Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘bubble economics

Krugman – one unflinching Keynesian economist

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Today employment in the US is lower than it was ten years ago, the stock market is lower than it was ten years ago. Keynesian economics has created a two tier society, with the investor-ownership class on one side and the working poor on the other.

Keynesianism has brought an end to the democratization of capital markets and helped to foster a politically inept society with less opportunities for fewer people. Before the advent of Keynesianism bubble economics occurred rarely and if it did it was linked to natural product cycles. Today bubble economics are part of the intricate mechanism of capital flows almost unhinged from natural product cycles and rather dependent on artificial and corrupt political initiatives.

US economist and Nobel laureate professor Krugman is a very outspoken representative of governement-spending-saved-the-world defenders of Keynesianism. In times he is so convinced by his ideas that he does not shy away from indulging policy makers with his nuggets of knowledge.

A good example for how far Mr. Krugman was willing to go, was his fierce attack of Germany finance minister Steinbrueck in December of last year. Steinbrueck warning of crass Keynesianism, in the midst of the largest government economic rescue effort in history, caught Mr. Krugman’s anger and earned Germany a collective boneheadedness from the professor.

Of course in the meantime more and more green-shoots are becoming evident and most national economies have stopped their abysmal plunge, with some even showing humble signs of growth in the second quarter. Mr. Krugman and other Keynesian economists find themselves now in a somewhat awkward position having to defend themselves over their radical support for stimulus.

Professor Krugman ventures deep into wonkish territory in his defense for deficit spending and why we should not fear it in the context of higher interest rates. Interest rates are of course important because as a discount to future earnings they are the most important factor in determining our wealth. Deficits and interest rates are the topic of one of his most wonkish blog posts in the New York Times to date.

The core of professor Krugman’s post is a positive correlation between GDP and interest rates and a negative correlation between interest rates and deficits. The core fallacy of Keynesians is what follows, lower GDP merits higher deficit spending and nobody needs to fear high interest rates because they are inversely correlated and therefore lower with higher deficits. This is despite the fact that most would acknowledge that deficit spending is inflationary.

deficits-interestchart shows neg. correlation btw. T-Note interest rates and government deficit spending

Most economic formulas (S-I = G-T is the one Professor Krugman is using), to the contrary what economist want you to believe, are not universally true laws of nature like a physical law or even most scientific laws. Economists of course believe that the only true science is economics.

In mathematics a formula about events at some future time-horizon always acknowledges uncertainty of a predicted outcome inherent in its logical argument. Economists though using mathematics merely extrapolate a present situation into some future time-horizon rather than acknowledging uncertainty. In other words they think what is true now has to be true also in the future. It seems to me that Keynesians are the world’s champion in extrapolating the facts ad infinitum.

The problem is not i.f., deficit spending. The problem is rather not knowing when its enough and when to withdraw, not knowing when to hold ’em and when to fold ’em is the real problem. It is this uncertainty that’s inherent in their economic formulas and yet they do not account for it. Keynesians live for the here and now, they completely discount the future. The crisis of 2007,08,09 should be proof enough that it can’t be done.

Economists are wrong about the economy nine out of ten times. Some Keynesians think they are right because they have not been wrong so far. I got news for ya, not being caught with a lie is not the same thing as telling the truth.

Bernanke in a town-hall meeting, shopping for popularity

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Last Sunday Ben Bernanke, chairman of the Federal Reserve responded to questions from the public in a town-hall style meeting. For the first time in history an acting Federal Reserve chair stepped into the arena that is usually the prerogative of obligations among elected officials. We truly live in interesting times.

What could have provoked this extraordinary move by the chairman given the daunting unpopularity of cumulative actions taken by the Fed in the last twenty four months? The answer is already given in the question. Ben Bernanke is shopping for popularity in order to better his approval ratings. His term as chairman ends in January 31, 2010, when he is up for reappointment by president Obama.

I can only imagine it must have been scary and embarrassing for the chief to step in front of the very same audience he led down over the course of the last ten years. He certainly did not mean to inflict any harm upon his fellow countrymen, but together with his predecessor Greenspan he helped lay the foundations of a shaky economy based on bubble economics.

Sure he gave birth to many millionaires and even some billionaires, but for most people Greenspan’s and Bernanke’s policies were rather harmful. Certainly one cannot expect any sensational outcome of such meetings with both a preselected audience and preselected questions. Organizers won’t let that happen though the chairman won’t suffer any lasting damages. It would have been nice though to read Bernanke’s mind.

To his defense the chairman admitted that he was disgusted from bailing out giant Wall Street firms like AIG, Bear Stearns or Merrill Lynch and rescuing them from going bankrupt. Though we certainly respect his wish not to reside over a second Great Depression, of course we have to believe him that there were no other options at the time. I might also add we are not yet with absolute certainty out of the woods with regard to another Great one.

Asked about his too-big-to-fail policy he seemed to indicate sympathy for the public’s frustration and promised to make it better in the future. Though his credibility was called into question by reiterating his opposition to an independent outside audit of the Fed. Why no audit if he has nothing to hide? Yes there is the issue of independence of the Fed, but just how much independence was there say in the last ten years?!

The Federal bank closest to Wall Street, and therefore in a special position with regard to the nation’s largest financial institutions, is the Federal Reserve Bank of New York. During the financial crisis Federal Reserve and Treasury Department officials made all major decisions, but the New York Fed executed them.

In the meantime the New York Fed has been criticized as too close to Wall Street. William Poole, a former Fed president, missed a longer-run perspective among the Fed’s staff. They adopted a trader mentality instead and did not pay enough attention to a system skewed towards too much risk taking by numerous bailouts of large Wall Street firms.

The Fed’s board of directors is composed of powerful bankers and corporate titans like Jamie Dimon, the head of JPMorgan Chase, and Jeffrey Immelt, General Electric’s chief. Richard Fuld had to resign after Lehman’s bankruptcy and Stephen Friedman called it quits over a conflict of interest with the other board he served, of investment power house Goldman Sachs. The corporate-federal officials network seems too tight to ever disintegrate.

It is not only the Federal Reserve that has to fear for its independence. The lobbying departments of large financial institutions have expelled their tentacles even into the Financial accounting Standards Board (FASB) of the United States and the International Accounting Standards Board (IASB) of Europe.

According to a recent report by an international team of former regulators and corporate officials, the Financial crisis Advisory Group deplored efforts by politicians to prescribe changes on accounting standards. The integrity of valued assets on the books of financial institutions should not be called into question in an effort to save those institutions from potentially harmful bets gone awry. In April, 2009, FASB already caved in to heavy financial lobbying and paused fair-value accounting rules for illiquid assets.

Beside all the regulatory and statutory powers bestowed on elected or appointed officials their most potent tool still remains the integrity of the person and organization in question. It is by no means sufficient for Fed chair Bernanke to communicate his objection to the bailouts on Wall Street even if it is within such an elaborate setting of a town-hall meeting. There is not enough meet on the bone to undo what has already happened.

A Gallop poll, conducted in mid-July, found that only 30% rated the Fed as doing an excellent/good job. The bank had the lowest score out of nine government agencies and it was down sharply from the 53% who still approved of the Fed’s job in 2003. This time even the CIA and the Internal Revenue Service scored better than the Fed. Bernanke will have to do better. It will most certainly be like walking a tightrope.