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Thursday, November 3, 2016

Are Central Bankers Pirates with a Conscience or simply Clueless?

I get feeds from conservative websites. This lets me see "what the other side" of arguments are. Usually I find that whatever they are saying reflects a point of view I disagree with. But they have to argue based on facts, and any argument based on facts is subject to debate. No article reflects this more than the article I'm reviewing here:

"Do Central Bankers Know What They're Doing Anymore?" by Kevin Dowd

Review

If you accept his central premise, then his arguments are on point. However I cannot accept his central Premise, and indeed I think anyone in the Modern Money Theory (movement) or who is a Post Keynesian would argue that his central premise is really what is wrong with Banking. Moreover it is why the Bankers are caught in no-win situations. They have no clue because the industry they regulate is self-destructive and all that they do as long as they accept that central premise will fail.

Separation of Money and State

He tries to put it in government principles:

"Separating Money and State" [Dowd]

The Tory Revolt

For the Pirates, Kevin Dowd describes how the "Tories" wanted the Bank of England to "be operationally independent of governments":

"We [the Tory “survivors”] decided not to demur. In private, we had considered doing the same thing ourselves. The idea that central banks should be free of political pressures and the electoral cycle as they set interest rates had become a prevailing one across the world — with good reason after the many wild swings in inflation and interest rates over previous decades." [Dowd]

The problem is that the Tory Bankers don't really want the bank to be free of politics, they want it free of "popular considerations" and to serve their "private, separate interest" first. That this is the definition of Tyranny according to Locke Doesn't occur to them. Of course John Locke was a Whig and these are Tories, a word that derives from a word for highwaymen and pirates ("toraidhe"). So this should be no surprise. But Tories dominate Banking and Finance world-wide and they especially dominate Central Banking, which has roots in pirateering and colonialism.

So separating the central banks from "political concerns" is really letting the central banks govern money for, by and of the interests of the banking system, without considering concepts of commonwealth, common-weal, or common sense. With pretty much inevitable results.

Inevitable results

Dowd rightly notes that PM Brown and the Tories got what they wanted. And seem to be misusing it. Referencing William Hague he notes how:

"Hague goes on to suggest that central bankers have badly misused the powers that were granted them and are “now in deep trouble,” continuing to pursue “emergency policies” that are “becoming steadily more unpopular and counter-productive.” Unless a course correction comes soon, central bankers “will find their independence increasingly under attack.” [Dowd]

He continues by noting that:

"In 2008 the central banks reacted to a massive crisis they had completely failed to foresee by cutting rates to record lows and embarking on “quantitative easing” … The trouble is that eight years later they are, to varying degrees, still doing it. Like doctors keeping their patients on a drip many years after an operation, they are losing credibility and producing very dangerous side effects." [Dowd]

Clearly quantitative easing isn't removing liquidity traps, freeing investment, putting workers back to work or much of anything except slowing a slide to misery for just about everyone, including the Tory Class. Therefor the question becomes;

"why are these “emergency policies” counter-productive?"

Wrong Diagnosis, Wrong Prescription

I think we can agree with Dowd and Hague that they aren't working. Indeed and naturally Tories like Dowd and Martin Hutchinson would use the failures to justify doubling down on destructive policies. Indeed they claim the "Overton Window" is moving in their direction, which is code for the willingness of the general public to swallow painful "medicines." They might be right. The Tories have done this before. It doesn't work, but it appears to improve things when Central Bank policy is failing. Dowd is right that "central banks are facing a legitimation crisis." But while he borrows Marxian language (actually term coined by Jürgen Habermas) but his prescription is anything but Marxist!

He rightly points out:

"He then outlines no less than 10 serious drawbacks from ZIRP and QE that could be “politically explosive or economically unwise if continued indefinitely”:

  1. Savers find they can’t earn a worthwhile return and are driven into riskier assets whose prices rise further.
  2. Asset holders get much richer, but others are left out, seriously exacerbating social and political divides and fueling the anger behind populist campaigns.
  3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than finance expansion.
  4. Banks find it harder to run a viable business, a problem very evident now in Germany and Italy.
  5. Those who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, i.e., low-interest rates cause those people to spend less, not more.
  6. Companies have an incentive to use borrowed money to buy back shares rather than spend the money on new productive investments. Central banks are buying up corporate bonds, not just government bonds, so they are acquiring risky assets themselves and giving preference to some companies over others.
  7. Zombie companies are allowed to stay in business only because they can borrow so cheaply, which drags down productivity. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash when it does come to an end.
  8. When people see emergency measures going on for nearly a decade it undermines their confidence in central bankers, whom they think have lost the plot.

[Dowd]

A Classic Liquidity Trap

All of these are caused by the inability of the banking system to move investment into actual capital spending and out of reserves. My friend Kimbal Corson ties this to hoarding of liquidity. This creates a classic and persistent overall liquidity trap as described by John Maynard Keynes, but not amenable to using the banking system to fix under current rules. It requires fiscal measures, but those are constrained by the need for governments to borrow to pay for those measures. Around the world entire nations are trapped by bad central banking policies. Why?

Well for Dowd, Hague and Hutchinson the solution requires pain. hard choices:

"I am not an economist but I have come to the conclusion that central banks collectively have now indeed lost the plot. The whole point of their independence was that they could be brave enough to make people confront reality. Yet in reality, they are blowing up a bubble of make-believe money to avoid immediate pain, except for penalizing the poor and the prudent." [Dowd]

Reality for Tories = Pain

Make people confront reality == foreclosures, layoffs, business closures. Yet QE just draws out that same process into a slow torture. The solution they want is for a condominium of Central Banks to

"no single central bank could reverse these policies without causing a recession for their own country, unless there was a coordinated move by all central bankers to gradually raise interest rates." [Dowd]

Doing it in Concert might cause World Wide Depression

Not only are the central bankers clueless, but so are Dowd, Hague and Hutchinson. Their "solution" would benefit the financial sector but not necessarily do anything for workers, small business or others. But they face a situation where the money supply is not sovereign anywhere! And this is the result of not having liquidity in the system. Bankers don't lend because they know they won't get returns. People can't borrow because they don't have the credit. They don't have the credit because they don't have the money. They don't have the money because those who have it won't invest. That is a Keynesian liquidity trap on a world scale. He notes:

"The policies of any one central bank may well be perfectly rational ... But so is a decision by any one sheep to run with the flock when in danger. The trouble is that the whole flock might be heading for a cliff." [Dowd]

And if they act in concert their is no guarantee that raising interest rates will not send the whole world off that cliff. To the Tories of banking not raising interest rates is the disaster. But the real disaster is that bankers are being forced to deal with Governing issues they are incompetent to fix. Everyone in the Post Keynesian/MMT movement knows that this trap requires Fiscal spending and money going to the right hands for the right purposes. QE just goes to the wrong hands for the wrong reasons.

Wrong Hands for Wrong Reasons

"I have bad news for them. The accumulating effects of loose monetary policy globally are intensely political. When pension funds renege on promises, or inequality widens further, or savers become desperate, huge public and political anger is gong to burst over the heads of the world’s central banks."" [Dowd]

The real problem is that the "loose money" is in the hands of people not prepared to spend on actual capital or things that will break the worldwide liquidity trap. QE puts printed money in the hands of privateers, speculators and lenders with no one to lend to. Without a means to dry out excess reserves it just adds to the reserves of banks and lets them concentrate their businesses even more.

Dowd quotes Hague's prescription:

"The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end." [Dowd]

One of my friends demonstrated mathematically that such increases in interest rates drive inequality and commodity inflation (though they depress wages). However if interest rates in the commercial sector go up while Governments have the resources to spend money into existence and invest in needed services and infrastructure, then that is no longer such an issue. Using MMT principles; farmers are fronted the money for seed and tools rather than having to borrow in such a way that they get no benefit from a mediocre harvest. Cities fix roads and highways without running out of money because the money lent is paid for with tax collections at the end of the seasons. The Tories consider such "funny money" but I'm sure they'll pay their taxes with it if it is actual legal tender.

Recession as a "Cure" for QE that is worse than the disease

To the wealthy Tories of banking, the only solution that is acceptable is for the USA to raise its interest rates so that other countries will be forced to follow suit and bankers can begin loaning at usury again. Raising interest rates will not work. It will simply start to hurt folks who need to borrow money and depress the ability of local government to spend on local needs. Which just drives the centralization and impoverisment cycle.

But they are right that all the countries need to work in concert. What they need to do is to:

  1. raise taxes uniformly and progressively on unearned incomes from rent and speculation while protecting basic income.
  2. Issue notes at zero interest to local and general government backed by expected tax collections or for productive projects.
  3. Use MMT principles to invest in infrastructure, markets and tax back unearned profits from the money privilege.
  4. Tax monopolies out of existence or into management as public utilities for the general good.
  5. Protect resources put back into the economy from taxation so that there is incentive not to hoard liquid wealth.
  6. Enable governments to engage in fiscal policy without usurious burden on their citizens.
  7. Give countries credit for their exports at zero interest and let them spend that on imports.

This is in draft form -- I have a couple of related pieces to write before it will be a finished product.

Tories and Whigs
"Word Tory derived from the Irish toraidhe ‘outlaw, highwayman,’ from tóir ‘pursue.’ The word was used of Irish peasants dispossessed by English settlers and living as robbers, and extended to other marauders especially in the Scottish Highlands. It was then adopted circa 1679 as an abusive nickname for supporters of the Catholic James II." Also describes pirates, including legal pirates (privateers).
http://holtesthoughts.blogspot.com/2015/09/tories-and-whigs.html
"Do Central Bankers Know What They're Doing Anymore?" by Kevin Dowd
https://fee.org/articles/do-central-bankers-know-what-theyre-doing-anymore

Draft published 11/3/2016

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