If they actually understood how it all works they’d be calling for tax cuts rather than interest rate increases.

>   (email exchange)
>   On Mon, Aug 23, 2010 at 12:18 PM, wrote:
>   Yes, Krugman criticised this today and I put in a kind word
>   for Mr Rajan in the comments section.

I suspect Rajan is looking in part at the deflationary impact of the “fiscal channel” via the current 0% interest rate. Your NY Times colleague, Gretchen Morgenson, had a very good piece on this in the Sunday NY Times. Of course, the impact of this policy would, as you suggest, be ruinous for borrowers and highlights the comparatively diffuse impact of monetary policy, vs fiscal policy in terms of solving the problem of aggregate demand. Overall, this uncertainty points to the problems involved in using monetary policy to stimulate (or contract) the economy. It is a blunt policy instrument with ambiguous impacts.

The major problem facing the economy at present is that there is not a willingness to spend by the private sector and the resulting spending gap, has to, initially, be filled by the government using its fiscal policy capacity. I prefer direct public sector job creation to be the principle fiscal vehicle. But fiscal policy it has to be. Then when the negative sentiment is turned around, private borrowing will recommence and investment spending will grow again. Then the economy moves forward some more and the budget deficit falls.

Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says

By Scott Lanman and Simon Kennedy

Aug. 22 (Bloomberg) — Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund’s former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed.

Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says.

“Low rates are not a free lunch, but people are acting as though they are,” said White, 67, who retired in 2008 from the Basel, Switzerland-based BIS and now chairs the Economic Development and Review Committee at the Paris-based Organization for Economic Cooperation and Development. “There will be pressure on central banks to follow an expansionary monetary policy, and I worry that one can see the benefits, but what people inadequately appreciate are the downsides.”

He and Rajan will have the chance to make their case at the Fed’s annual symposium in Jackson Hole, Wyoming, this week. In 2003, White told attendees central banks might need to raise rates to combat asset-price bubbles. In 2005, Rajan, 47, said risks in the banking system had increased. They were met with skepticism from then-Fed Chairman Alan Greenspan, 84, and Governor Donald Kohn, 67.

Losing Confidence

While the Fed did boost its target rate for overnight loans among banks in quarter-point steps to 5.25 percent by 2006 from 1 percent in 2004, that didn’t prevent a housing bubble, which began to pop in 2006. Banks began losing confidence in August of the same year and started charging other financial institutions higher interest on loans.

A minority of policy makers are increasingly echoing Rajan and White’s current worries, including Kansas City Fed President Thomas Hoenig, who is hosting the Aug. 26-28 symposium, and Andrew Sentance, one of nine members on the Bank of England’s monetary-policy committee.

Hoenig has dissented from all five Fed policy decisions this year, preferring to jettison a pledge to keep rates low for an “extended period.” Sentance was defeated for a third month in August in his bid to withdraw emergency stimulus by increasing the benchmark interest rate.

Few Converts

The naysayers may fail to win many converts any time soon as the recovery slows and U.S. unemployment, at 9.5 percent in July, remains near a 26-year high. The resulting extension of low rates may increase volatility of government bonds, especially in response to any stronger-than-anticipated economic data, said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc.

Indications that growth will be at least 3 percent “in the coming months” would cause yields on 10-year Treasuries, which were 2.61 percent on Aug. 20, to rise to 3 percent within about a week, said Fovinci, who is based in Portland, Oregon, and helps invest $2.5 billion.

JPMorgan Chase & Co. reduced its forecast last week for growth in this quarter to an annual rate of 1.5 percent from 2.5 percent and in the last three months of 2010 to 2 percent from 3 percent.

“I’m not worried about inflation, because the economy appears to be weak,” Fovinci said. At the same time, the bond market seems to be “tightly coiled up like a spring.”

Rising Yields

Between June 3 and June 8, 2009, yields on 10-year Treasuries rose to 3.88 percent from 3.54 percent after the smallest drop in U.S. payrolls in eight months and European Central Bank President Jean-Claude Trichet’s forecast for economic growth in 2010. Two-year Treasury yields rose to 1.4 percent from 0.91 percent in the same period.

The margin for error is “incredibly thin,” said Derrick Wulf, a portfolio manager at Dwight Asset Management Co. in Burlington, Vermont, which oversees $64.3 billion. “A lot of investors have become complacent about being long” in Treasuries.

Rajan, now a professor at the University of Chicago’s Booth School of Business, says near-zero interest rates are a crisis tool and economists don’t know if the benefits from using them for longer periods outweigh the costs. While inflation isn’t the main threat now, “you can’t be totally comfortable,” he said in an Aug. 18 interview. People think “there is significant unused capacity in the economy” and that assumption may be mistaken.

‘Bad Incentives’

Near-zero rates create “bad incentives” for financial firms, he added.

“Blow the system up, we’ll come back and reward you with very low interest rates that allow you to build up capital, and then you could try it again next time around,” Rajan said.

The Fed also may be “prolonging pain” by propping up the housing market and keeping home prices from falling, he said.

Companies are sending mixed signals.

“Demand is very low across the country” for houses, Richard Dugas, chief executive officer of Bloomfield Hills, Michigan-based Pulte Group Inc., said Aug. 20 on Bloomberg Television’s “In the Loop with Betty Liu.” Meanwhile, Caterpillar Inc., the world’s largest maker of construction equipment, may add as many as 9,000 workers worldwide this year, Doug Oberhelman, chief executive officer of the Peoria, Illinois-based company, said Aug. 19.

Another Bubble

White, a Bank of Canada deputy governor from 1988 to 1994, says the benefits of low rates may already be waning “in a world with so much debt, especially household debt,” which in the U.S. totaled a near-record $11.7 trillion at the end of June. There’s also a danger they might create another bubble, he said.

Another risk is that near-zero rates allow companies to roll over nonviable loans, a practice known as “evergreening” that can create so-called zombie businesses, which happened in Japan, he added.

Rajan and White’s arguments aren’t winning over Keith Hembre, chief economist at U.S. Bancorp’s FAF Advisors Inc. in Minneapolis, where he helps oversee $86 billion.

“There’s little evidence that the very low rates today are inflicting any harm,” said Hembre, a former Fed researcher. While he has “some longer-term sympathy with the argument,” it’s “just off-base today, given the evidence available from both real-time and market indicators.”

Bernanke, 56, and the majority of Fed officials show little inclination to change course. The Fed lowered its benchmark rate to a range of zero to 0.25 percent in December 2008 and said after each policy meeting since March 2009 it will likely stay very low for an “extended period.”

Emergency Measures

The ECB has kept its main refinancing rate at 1 percent since May 2009, and the Bank of England’s key rate has been 0.5 percent since March 2009. Axel Weber, an ECB council member, said in an Aug. 19 Bloomberg Television interview that policy makers should keep emergency liquidity measures in place at least through the end of the year, beyond Trichet’s October guarantee. Bernanke and Trichet will speak at the Fed symposium Aug. 27.

White and Rajan have ruffled central-bank feathers before at Jackson Hole, where policy makers, academics, analysts and money managers from dozens of countries mix hiking and rafting in Grand Teton National Park with debate over monetary policy and bank regulation.

In 2003, White and then-colleague Claudio Borio, who was head of BIS research and policy analysis, told central bankers they might need to raise interest rates to “lean against” asset-price bubbles.

‘Cannot Work’

“The one thing I am sure about is that a mild calibration of monetary policy to address asset-price bubbles does not and cannot work,” Greenspan, who retired in 2006, responded at the conference.

Bernanke, then a Fed governor, told attendees that Japan raised rates in 1989 to prick a bubble, and as a result, “asset prices collapsed and they had a 14-year depression.”

In 2005, Rajan warned that if banks lost confidence in each other, “the interbank market could freeze up, and one could well have a full-blown financial crisis.”

Kohn disagreed in a speech after Rajan’s presentation.

“As a consequence of greater diversification of risks and of sources of funds, problems in the financial sector are less likely to intensify shocks hitting the economy and financial market,” he said.

More Open

Bernanke has since become more open to White’s view. While low interest rates didn’t cause the U.S. housing bubble, he said in a January speech, if the next wave of regulation proves “insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks.”

Kohn, the Fed’s vice chairman from 2006 through June, said in a March speech that “serious deficiencies” with securitization of loans “exposed the banking system to risks that neither participants in financial markets nor regulators fully appreciated.”

Spyros Andreopoulos, a London-based global economist at Morgan Stanley, says he worries about the inflationary implications of extreme monetary accommodation beyond the next two to three years, with policy makers likely to lean toward low rates because of the fear of deflation.

“Imagine a car that’s stuck in the mud,” he said. “When you press on the gas, the car doesn’t emerge smoothly; it jumps up. My fear is when economies pick up after the stimulus, you’ll see inflation faster than was expected.”

57 Responses

  1. Looks to me like Rajan has the causality backwards and is recommending wagging the dog’s tail. But this pooch is a vicious pit bull.

  2. i know rajan

    i assure you he is not worried about the impact ZIRP is having via fiscal channel.

    his concern is with asset pricing. if you DCF and have FFR in discount rate, and is zero, it generates asset values “too high” and maybe bubble. It is opposite to “natural rate of interest” is zero.

    1. Well at least Rajan is dealing in the world of actual numbers. Public employee pensions are still using an 8% discount rate.

      Another issue: how to calculate the unfunded pension obligation. Currently, the total projected benefits obligation is lowered based on how much the fund is expected to reap in investments, commonly 8%.

      Critics argue that rate, which for accounting purposes is known as the discount rate, is inappropriately high. GASB has looked at several alternatives that are currently lower than 8%.

      The drop of one percentage point in the discount rate means a 10% to 20% increase in the total pension obligation, according to James Rizzo, senior consultant and actuary at Gabriel, Roeder, Smith & Co., a consulting firm for the public sector.

  3. Starting to think these guys are evil rather than stupid.

    This would result in an inverted yield curve and help to throw the economy back into a recession by his own paradigm.

    What kind of person would want to do this?

  4. I think there are many people who do want higher interest rates, they have gotten used to them since 1980 or so. Scott Fullwiler has pubished scholarly works on how interest rates have been historically high over this period.

    I didnt follow it back then, but back when Volcker raised policy rates to 20% due to what looks to me now as an oil supply shock, that seems to have “loaded the gun”. I think this long term interest rate policy (down) provided the perfect backdrop for all the “shenanigans” we have witnessed over this same time frame. Basically what we all have lived thru during these times may be the exception rather than the rule, a “parenthesis” in US economic history (higher rates) due to Volckers foul up 30 years ago.. If so, major new policies/changes are going to have to be developed to make up for this lost return to savers/retirees, but alas, unfortunately Obama is back on the golf course this week..doh!

    On the other hand, I think its low probability, but if a new larger war was to break out in the mid-east, oil could shoot back up and the FIRE industry could try to sell the public the “inflation” story once again and get the Fed to “load the gun” by raising interest rates back up to the teens due to higher oil prices and they could short the bonds and then get out and start it all over again.

    Its definitely a time to be very careful and watchful…Resp,

    1. Its definitely a time to be very careful and watchful…

      The asset value/wealth effect/financialization model of the US economy began after WWII, specifically with Levittown, NY, the first suburban housing development or “planned community.” That was the marriage of the house and the car that launched the oil age, on which suburbia depends. In the end, financial capitalism, based on financing housing and automobiles, began to supersede productive capitalism as the US become increasingly a service economy. Indeed, the automotive companies realized that they could do better as finance companies that happened to make products nearly as expensive as an ordinary house used to be relative to annual wages.

      That model depended on easily available credit, and easily available credit expanded dramatically with the credit card industry, now dominated by a few big players. The model depends on relatively expensive houses and automobiles that are financed (and later securitized), cheap abundant credit (credit cards to manage cash flow), and cheap abundant oil. That era is ending and it is unclear what is going to replace it.

      Meanwhile, the US is sitting on huge excess capacity and historically high unemployment — too much supply and too little demand. Everyone but the top end of town is anxious about what’s coming. Social unrest is rising the developed world.

      War clouds loom over the Middle East as Iran portends to become a member of the nuclear club and Israel has declared this unacceptable as threat to its survival. Nuclear North Korea is becoming more and more of a wild card, and nuclear Pakistan is unraveling. Anti-Muslim feeling in the US is driving Al Qaeda recruiting, and experts predict that its only a matter of time before another successful attack is carried out against a Western target. The US and NATO are bogged down in Afghanistan, trying to work with a corrupt partner. Iraq portends to descend into civil war as US forces withdraw.

      The UK and Australia could not agree on a majority government, and the US is facing a divisive election and a gridlocked legislature. States’ budgets are a shambles. Voter dissatisfaction and distrust of government is at a historical high. Demagogues are rife, and incumbent politicians are for the most part clueless, spineless, or boughten. The military is involving itself more explicitly in policy, and also using covert tactics to influence domestic opinion. Liberties have been constrained due to fear of terrorism. Previously unheard of behavior is not only permitted but rewarded.

      Climate change is becoming more and more a reality to be reckoned with, and few steps are being taken to reckon with it.

      These are just some of the trends converging. Definitely a time to be careful and watchful.

      1. Tom,

        “financial capitalism, based on financing housing and automobiles”

        That’s an interesting, succinct way of looking at the big picture.

        “That era is ending and it is unclear what is going to replace it.”

        What’s your best guess at where it goes from here?

        I find it difficult to believe that people will stop wanting nice houses and cars, given the technology available to build them, including new energy technologies. I find it particularly difficult to believe that people in developing countries won’t want these things in abundance.

        What’s going to force deployment of resources elsewhere, and what is that elsewhere?

        If the future economy and its finance are not based on housing and automobiles, what will they be based on?

        Or is it a rebalancing of some sort, more than a shift to something else?

        I see the trends you note, but aren’t those the challenges that confront universal economic desires, rather than forces that will permanently change those desires?

      2. P.S.

        That’s a new record for me – a complete comment without mentioning interest rates, reserves, or the multiplier.

      3. I think the question is, to what extent the physical availability of these assets (especially housing) can be disconnected from the financial industry and the subsequent vested interests and only be targeted in terms of socially desirable outcome.

        From an architect’s viewpoint, suburban sprawl is indeed a challenge and arguably an unsuitable module for an (energy) efficient society. On the other hand, there is a plethora of variables of physical, cultural and even philosophical nature that influences the behaviour and consumption patterns of humans within their built environment. It is by no means always the case e.g. that inhabitants of large cities consume less energy per person than those of rural or suburban areas. Energy consumption is also a function of building norms, functional segregation, income / wealth, leisure preferences etc. and cannot be blamed solely on the desire to live in a less densely built up environment. You will find, for example that city dwellers, while using up less space and commuting less far per person, are prone to engaging in far more wasteful leisure activities such as flying abroad for the weekend just to ‘get away from it all’.

        It’s the combination of the availability of cars and highways, functionally segregated city plans, relative affluence of those living in suburbia (which wasn’t always the case) and willingness / expectation to commute that has proven to be particularly wasteful. The question is, where does one begin with changing things? Do we tear down houses? Ban cars? The way it looks, the most likely and also most painful channel for change will be via decreased affluence, at least of some, which will be exacerbated by higher energy prices.

      4. JKH: If the future economy and its finance are not based on housing and automobiles, what will they be based on?

        According to a n article in the current issue of Foreign Policy, the world population migration is trending away from decentralization toward greater centralization. Urbanization is the dominant trend and the rise of the new city-state and leagues of city-states, with economies dominated by multinationals is bringing the age of nations to a close.

        Beyond City Limits: The age of nations is over. The new urban age has begun By Parag Khanna | Sept. / Oct. 2010.

        One result of this will be the fading of Wall Street and the City as the predominant players that everyone has to come to. Finance is going to get a lot more competitive, with Asia, SE India, and Latin America coming on line. While US and European dominance will wane, it won’t be overnight. The US has a GDP of ~$14 T and #2 China hasn’t hit $2T yet. But marginal effects are already being felt and they will increase apace as the speed of development picks up. The US and Europe have essentially peaked, and the emerging nations are playing catch up. That’s where the growth will be and it’s the direction capital will flow.

        The big problem with the US suburban model is that it is extremely energy inefficient and cost-inefficient. A variety of factors masked this since WWII, including underpriced energy and easy credit that was also underpriced in terms of risk. “What is underpriced gets over-consumed,” and that cannot go on forever. The US is entering a new phase and many US businesses are already preparing for it, realizing that the days of eccessive credit-driven demand are winding down, as a long financial cycle ends and the foundation is laid for a new cycle that won’t peak again for decades.

        Moreover, without strong government promotion of the “ownership society,” high levels of home ownership are not possible to maintain. That seems to be ending, too, with the recognition that building more MacMansions and spreading out further is unsustainable. The US housing market is going to downsize, as we work through years of excess inventory in residential and commercial real estate. A lot of RE is also going to be repurposed as age of the mall ends, too. The present trend is for more workers to work at home through digital networking instead of commuting to the office. This wil reduce the need for petro-energy and automobiles. For example, where two or three vehicles were required one might suffice.

        There are going to be more apartment dwellers and that means either renters or condo-owners. With urbanization, public transportation will increase within cities and between cities, although travel will be less necessary owing to digital communication, which will soon be 3D and lifelike. Traditional media will be replaced with more diversified and tightly targeted content delivered digitally. Employment will grow markedly in these fields. Social networking will also explode globally and it will be simple to link up with like minds and hearts. That will automatically create new markets for targeted products and services.

        The next big trend in the US is the moving of the boomers into retirement and the then the cemetery. That is going to change US demographics and culture drastically, and with it the economy. There will be a last big surge of the boomers, and then a new multicultural US in a digital world without traditional borders. Those borders may persist on maps, but they will disappear from minds as the world becomes more homogenous and interdependent.

        Of course, this is not all going to happen smoothy, but it fits and starts, and with a lot of opposition from interests vested in the status quo, outmoded institutions, and crystallized thinking. But it is inevitably going to happen if presently developing trends persist. And, of course, new ones will develop, too, with innovation and technology. I expect to see a boom in alternative energy as conventional energy prices rise owing to supply bottlenecks and repricing in light of externalities. I also expect to see a lot of small entrepreneurs entering markets with tightly targeted niche products that can be distributed through the net using social networking.

        In short traditional ways of living and doing business are changing, and there is a lot of opportunity out there for innovators.

        On the downside, it is going to be difficult to integrate the world into a globalized culture and global economy. This will inevitably result in dissension and conflict, and some hot wars. There is always a danger of things escalating. There is also the increasing concern over global climate change and the challenges its brings, like water shortages and droughts. It also increases the likelihood of epidemics. On the bright side, these challenges are solvable, and there will be innovative solutions coming, especially in the field of medicine.

        Health care is going to be one of the big winners in the coming years as boomers demand more. This will result in a gearing up that will produce lasting effects and lots of innovation. Over time, more public funding will go to health care and ways will be found to make it widely affordable. On the way to this, medical tourism will increase.

        Well, I could go on but you get the picture. Big changes are in store, so stay loose. It’s going to be a mixed bag, with a lot of opportunity but a lot of challenges and danger, too.

      5. The US is foregoing one of its greatest geographical advantages, Latin America, and even forcing it to the left and into China’s lap.

        Western Hemispheric integration under US leadership and partnership is the obvious way to go. It will eventually happen, but not necessarily the way the US would like if it waits too long. Unfortunately, the US doesn’t see itself in the position of needing it yet. Very short-sighted. Of course, the US does need Latin workers now, and is disingenuously calling them migrant workers by day and illegal immigrants by night.

        We need not only a immigration and guest workers program, but also more bilateral relationships with Central and South America with a view to hemispheric integration. A good first step would be to require Spanish as a second language in US schools and English in Latin American schools. This would go a long way to removing cultural barriers. Actually cross-over music and salsa are doing a good job of it, too. This is a trend that government would kick start and support if they were wise instead of venal and corrupt.

      6. LOL. Tom, you really are over the top. I wonder what you would have written in 1980 or so when things really did look dire. Maybe nothing because you probably couldn’t afford to own a TRS-80 back then. :^P

      7. ESM, I started this thinking in the late Sixties, when I encountered people like Bucky Fuller, Ludwig von Bertalanffy, Abraham Maslow, etc. At that time I realized that there were a substantial number of people that were “counter-cultural” and that there was a market serving them — and I mean serving them, not making money off them. That is were I have lived since that time, and it has been a great ride with a lot of terrific people and some amazing adventures. It’s a great world out there if you avoid the swamps and sink holes, and stick to climbing the mountains.

      8. Lol!

        Over the counter counter culture! It is those guys making big bucks from everyone else, or have you not noticed rise of “professional Left”?

        I now understan why you spout such dated nonsense though

      1. “Seniors in particular are feeling the pinch of low rates. But I’d hike social sec benefits rather than increase rates if we wanted them to have more income.”

        That would appear to be a riff on the zero natural interest rate.

        I’ve read about the mechanical derivation of the zero natural rate, including your piece on this site.

        The zero natural rate shifts monetary policy from interest rates to taxation.

        And it resets income distribution by stripping out a (normally) nominally positive premium for the risk free rate from all investment income.

        I’ve always wondered about the paradox of the risk free rate.

        It’s risky to the degree the central bank sets it, actively, currently.

        Did Keynes say anything about the idea of a zero natural rate in the General Theory?

        If so, can you reference the chapter?

      2. Thinking about it, Keynes wrote the General Theory when the gold standard was still in play, I believe.

        If that’s the case, then the zero natural rate concept wasn’t really an operational option within the prevailing monetary architecture.

        I’m revealing my ignorance a bit here, but did Keynes effectively anticipate an MMT type interpretation of fiat currency operational alternatives?

        Or is there a dividing line there that is the essence of the “Post Keynesian” progression?

      3. Try Chapter 24.

        I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

        Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

      4. Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead

      5. He is sounding like Christian railing against usury there.

        Big irony is that Keynes wrote at time when there was gold standard — MMT not really applicable.

      6. Thanks, BFG.


        “together with some margin to cover risk”

        That appears to be a risk premium, whether it’s the credit risk interest rate spread over a zero risk free rate, or over a non zero risk free rate.

        “yet it would mean the euthanasia of the rentier”

        Famous words – but are they consistent with “some margin to cover risk”?

        He seems to be arguing that scarcity is impossible, assuming that the market clears at “some margin to cover risk”.

        “An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant.”

        So rates have to go up when investment can’t sustain consumption at full employment.

        “But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.”

        Deficit spending and net financial assets?

      7. Central bank operating procedures were figured out by a person called Sir Dennis Holme Robertson http://www.amazon.co.uk/Money-Cambridge-Economic-Handbook-Robertson/dp/B0007E5NF6 in 1922

        Keynes got a lot of things right and a lot of things wrong. Neoclassicals picked up the latter.

        The interaction of central banks with banks is dependent on interaction of banks with firms and households and the Post Keynesians figured out all of this. Basil Moore’s text Horizontalists and Verticalists was the best writeup of his work and others such as Nicholas Kaldor. Even in a Gold Standard setup, central banks can’t do anything except play around with interest rates. Anything else they do will lead to a cataclysmic failure of the payments system. The central banks may have preached one thing and practiced another but in reality they were setting rates but with a different reaction function.

        Personally I do not think that zero interest rates is achievable. It is unstable. Let us say that all nations in a floating rate regime play a cooperative game and set the rates to zero. A slight perturbation can cause one nation to increase its rates and others may have to follow. That does not mean that I am saying that central banks have no control. They have it at each point in time. When business cycles are not similar, it will be difficult to resist because it has effects on other things such as currency.

        The PK belief is that demand falls due to higher rates because of redistribution of income to the rentier class and also due to a fall in employment. Also prices rise when rates are increased causing more shortage of demand. Neoclassicals believe that inflation is a result of increase in demand which PKEists think is chimerical.

  5. I’m a fan. Why do you say it’s “dated”, Zanon. I’d say Tom has kept his outlook up-to-date over the years. Once you’ve got the big picture, it’s easier to understand the details…

    1. Tom Hickey says that his eyes open in “late sixties” and he has lived there ever since. I agree, nothing new has entered his brain since then.

      this is the big joke — the sixties won, and look at california today! How does this fit into “big picture”? How does a sense of history that begins in 1930s claim to be “big picture”?

      1. Zanon, you seem to have a strange idea of the Sixties as a bunch of DFH’s that ended up either becoming yuppies or dope dealers. Yes, a lot of people did go in that direction, but there were a lot of people that didn’t.

        The fundamental message was, question authority. It began with the Free Speech movement at Berkeley, but the catalyst was the Vietnam conflict, which became deeply unpopular with draft-age youth as it dragged on. The Nixon fiasco further undermined trust in authority and convention. A whole new mindset was developing and spreading quickly. It became known as the “New Age.”

        Along with the Sixties pop culture, with which the counter-cultural revolution is often equated, there was also an influential group that transformed US culture in significant ways. For example, Abraham Maslow succeeded in dethroning Harvard doyen B. F. Skinner’s behaviorism that had dominated psych departments, for instance, This is similar to MMT replacing the new dominant New Classicalism and New Keynesianism, its bastard child. That led to the transpersonal revolution in psych.

        One consequence of this institutional change in psych was that formerly “mystical” practices like meditation that were being introduced from the East in the ’60’s and 70’s were “blessed” by institutional psychology, and they eventually went mainstream. Now they are regularly prescribed by physicians to reduce stress and improve functioning. The popularity of Hatha Yoga is an off-shoot of this. Millions of people now do their asanas regularly.

        Alternative healing began the march to integrative medicine and the integration of natural healing, Traditional Chinese Medicine, and Ayurveda into the medical repertoire so that now non-allopathic health care is a multibillion dollar industry that has gone mainstream, too. NIH and NIMH are also putting weight behind this R&D now.

        Stewart Brand and the Portola Institute made alternative technologies popular, as well as comprehensive thinkers like Bucky Fuller. The World Future Society was founded in Washington, DC, in 1966 and since has become a Rand Corp of alternatives. These kinds of endeavor began small, as countercultural “start-ups.” But they have grown and prospered, and joined the list of respected institutions.

        Apple Computer is another good example of the innovation that occurred at this juncture, as two forward looking young men realized the possibilities of digital electronics, specifically for education. Apple has grown into one of the most innovative and influential cultural phenomena of all time, with global reach. The digital revolution has accelerated the knowledge/information revolution that is replacing the industrial revolution, and transforming the world.

        The counterculture also produced its own cultural music, art, literature, and even myth — Star Wars as conceived and produced as a modern myth, with the assistance of myth master and countercultural hero, Joseph Campbell.

        Even in religion, institutional religion has been increasingly challenged by personal spirituality. As comedian Lenny Bruce put it, “People are leaving the church in droves — and returning to God.”

        The list goes on.

        These things and more were trends that people like me not only noticed but got heavily involved in, because we liked the adventure of being on the cutting edge. That’s one reason I am interested in MMT. It is on the leading edge of a coming transformation of economic thinking, just as Maslow knocked Skinner off his pedestal in psych.

      2. Toms Hickey:

        LOL! You are too funny — I think the hippies became college professors, judges, community organizers, and various other parts of the Professional Left (as well known right-winter Robert Gibbs put it).

        They then put in place Black/Latino/Gay/Women/Transvestite Study culture which, 50 years laters, gives us a California where:
        – illegal underage hondouran drug dealers are protected from Federal Government and paid $4000/month
        – brain injured children have services cut
        – big discussion is how much to tax pot (and how unionized pot growers should be)
        – entire cities become murderous abaotoir hell hole
        – school system go from best in nation, to worst

        authority has not so much been questioned as entirely eviscerated. and instead of paradise we get compton, oakland, and frankly much of san franciso. LA Times has great series of articles on school teachers who get paid full salary but don’t show up to school because they molest children, but of course cannot be fired. This is frankly better for children than school teacher who are so bad, children regress under their care, but also cannot be fired.

        there is no authority. in 50 years, there will be even less and I fully expect to see technicals roving up and down 101. Manned by the “oppressed” no doubt

        Yes, music is much better, but I think in this day of sonic depravity we might have mined out that one blessing.

      3. Zanon: there is no authority. in 50 years, there will be even less and I fully expect to see technicals roving up and down 101. Manned by the “oppressed” no doubt

        I think that there is a high probability of this transpiring, actually, but it won’t be the result of the “professional left.” It will be the result of gross mismanagement by the professional political class, enabled by their oligarch masters, all of whom will be living in fortresses aka “gated communities,” like I witnessed in the Manila of the ’60’s and a few years ago when I was in Mexico City.

        This body won’t be alive then, but if it were, I would plan to be be living in a sustainable community running on alternative energy, remotely located in some benign place like rural Iowa that is relatively isolated from transportation. Moreover, I think that things could turn ugly a lot sooner than forty years from now. Clouds are gathering, and the dominant trends are troubling, as I wrote above. It will take a miracle to reverse course before the bill comes due, and that would mean waking up and listening to alternative proposed by “the professional left,” among whom I count the MMT’ers.

        BTW, most of the professional left are more libertarians of the left than old style lefties. They see society ideally composed of self-sufficient individuals that voluntarily cooperate for mutual benefit, and they forge relationships on that basis. Most of the people I know aren’t waiting around for government to solve their problems, but they are networking and creating alternatives instead of stockpiling arms, ammo and food in bunkers.

        While there is a current of progress beneath the surface, the waves are rising and storm is brewing. The old rules of the game are breaking down, and new ones have not yet risen to replace them. Only the adventurous are going to enjoy what’s in store. Believe me, the late Sixties and early Seventies weren’t always all that much fun, there was also the tear gas and billy clubs. People that weren’t there tend to forget that side of it. I suspect that we will see this again before too long if things stay on the present course, or take a turn rightward. The future is never smooth and linear. There’s bound to be shocks that will prove to be tipping points, and in this fragile environment that can easily produce reverberating repercussions.

      4. BTW, most of the professional left are more libertarians of the left than old style lefties. They see society ideally composed of self-sufficient individuals that voluntarily cooperate for mutual benefit, and they forge relationships on that basis.

        You really are still living in 1968 — high on pot!

        The Professional Left is Lesbian/Black/Transgender study department at Harvard. Not libertarian. It is huge phalanx of Government and Non Government department, bureucracy, think tank, community group etc. etc. who meddle and do one damn thing after the next, all awful. I live in California, near San Francisco, which is ground zero for hippie and for Professional Left, and it is not libertarian in the slightest.

        And where did you think root of “gross mismanagement by professional political classes” came from? Anyone with a brain, so not you, finds it plain as nose on their face that paying illegal hondouran underage drug dealer $4000/mo to live in San Francisco is “gross mismanagement”.

        The combination of policy, politic, etc that created this “gross mismanagement” has a clear root — leading right back to 1968 (and earlier still).

        I hope you enjoy eating your organically grown vegetables in your yurt as the technical pulls up. This is scene that play out every day in mogidhisu. Good news though — no authority left to question!

      5. I actually like BF Skinner’s work. There is a time and place for treating people like children, and that would be elementary school. For teaching basic academic skills, behaviorist methods work great.

        As to treating adults like children, I agree that old Skinner was rather creepy.

        Zanon, you’re not looking at the big picture. California makes other states more livable by skimming off a large chunk of the rest of the country’s malcontents, flakes and mentally ill. Its like one big sanctuary city.

      6. Zanon, California still has the 7th (thereabout) largest economy in the world. Why hasn’t Venture capital fled if things are so bad?

      7. Why hasn’t Zanon fled if things are so bad? I’m sure there are lots of transgender-free zones nearby that would welcome the arrival of a ranting blogger ;-).

        Or to put it economically: the same forces that attract Zanons to California (I’m guessing he’s not originally from there, correct me if I’m wrong) obviously also attract characters from other spheres.

      8. Beowulf: I actually like BF Skinner’s work.

        I am not saying that Skinner and Behaviorism have nothing to say. What I meant was that prior to Maslow and the rise of Humanistic and Transpersonal Psych, Skinner and the behaviorists had successfully marginalized everyone else and dominated academic psychology in the US to the exclusion of other views. Harvard doyen W. V. Quine had a similar lock on academic philosophy at the time. I chose to pursue grad study at Georgetown, since it was one of the only schools in the US offering a historical approach and many of the faculty were European. Again, I don’t want to diss Quine, and I think he had important things to say. But he was not the only voice in town with something to say, either.

        We see a similar situation in the US today in economics. One of the few universities with a heterodox economics contingent was Notre Dame, and they just shut it down.

      9. BTW, Beowulf, Skinner’s work was an inspiration for an intentional community called Twin Oaks in rural Virginia. The original inspiration was Skinner’s novel, Walden Two. Skinner was bemused by it. I liked Walden Two, and I visited the community in the early ’70’s, when I was involved with an experimental intentional community while I was a grad student.

        Twin Oaks was founded in 1967 and is still going strong. Hereis their site.

      10. beowulf: California is primarily big sanctuary city for illegal mexicans. Same people who have turned Juarez in charnal house. But, the Professional Left of Gross Mismanagement scream the tired old RACIS card when anyone suggests that illegal might, possible, be illegal. Or at least a bad idea.

        jcmccutcheon: good question, and california is like US writ small. It has positive and negative elements, and the positive elements in this case outweigh the negative elements. You want more of good, less of bad. Professional Left policy and politic produces reverse.

        The Tom Hickey “question authority” approach will lead to gated community surrounded by barbarian on technical, because it is impossible to enforce any sensible civilized law. You know in San Francisco, you can defecate on any doorway you want, and ejaculate out of window onto passerby, but plastic bag are banned from supermarket. Only law abiding are bound by laws — it is joke, and we got here because of too much “question authority” and not enough “do sensible, responsible thing”.

        oliver: See response to jcmccutcheon. Mix of good and bad. There are definitely areas of California I will not enter for fear of life. Muni is included in that, if you have ever looked up their hit rate. Still, it is not “like it or lump it” situation. When you know source of bad action, you target source.

        And I have no problem with transgender peoples (although i do not believe taxpayers should subsidize academic department dedicated to their study). I simply want responsible governance, and “questioning authority” a la Toms Hickey has not created this — it has produced insanity.

        SF wants to host Americas Cup. Fine. It has petitioned State to exempt it from own Environmental Impact laws. There are about 50 different agency, community group, etc. that need be consulted and get approval so marina etc. can be held for cup. This is not good governance, this is monkey house in zoo.

        with more murder.

        Toms Hickey: I can think of nothing less relevant to change that happened in Academy during 60s and 70s and Skinner up and down. Thank you though for demonstrating your insane myopia

      11. I see much of the illegal immigration issue as a corporate subsidy. Corps get cheap labor and govt supports it with social assistance at public expense.

      12. It is part corporate subsidy and also part wealthy subsidy (as Latinos often work as domestic maid, Gardner, handyman)

        Primarily though it is to create Democratic vote bank. Labour in uk pursue similar policy. Politicians do not like their electorate so are creating a new one

      13. I have used Pirsig’s work (Zen and the Art of Motorcycle Maintenance was his first and Lila an elaboration) in teaching introductory philosophy. His dialectical method and philosophy of quality as foundational are similar to Plato’s approach since Pirsig uses Plato as a model. Plato used to be the standard in introducing philosophy, e.g., The Republic, but contemporary students take to Pirsig much better, since Plato’s approach seems dated to them after over two millennia.

        The quality vs quantity debate is central to social science, since science is chiefly quantitative and quality is difficult to impossible to quantify adequately. Moreover, quality is often considered “subjective” in the pejorative sense of “opinion” in comparison to “objective,” implying “truth.” However, social sciences study behavior, and behavior is the result of choice.

        Choice is subjective, and it depends on criteria. Having a sound theory of choice and carefully examining qualitative standards is essential to social sciences. In equating economics with econometrics, which has been increasingly the trend in the mainstream, the aspect of quality gets submerged. Moreover, mainstream economists have simply make up a theory of choice that make their models work, not bothering to look outside of their narrow silos to see what of relevance might be gleaned from other fields. Research on economics papers reveal few citations from outside the silo.

      14. Zanon, I think you’re right about low wage illegal immigration being both a corporate and wealth subsidy; sort of a wage subsidy for factory owners and a childcare tax credit for rich families.

        I agree with most of what Michael Lind (one of the sharpest liberal columnists) wrote in the linked column, especially this part…
        If we are concerned about polarizing inequality in the U.S., then a shift from unskilled to skilled immigration that leads to lower salaries for college-educated professionals and higher wages for janitors, nursing aides and other less-skilled workers can produce a more equal America without the need for massive after-tax redistribution.

      15. Yes, but you cannot guarantee that these skilled immigrants will be reliable voters so best keep importing from Jaurez. and call anyone who points out this is madness a racis bigot. it is left wing way

  6. Interesting article, Tom. I still insist there is a difference, if not an inverse relationship, between information efficiency and energy efficiency. The inhabitants of cities like Dubai and Hong Kong have horrific carbon footprints and show no signs of wanting to improve on that. Carbon gobbling amenities are what make life bearable there. A well paying job and precisely these amenities are what makes them so attractive in the first place. I claim the same can be said if you compare places like Mumbai and Lagos with their rural surroundings. All forms of perceived progress have until now been accompanied by an increase in energy consumption. Urbanisation, if it can be considered an improvement at all, is no exception, so I see no point in vilifying suburbia in this respect. And I say this as a staunch, bike-riding, organic food munching, architect urbanite. You know, the ‘Mac guy’ ;-).

    1. Whoops, I slipped down the ranks there. I was replying to Tom Hickey @ August 24th, 2010 at 11:00 am und #4…

    2. Oliver, I am not “vilifying” suburbia here, although I have plenty to say about that wasteland in another context. I am talking trend and sustainability. My research leads me to think that suburbia as it exists in the US, with long, gas-guzzling commutes, is going the way of the buggy whip, and the US auto market are it presently exists with it. Of course, this is not going to happen overnight, but we did witness some pretty big changes in the US when gas was at the $4 level. That more than pinched discretionary spending for a lot people and led to retrenchment.

      I am not an architect but I have a friend who is. We were standing on the other bank of the river looking at the Boston skyline one day a couple of years ago, and he was explaining to me the cost saving that can be gained from building energy-efficient high rises. BTW, the building in which I was staying was new construction and energy-efficient, and the utilities except for water were included in the rent, which was well below that of comparable non-energy efficient buildings when separately billed utility bills were figured in.

      I don’t disagree that all forms of progress are generally accompanied with increased energy use. What I am saying is that the planet’s ability to provide and absorb carbon-based energy increases is limited and system dependent on cheap available carbon-based energy are going to be phased out in the future in favor of sustainable alternatives, like solar, wind, geothermal, and tide-produced energy, which is pollution-free and unlimited in scope and scale once production, distribution and storage problems are resolved. This will be a matter of gradual replacement, and in the transition way will be found to reduce the carbon footprint through conservation, pollution control devices, more efficient engines, etc.

      Even people who think that climate change is not a problem should realize that pollution is. It is very costly in terms of degradation of quality of life and human resources, and the medical cost is also astronomical. Everyone living it cities is affected and most people living in suburbia, too. Over three quarters of the people living in the US are living in toxic environments that are affecting their health adversely. Thirty years ago a lot of cities in emerging nations were highly polluted to the point of being noxious, and that trend is spreading and worsening. I was recently talking to a friend who was telling me that he now travels to Beijing every six weeks. I said, “That’s nice.” He responded in disgust, “The pollution is so bad you could cut it with a knife.”

      Of course, we can just do nothing and watch respiratory disease and cancer rates rise and lifespan decline. That’s an option, too, I guess.

  7. I’m partial to your sentiment, believe me.

    I am talking trend and sustainability

    I’m just saying the current trend is no more energetically sustainable than what it’s replacing. I spent 20 years living in one of those trends and let’s just say sustainability is not an adjective I’d use to describe it. High rise buildings are not particularly efficient in and of themselves. The amount of concrete (cement also takes huge amounts of energy to produce, btw.) increases non-linearly with the hight of a building. There is an optimal size for buildings from an energy and planning perspective which is often not attained because the price of land dictates otherwise. Wood is a far more efficient construction material than concrete, for example.


    I would say that certain kinds of semi-dense suburban landscapes (I can’t speak for the US as I’ve never been there) are no further away from an optimum than most cities are. Take away the need to commute by mixing functions (i.e. live and work closer), create quality sub-centres for leisure and identification, improve massively on building standards (from what I hear, US standards are crapperoos) and you could turn faceless suburban wastelands into places of high quality and energy efficiency. An optimal urban fabric does not necessarily need to be super dense, especially in a large country like the US. And high-tech is not always the best way forward.

    1. Agreed. Bucky Fuller observed the level of inefficiency/waste in architecture/construction fifty to sixty years ago in comparison with intelligent design standards. H e recommended adopting the kind of think that goes into naval and aeronautical design, calling it “design science.”

      Are you familiar with A Pattern Language?

      BTW, US suburbs are generally sprawling, monotonous, boring, and ugly, in addition to inefficient and wasteful.

    2. correction to my post: sustainability is not an adjective, period 😀

      Thanks, I’m not very familiar with Buckminster Fuller nor with the book, only remember pictures of the geodesic dome from uni. Cool stuff and there was a lot of interesting think coming out at that time. What was actually built has not withstood the test of time particularly well though. Most cities are busy removing the atrocities committed in the 60s and 70s. The Big Dig in Boston comes to mind. I’m too young to have experienced any of it first hand, but from a modern perspective, the unbridled optimism of the time certainly had its down sides. There was a project to fill in the whole lake of Zurich for land reclamation for some megalomanic project. Good thing the Swiss are not known for their efficient decision making process…


      1. A Pattern Language is a book by Christopher Alexander, et al (1977)

        A Pattern Language: Towns, Buildings, Construction is a 1977 book on architecture, urban design, and community livability. It was authored by Christopher Alexander, Sara Ishikawa and Murray Silverstein of the Center for Environmental Structure of Berkeley, California, with writing credits also to Max Jacobson, Ingrid Fiksdahl-King and Shlomo Angel. Twenty five years after its publication, it is still one of the best-selling books on architecture.

        The book is a substantive, illustrated discussion of a pattern languagederived from traditional architecture, with 253 unitary patterns such asMain Gateways given a treatment over several pages. It is written as a set of rules that are invoked by circumstances. This is a form that a theoretical mathematician or computer scientist might call a generative grammar.

        Here is Alexander’s web site.

      2. I am actually big fan of christopher alexander.

        unfortunately, he has been total failure, both on his own terms and the terms of his discipline.

      3. I realize why that book ” A Pattern Language” rang a bell. It was part of of my Env. Design curriculum in the late 70s early 80s.


    3. Have you seen the second Zeitgeist movie? Sounds like it’d be up your alley. The filmmaker was a maniac for bringing into the first Zeitgeist movie religion and 9/11 truthiness (taking anti and pro positions, respectively) before getting around to the movie’s core, reform of the monetary system. Out of paradigm, of course, but he made some interesting points.

      The second film (Zeitgeist: Addendum) starts on the monetary system and segues to discussing, “futurist Jacque Fresco. The film looks at Fresco’s proposal of a “resource-based economy”, which he states would create abundance, is environmentally friendly and sustainable.”

      A little too flower power for my taste, but that Jacque Fresco is an interesting fellow (I suggested strawberry picker look to him as a potential guru a while back). :o)

  8. Tom, don’t forget the crucial influence of the Frankfort school on the sixties. Also, its prolongation in the French student movement. Then there is the Vietnam war–an absolutely crucial watershed. In pop culture, England was important–Beatles, Rolling Stones, etc. In a sense, “freedom” is the watchword; in another sense, some would say “quelle degringolade!” It was in large measure an age of illusions, and now the chickens have come to roost, as it were.

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