I Like Ed Schultz

The MSNBC prime time hosts are all winners, in my opinion. Uygur, O'Donnell, Maddow, Schultz and even Matthews are credible, in contrast to the conventional wisdom which likens them to Fox hacks...

And Still More

With regard to the Volcker recession in the early '80s, this was clearly a case where monetary policy did make a difference, albeit not one that we would want to repeat. Randall Wray puts this incident in perspective:

Milton Friedman played the biggest role in promoting the Fed as the all-powerful Wizard of Oz, spinning dials and controlling the money supply which then determines output and employment. However (according to Friedman), the Fed is not to be trusted, hence, should be constrained by a constant-rate-of-growth-of-money-supply rule. This was finally tried in the disastrous early 1980s great monetarist experiment run by Fed Chairman Paul Volcker (simultaneously attempted in Thatcher’s UK). I say disastrous because it wiped out half of our thrifts (home mortgage lenders-but not before helping to set off a wave of fraud that was the subject of Bill Black’s book). By the mid-1980s the Fed had given up money targets, and had also abandoned the Friedmanian myth that money and output are closely correlated-with money driving output.

In truth, central bank policy has always determined the overnight interbank lending rate (the fed funds rate in the US). Leaving to the side regulatory and supervisory power, that really is all the central bank does. There is no evidence that changing the overnight interest rate (within the usual range) has any significant or predictable impact on the economy. It truly is a Wizard of Oz-if one recalls that the Wizard behind the curtain actually had no power at all. What is unfortunate is that for a very long time policymakers believed that economic policy could be left to the “omnipotent” Fed-which means that the truly powerful fiscal policy has been neglected.

More on Monetary Policy

Here's why I say the conventional wisdom regarding monetary policy is absurd. We've had 30 years of loose monetary policy. The Fed Funds rate has decreased in fits and starts from 19% to 0%. During that same period, the rate of inflation has steadily declined. So after 30 years of loose monetary policy by the Fed, we have much lower inflation and much higher unemployment than we had to begin with! This is the exact opposite of what one would expect according to the conventional wisdom.

The simple explanation is that encouraging more private sector debt (by lowering interest rates, amongst other tools) when the economy is slumping is not the way to run an economy. While the increased borrowing will temporarily boost the economy, the more lasting effect is to increase private sector debt to unsustainable levels. This is obviously what has happened, aided and abetted by repeated bailouts of the private sector by the federal government.

Monetary Policy is a Joke

Recently, my favorite blogger (Kevin Drum) wrote what I consider to be his dumbest post in the 9 years I've been reading him. He claimed that the U.S. middle class has been "screwed" because of overly tight monetary policy. The Fed, he said, has ignored the full employment part of its mandate, in favor of fighting inflation.

This seems ludicrous to me. The main tool in the Fed's toolbox is setting interest rates. Drum's argument must be that the Fed has been keeping interest rates too high, thereby keeping the volume of loans too low and consequently failing to promote employment. A moment's reflection on the repeated bubbles we have experienced, most recently in housing, shows this to be absurd. The problem has been just the opposite of what Kevin said -- there have been unsustainably high levels of private debt. The U.S. has one of the lowest savings rates in the world as we learned to finance consumption with debt. After 25 years of increasingly loose monetary policy, the result has been the high unemployment that we have today.

The situation is equally absurd if we look at the short term effects of monetary policy. The Fed reduced interest rates aggressively beginning in August 2007. This had no discernible effect in boosting employment. In fact, unemployment soared in the face of this supposedly loose monetary policy. This is just one example of what I have noticed since I began paying attention to this sometime around 2004. Monetary policy, it seems to me, is a joke -- a sort of 21st century voodoo that generally serious people like Kevin Drum fall for...

Monetary Apologists

Not so long ago in the United States and Europe, basic religious facts were considered to be unknowable. Some still are unknowable in our day and age, but other religious assertions have become increasingly absurd over the years. For example, there is evidence that the age of the earth is billions of years, rather than the thousands of years that it would seem from a literal reading of the Bible. The facts surrounding the birth of Jesus are hard to swallow in light of historic facts such as that many of the myths are plainly recycled from other religions. Inconsistencies in the Biblical text are readily identifiable and easily communicated in modern times.

Still, for the last several hundred years, Christian apologists have tried to reconcile the absurdities. Generally liberal, the apologists tried to make sense of the changing intellectual landscape, while reassuring the powers that be and the people that believe in them that the old beliefs are still valid.

Paul Krugman is an apologist for the increasingly implausible monetary theories that we are governed by. Obviously, sovereign governments create money at will. Yet we pretend that governments borrow money from the private sector to finance their expenditures. The fact that this is untrue, in all but the most manipulated and superficial manner, cannot be acknowledged, because the nation sees this as a moral issue.

People see the workings of the macro-economy as fundamentally unknowable. Common sense dictates that government finances are just like the finances of a household or business. A moment's reflection will show this to be untrue, but we are unwilling to openly acknowledge something that may have morally deleterious consequences. If government deficits are okay, then nothing is true and the forces of hedonistic anarchy will have won.

The Mother of all Analogies

The Cheney Administration very publicly derided the CIA for not clearly identifying Saddam Hussein as having a massive WMD program, and thereby justifying the 2003 U.S. invasion of Iraq. It is well known that Cheney established his own intelligence office to bypass the old CIA and provide the intelligence that he wanted. Then, when it was evident that the logic for the Iraq invasion was based upon false claims of Saddam Hussein having a massive WMD program, the Cheney Administration blames the intelligence agencies!

Similarly, the Bush/Administration presided over a massive economic and financial collapse. Bush himself told Congress that a massive Wall Street bailout was necessary to prevent the collapse of the financial system. This was true. But then, after the financial system was saved by the government, the Republicans blamed the federal government for spending too much money, as if this was at the root of the massive problems that brought the economy to its knees.

The enormity of these lies boggles the mind, and indicates the depravity of our political system and indeed, since the lies have been swallowed to a significant degree by the conventional wisdom, of our nation itself...

Modern Monetary Theory Gains Popularity

Courtesy of Mike Norman, here are some recent articles about how the economy works (which doesn't correspond to conventional wisdom of the Democrats or Republicans):

• The Big Danger In Cutting The Deficit, John T. Harvey in Forbes
  
• Debt and Deficit in a Nutshell (9 minute YouTube video)
  
• Bill Mitchell in The Nation
  

Middle East Musings

I just finished reading a book about Hezbollah -- "A Privilege to Die: Inside Hezbollah's Legions and Their Endless War Against Israel", by Thanassis Cambanis. It's a fascinating account of Hezbollah's rise, the 2006 war with Israel, and the subsequent ascension of Hezbollah to dominance of Lebanon and leadership of an anti-western "axis of resistance" throughout the Arab & Islamic worlds. With Bill & Misty traversing the region, Joe Chahine reminding me of the intense Dearborn connection, and ongoing uprisings in Tunisia, Egypt, Libya, Yemen, Oman, and Bahrain, it's highly relevant. While extremely sympathetic, the book is an ultimately damning (perhaps excessively so) account of the principled, dedicated, and fanatical leaders (and followers) of the Shia axis of resistance.

The anti-western axis of resistance includes Hezbollah and their patrons in Iran and Syria, along with Muqtada al-Sadr in Iraq. Though a Shia movement, there are many Sunni sympathizers including Hamas. Opposed to the axis of resistance are the forces of accommodation led by Saudi Arabia. The accommodationist Sunni Arabs have been weakened by the recent revolutions including, especially, the ouster of Hosni Mubarak in Egypt. The Taliban and al-Qaeda are a third loosely-affiliated group on the fringe of current developments.

It remains to be seen what will happen as a result of the Egyptian revolution and the ongoing conflicts in Libya, Bahrain, and Yemen. There are two clear sides struggling for preeminence -- the Shia led axis of resistance and the Sunni led axis of accommodation. While the Iranian led axis of resistance is on the offensive with the fall of Mubarak, it is doubtful that the Saudis, with their enormous wealth, can be toppled. It is more likely that leadership of moderates will pass to more democratic regimes in Egypt, Qatar, and Jordan.

While openness will provide an opening for anti-western factions in the Sunni lands, it is likely that the economic might of the capitalist west will predominate. Sunni self-interest lies not in futile resistance, but rather in independent pursuit of modern technology and human rights. The best case scenario is that the axis of resistance is slowly marginalized as more liberal movements succeed. With prudent behavior by the western powers, the axis of resistance will crack when one of its members decides the west isn't so bad after all, and strikes a deal to open up and reap the rewards of modernity and liberalism. Iran is the most likely prospect in this regard, and its change of heart would likely spell the end of the axis of resistance.

Worst case scenarios include the following possibilities:

• A crushing of the axis of resistance by the overwhelming firepower of Israel and its U.S. ally. This might be similar to the crushing of Jewish resistance in the 132 CE revolt of Bar Kochba. As described in Wikipedia, "The Bar Kokhba revolt (132–136 CE) against the Roman Empire was the third major rebellion by the Jews of Judaea Province and the last of the Jewish-Roman Wars. Simon bar Kokhba, the commander of the revolt, was acclaimed as a Messiah, a heroic figure who could restore Israel...580,000 Jews were killed, and 50 fortified towns and 985 villages razed...Hadrian attempted to root out Judaism, which he saw as the cause of continuous rebellions...Modern historians have come to view the Bar-Kokhba Revolt as being of decisive historic importance. The massive destruction and loss of life occasioned by the revolt has led some scholars to date the beginning of the Jewish diaspora from this date...The disastrous end of the revolt also occasioned major changes in Jewish religious thought. Messianism was abstracted and spiritualized, and rabbinical political thought became deeply cautious and conservative."
  
• Another worst case scenario would be more of the same as we have experienced in recent years. Israel, with the backing of America, would continue to confiscate Palestinian land and mistreat Arabs in the region. The power and prestige of the axis of resistance would continue to grow as a result. Eventually, the axis of resistance could obtain weapons of mass destruction.
  

The middle case, which I would like to think of as the most likely case, is that the Saudis will be unable to continue their leadership position in the Islamic world. While western power will ensue that the oil fields are protected from radicals, the Saudi royalty will realize that their best prospects lie in relinquishing absolute power and retiring as wealthy international citizens (see Aga Khan). In combination with a more liberal Egypt and increasingly liberal regimes in Jordan, UAE, Libya, and perhaps Syria and Iran, the balance of power will tilt in favor of regimes that more legitimately represent their citizens.

Israel, faced with the prospect of an increasingly powerful, balanced, and coherent Arab periphery, will eventually make peace. Israel will retain deterrent military power, but move beyond the siege mentality and become a more mature and independent middle eastern democracy.

I admit that I'm engaged in wishful thinking here. My middle case sounds suspiciously like my best case. May it be so...

Mike Norman Says It Well

From Mike Norman --

But since global capacity exceeds the demand that the US and rest of the world can absorb, the world is faced with a demand shortage, which manifests as massive unemployment and underemployment, as well as sub-optimal economic performance resulting in massive foregone opportunity. The present approach is not working and cracks are widening in the foundation. The fact that the dollar is a source of controversy shows this. On one hand, China wants to export to the US, and on the other, fears dollar depreciation that would affect its savings in dollars.

The challenge is to increase effective demand in order to grow the global economy. Ideally, this would evolve from a democratic new world order based on interdependence in a way that is sustainable financially, economically, politically, socially, environmentally, and ecologically. For this to happen, a fresh approach to globalization based on a new vision of possibilities and a grand strategy for achieving this vision are required. This is the discussion that we need to be having now. Neoliberal austerity is leading to economic underperformance and social unrest.

Simple Economics

The government should, in general, increase the money supply over time to support the growing economy. The way it does this is by deficit spending. The alternative is that the private creates more money via loans, but this does not increase the net financial assets of the private sector, since all new money is then offset by new liabilities. Inevitably, private debt gets too high and there is a deflationary collapse, unless the government steps in with a bailout. Better to get the deficit spending up front, rather than bailing out those who made the biggest mistakes...

Economic Superstition

I've concluded that superstition reigns in our national economic discourse (as it did in religious discourse not so long ago, and still does in many places). Facts regarding how the monetary system works are subservient to superstition regarding deficits and debt, even in the speech and behavior of leaders such as Bernanke. We have basic assumptions which are faulty but taken for granted.