Yellen cite David Reifschneider anymore. Reifschneider for the record seems to be Yellen’s go to guy. Whatever he says she holds on to like it was the word of God. Reifschneider is a Senior Economist for the Federal Reserve Bank and posits (really guesses without evidence) that bond purchases and low-rate promises should be enough for the Fed to deal with severe recession if such were to occur. This is why I think she has not been out into the real world for she is always saying the same thing, or rather something to the effect that US GDP growth to lift labor markets. Again, an observation I don’t see even looking at BLS data, for there is no known value for potential economic output whether one is taking about labor or GDP – all of this is just speculative talk.

Simply put, central banks, in particular the US Federal Reserve should not be involved in developing, formulating or implementing fiscal policy. This should be left in the hands of the Treasury department in my opinion. One should ask what is their policy and where would we be if they couldn’t buy assets? Since 2008, the US Federal Reserve bank has amassed $2.5 trillion in Treasury securities and $1.8 trillion of mortgage-backed securities (maybe even more) through its asset-purchase programs, yet we still have deplorable growth and horrific levels of unemployment if you read between the lines. What will be next? Will we follow the lead of Japan and start to buy exchange-traded funds (ETFs), or the ECB and begin to purchase corporate debt? Or even worse follow the path of Prime Minister Modi in India and remove cash from circulation?  It is even easier to do in The US with electronic/digital money.  More so given that today, money has no real value in and of itself due to separation of them from the original sources of money – gold and silver. Used to be a time when paper money just represented how much gold and silver we had, but not anymore. Add this to the massive depreciation and devaluation of money over past decades, a cashless society could be a real manifestation. But I regress.

All I am saying is that the philosophical acceptance of Greenspan economics has shown the ineffective, foolish and disconnection from reality that Fed policy is, and that we need to move beyond the make believe boundaries of Central bank policy (guessing) before it is too late.  It is impossible to look at all economic activity in a contrived environment, under a contrived lens in which all stating points begin with full employment, inflation at 2 percent, and interest rates atnormal longer-run levels.  Honestly, like the Euro, the Federal Reserve Bank was flawed from birth.

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