Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 10 April 2016

Can central banks make 3 major mistakes in a row and stay independent?

Mistake 1

If you are going to blame anyone for not seeing the financial crisis coming, it would have to be central banks. They had the data that showed a massive increase in financial sector leverage. That should have rung alarm bells, but instead it produced at most muted notes of concern about attitudes to risk. It may have been an honest mistake, but a mistake it clearly was.

Mistake 2

Of course the main culprit for the slow recovery from the Great Recession was austerity, by which I mean premature fiscal consolidation. But the slow recovery also reflects a failure of monetary policy. In my view the biggest failure occurred very early on in the recession. Monetary policy makers should have said very clearly, both to politicians and to the public, that with interest rates at their lower bound they could no longer do their job effectively, and that fiscal stimulus would have helped them do that job. Central banks might have had the power to prevent austerity happening, but they failed to use it.

Monetary policy makers do not see it that way. They will cite the use of unconventional policy (but this was untested, and it is just not responsible to pretend otherwise), the risks of rising government debt (outside the ECB, non-existent; within the ECB, self-made), and during 2011 rising inflation. I think this last excuse is the only tenable one, but in the US at least the timing is wrong. The big mistake I note above occurred in 2009 and early 2010.

What could be mistake 3

The third big mistake may be being made right now in the UK and US. It could be called supply side pessimism. Central bankers want to ‘normalise’ their situation, by either saying they are no longer at the ZLB (UK) or by raising rates above the ZLB (US). They want to declare that they are back in control. But this involves writing off the capacity that appears to have been lost as a result of the Great Recession.

The UK and US situations are different. In the UK core inflation is below target, but some measures of capacity utilisation suggest there is no output gap. In the US core inflation is slightly above target, but a significant output gap still exists. In the UK the output gap estimates are being used to justify not cutting rates to their ZLB [1], while in the US it is the inflation numbers that help justify raising rates above the ZLB. (The ECB is still trying to stimulate the economy as much as it can, because core inflation is below target and there is an output gap, although predictably German economists [2] and politicians argue otherwise.)

I think these differences are details. In both cases the central bank is treating potential output as something that is independent of its own decisions and the level of actual output. In other words it is simply a coincidence that productivity growth slowed down significantly around the same time as the Great Recession. Or if it is not a coincidence, it represents an inevitable and permanent cost of a financial crisis.

Perhaps that is correct, but there has to be a fair chance that it is not. If it is not, by trying to adjust demand to this incorrectly perceived low level of supply central banks are wasting a huge amount of potential resources. Their excuses for doing this are not strong. It is not as if our models of aggregate supply and inflation are well developed and reliable, particularly if falls in unemployment simply represents labour itself adjusting to lower demand by, for example, keeping wages low. The real question to ask is whether firms with current technology would like to produce more if the demand for this output was there, and we do not have good data on that.

What central banks should be doing in these circumstances is allowing their economies to run hot for a time, even though this might produce some increase in inflation above target. If when that is done both price and wage inflation appear to be continuing to rise above target, while ‘supply’ shows no sign of increasing with demand, then pessimism will have been proved right and the central bank can easily pull things back. The costs of this experiment will not have been great, and is dwarfed by the costs of a mistake in the other direction.

It does not appear that the Bank of England or Fed are prepared to do that. If we subsequently find out that their supply side pessimism was incorrect (perhaps because inflation continues to spend more time below than above target, or more optimistically growth in some countries exceed current estimates of supply without generating ever rising inflation), this could spell the end of central bank independence. Three counts and you are definitely out?

I gain no pleasure in writing this. I think a set-up like the MPC is a good basic framework for taking interest rates decisions. But I find it increasingly difficult to persuade non-economists of this. The Great Moderation is becoming a distant memory clouded by more recent failures. The intellectual case that central bank independence has restricted our means of fighting recessions is strong, even though I believe it is also flawed. Mainstream economics remains pretty committed to central bank independence. But as we have seen with austerity, at the end of the day what mainstream economics thinks is not decisive when it comes to political decisions on economic matters. Those of us who support independence will have to hope it is more like a cat than a criminal.

Postscript (11/04/16). If you think that those who are antagonistic to central bank independence are only found on the left, look at the Republican party, or read this

[1] Unfortunately I think some of this survey data is not measuring what many think it is measuring. More importantly, not cutting rates after the Conservatives won the 2015 election was a major mistake. That victory represented two major deflationary shocks: more fiscal consolidation, plus the uncertainty created by the EU referendum. So why were rates not cut?

[2] But not all German economists, as this shows.         


  1. This blog is about macroeconomics and tends to concentrate on the relatively short term. In doing this it tends to ignore the secular trends that underpin macroeconomic circumstances.

    The reason I raise this is that I'm just reading Robert Gordon's book: The Rise and Fall of American Growth in which he postulates that the growth we enjoyed up to about 1980 was a one off and is not to be repeated; that we are in a lower growth era - that is until some other major innovation comes along to give us another push forward .

    If you combine this with demographic trends which are now taking hold with a vengeance in many parts of the World then you have a situation which is fundamentally different from that which we experienced in the recent past.

    Your prescriptions seem to me to contain the implicit assumption that we can return to the situation we had before if we are prepared to let the economy "run a little hotter". However, what if we are indeed in a new, and lower growth era there may be a lot more we need to do than tweak the macroeconomic tools we have and to beef up central bank independence.

    It may be that those firms you mention would not be willing to increase output because they are beginning to recognise that the demand isn't there. One of the effects of low interest rates has surely been to bring some of tomorrows "perceived" demand forward to today but this "intertemporal adjustment" may be only part of the picture and that we are not only bringing tomorrows demand forward but there is less of "tomorrow" anyway.

    If this is only partially true then it makes your prescription somewhat inadequate because you are implicitly targeting a position that is false.

    Putting it another way I think there's a good deal more going on here than will be cured by macroeconomic tinkering or central bank indepenedence or even short term changes to fiscal policy.

    1. I disagree. Demographics and productivity changes are excuses for past failures and for not trying to do more. I bet if we tried to boost growth we could. At least try. The rightwing is always arguing the government can't do much to effect the economy (except negatively). The fact is that monetary policy, fiscal policy and trade/currency policy are extremely powerful tools.

      We've had slow growth, low inflation and slack labor markets b/c that's what the elite want. It's good for profits but not so good for the average citizen.

      In the U.S., Bernie Sanders had a good op-ed on the Fed, criticizing it for raising rates in December, Hillary Clinton has said nothing about monetary policy. It isn't for us plebes. Bernie has a proposal for $275 billion a year in infrastructure and job creation over 5 years. Hillary's is only $55 billion a year over 5 years.

      Economists and central bankers should be writing op-eds saying that Sanders's plan would help the Fed "normalize" more quickly, but they're not.

    2. This is a point that historians have been making for some time. (And I mean by this genuine economic historians who plough through the archives - not ones that use models and theories as explanations or just run huge amounts of data through a computer and call such time series analysis serious historical investigation; the really good historians tend not to be mainstream economists.) A good example is Ryouichi Miwa in Japan who has been pointing out for over 15 years now why large monetary stimulation packages in Japan are unlikely to lead to substantial improvements in growth. Angus Maddison gave similar reasons for Europe and the US back in 1989 - and they very much echo what Gordon was to say much later, although Maddison did argue that the shift to conservative policies and the rise of monetarism (which is linked to central bank independence) that implemented aggressive inflation busting policies under Reagan/Thatcher/Volcker exacerbated these trends. The trends we need to understand relate to deindustrialisation and decline in advanced capitalist countries (mainstream economists have tended to focus on growth - and as Farmer has alluded to, their understanding of growth is weak - which I would argue reflects abstraction from any substantial historical content - let alone their understanding of decline. This is also another example of where neo-liberalism and neo-classical economics are linked. The idea that history and ideas are fundamentally progressive. No wonder there is no substantial interest in the profession in history or reading the classics.


    3. In fact it is often assumed that business folks are inherently in favour of 'pro-growth' policies. I think this assumption is far from obvious because these people care first about their own profits. And these are not necessarily correlated with growth, at least in the short run. From their perspective, is it better to have a stagnant economy but decent corporate profits and a low tax-rate or a higher-growth economy with possibly lower profits (with businesses competing to hire workers amid low unemployment) and higher tax rates?

      In other words when they talk about supply-side reforms, do they really believe these reforms will indeed boost the supply or do they just cynically understand that they will increase corporate profits (by weakening worker's bargaining power, etc) even if they do little to boost the economy?

      Just my 2 cents as a non-economist.

    4. I think Robert Jones makes a fair point. Too much emphasis is given to cyclical factors, leaving secular factors ignored. This allows monetary theorists to bang on incessantly about appropriate policy as if nothing else counts. This monetary fetishism is detrimental to sound policy development. The Great Moderation is largely ascribed to sound monetary management, at least that's what the central bankers will tell us. I believe it had more to do with a new phase of commercialization of emergent technologies, same as the 1950s and 1960s. I believe we are currently in an interregnum where technological saturation has occurred, awaiting the next burst of new technology commercialization. Other than the rise of China to pre-eminence and the 2008/09 slump and ensuing dislocation, nothing much has happened in the world economy. Monetary theorists have very short vision and limited insight, blaming the current malaise (feeble growth, deflation) on ineffective monetary policy. Sometimes central banks are just irrelevant to current state of affairs.

    5. "The growth we enjoyed up to about 1980 was a one off and is not to be repeated; that we are in a lower growth era - that is until some other major innovation comes along to give us another push forward ."

      We've got one major push forward coming, which is the switch to renewable energy. This is causing a boom, right now, we're in the early days of it, and it will sweep around the globe.

      However, this is probably the *last*. We're already producing enough to sate most people's basic needs; the population will have to drop to match agricultural carrying capacity, and it is already doing so due to the 'demographic transition'; almost everything is manufactured by machine; when all of this is being produced with renewable energy, we are basically set for a steady-state society, where the only improvements are in quality of life.

      We need to fix our governments and economies because after the solar boom fades out, "growth-based" economics is not going to be functional any more.

  2. This is another reason why the Tory Party's claim that the Labour Party created the 2008 economic crisis should have been challenged by the BoE when the Conservatives used it in the 2010 election campaign.

    Independence means freeing yourself from politics, not keeping quiet when bad views on the economy are taking hold in voters' minds, because this makes a political blowback from the opponents of the Tories more likely at a later date.

    On this, the BoE has fallen into the same trap as the BBC.

  3. A rational assessment (yes, I know that's optimistic) would require consideration of the counter-factual. What would the world have looked like had central banks not been independent?

    It seems unlikely to me that mistake #1 would have been avoided. The era of the Great
    Moderation was somewhat neoliberal in flavour. Academics, like politicians, and like central bankers were generally fairly sanguine as a whole before the event.

    Mistake #2 would surely have been made a fortiori had the government controlled monetary policy. If you want criticism of government policy, then this is more likely when the Bank was independent.

    With mistake #3, I think you're on to something. But is this not a consequence of the obsession for inflation-targeting beyond all else that might matter? You've argued for a dual mandate yourself in the past. We're this in place, then the more considered analysis of risk that you provide in your post gets internalised.

    There is much to be gained from delegating monetary authority. Of course it should be designed better, but losing independence would be to throw the baby out with the bath water.

    1. I agree. #2 is critical here, and that was what my two posts that I link to in the last paragraph of this post were all about. I also agree with your final point (hence my last paragraph), but as you say rational assessments are optimistic.

      I agree, which is the point of my last paragraph.

    2. I accept the realism of Magnus' points but I still think mistakes 1 and 2 are more significant than most (including our blogger until today) recognise.

      It's not just that the independent Central Banks sighed and decided to do what they could when politicians failed to turn the fiscal taps on. On the contrary, at least in Europe and the UK, the CBs were vocally advocating more austerity, saying quite openly that politicians who argued for spending more (though, curiously, less often politicians who argued for taxing less) were simply trying to buy votes. The independent status of the BoE and ECB added a lot - in retrospect far too much - weight to these interventions and allowed the creation of what Krugman called the VSPs - Very Sensible People. These were perhaps epitomised by Jean-Claude Juncker, when still PM of Luxembourg, who was quoted as saying "We all know what we should do; we just don't know how to get reelected when we do it."

      So, I would still argue that independent Central Banks worked very well when the challenge was to bring inflation down. However, that independence is an active, and significant, hindrance when policy needs to go the other way.

  4. Very good post but I don't get the conclusion. For despite the listed mistakes, whether it was in Europe, in the UK or in the US central banks have behaved more 'reasonably' than their governments. In the US they had simpson-bowlesism (as krugman calls it), in the UK you have written at lengths about the damaging austerity and in Europe the euro still exists only because of independent Draghi's "whatever it takes". Wouldn't a non-independent central bank in the Eurozone look like a clone of the Bundesbank, some monster effectively piloted by Dr Schäuble?

    1. See the previous comment and my reply. This is not me arguing that after these 3 counts ICBs should be out, but rather what I think might happen. If ever I believed politicians and voters made rational decisions this was dispelled by austerity.

    2. Yes I may not have been clear but I know where you stand. What I mean is that anyone criticizing central bank independence on the basis of the mistakes you listed would fool himself to believe that it might have been better with a non-independent central bank. Because the most vociferous critics of central banks (at least in the general media) are in fact right-wing people. See "audit the Fed" in the US and Dr Schäuble's recent comments about how the ECB was responsible for the rise of AFD (Alternativ für Deutschland, the far-right "populist"party). 

      Everyday the German media is full of comments about how evil the ECB is - not because it didn't do enough of course but because it did too much. As you know they were furious about the ECB buying sovereign bonds and challenged that in court. They believed that soaring interest rates in the periphery were very good because it provided those countries an incentive to reform.  Also negative interest rates are absolutely against the laws of nature, and let's not even talk about helicopter money which would mean instant Armageddon.

  5. "If you are going to blame anyone for not seeing the financial crisis coming, it would have to be central banks. They had the data that showed a massive increase in financial sector leverage. That should have rung alarm bells, but instead it produced at most muted notes of concern about attitudes to risk. It may have been an honest mistake, but a mistake it clearly was."

    The General Accountability Office has data on leverage ratios for many financial institutions. For some of the largest which required government intervention, such as Goldman Sachs and Lehman Brothers, they had higher leverage ratios in the late 90s than pre-crisis (see Andrew Lo

    If you want to understand the financial crisis for what it is (a bank run/financial panic), I heavily suggest reading research by Gary Gorton and Darrell Duffie's How Big Banks Fail and What to Do about it.

    "Of course the main culprit for the slow recovery from the Great Recession was austerity, by which I mean premature fiscal consolidation. But the slow recovery also reflects a failure of monetary policy. In my view the biggest failure occurred very early on in the recession. Monetary policy makers should have said very clearly, both to politicians and to the public, that with interest rates at their lower bound they could no longer do their job effectively, and that fiscal stimulus would have helped them do that job. Central banks might have had the power to prevent austerity happening, but they failed to use it."

    Where are you placing the beginning? The beginning of the financial crisis is August 2007 with the runs in the asset-backed commercial paper market while NBER starts the recession at Dec. 2007 (unsurprisingly, when the first set of runs ended).

    Traditional rate setting and fiscal policy cannot fix that. Only a lender of last resort can address this unless the government can credibly insure all the money lent and the cash collateral posted by securities borrowers.

    And the Fed began to address this with the Term Auction Facility in Dec. 2007 since the discount window was hardly used.

    1. Really, the 'financial crisis' started long before any market crises were seen. These were just the unavoidable symptoms of the underlying, long-running problem: the vast disconnect between price and value for a huge range of financial and other assets.
      Does anyone really think that an increase in public spending could have corrected for a vast misallocation of resources spanning many years?

    2. 1. Are you saying that increased leverage does not make the financial sector much more vulnerable to shocks?

      2. In talking about austerity I'm talking about the recovery from recession once the financial sector had been fixed by central banks doing what central banks have to do.

    3. Just for reference, the financial sector has not actually been fixed. See the works of Bill Black for one of many people who have analyzed this. The sector became riddled with fraud, which was the root cause of the increased leverage and the 2008 crash.

      The fraud is still there. It was papered over with a wall of money, but it's building up for a second collapse. The leverage is rising, but of course it's even better hidden now (the fraudsters learn from experience).

      This is a deeper strike at the heart of the central bank than anything else; they bailed out *crooks*, and a lot of people realize it. If bankers had gone to prison, the central banks would have more credibility.

  6. Enjoying this blog! Following up on what Robert Jones wrote, and the OP, it may be 2 strikes and central banking it out, gone the way of the powerful state banks that ruled when I was a kid. The secular changes I see: bitcoin, China emerging as a 3rd military superpower, massive surges of global investment capital distorting energy markets, real estate, etc., increasing numbers of "gated" communities (and corresponding radicalized ghettos in Europe--will the U.S. be next?).

    The only reason I need for the new world of central banking is point #2 "Monetary policy makers should have said very clearly, both to politicians and to the public, that with interest rates at their lower bound they could no longer do their job effectively" The reason they didn't do that is they the fact of #1 had already removed most credibility in the eyes the public. In short, Simon, you had me at #1 ;)

    Is it a coincidence that a woman is in charge of the Fed at the exact time "they" don't want anyone touching the wheel? Men can't help but push buttons and fidget (sorry for the sexism). The question isn't one of independence, that went out with #1, the question is to whom will they be dependent on in the future? (I'll make sure to keep reading this blog to find out!)

  7. Speaking purely from the U.S. perspective, I don't see these mistakes as coming anywhere close to justifying major institutional change.

    The first mistake you cite has no obvious relationship to the institutional structure.

    With regard to the second mistake, the Federal Reserve has no mandate to meddle in political outcomes. The President and his Council of Economic Advisors are capable of figuring out and explaining to the public that we are at the zero lower bound. I don't remember what the Federal Reserve was saying about fiscal stimulus in 2009-2010, but whatever it was, I doubt it had much effect on the size of the stimulus package (or the failure to pass a followup stimulus later).

    As for the third mistake, if Republicans had their way interest rates would have risen sooner and faster. (Ted Cruz wants to return to the gold standard.) So this mistake doesn't undermine the notion that having an independent central bank leads to better economic policy.

    1. On 'justification', I can only repeat that what happens is not always based on what is rational.

      On austerity, I do not think pointing out basic economics is meddling. What the Fed did not do (until later) is to say clearly that fiscal stimulus was necessary (to achieve the Fed's goals). They should have. But on this the Fed were saints compared to the UK and especially the ECB.

  8. BTW B. Mitchell has a blog on this - Demand and supply interdependence – stimulus wins, austerity fails, although it is more to do with the Labour Market.

    Full blog:

    Paper he mentions:

    "They find that:

    1. By the end of 2013, the “level of potential GDP” was “below the trajectory that appeared to be in place based on the average pace of growth estimated over the 2000-2007 period” by some 6.75 per cent.

    2. The “growth rate” of potential real GDP “has been less-severely affected, because … a substantial portion of the hit to potential GDP since 2007 … reflect … one-time adverse shocks to the level of the natural rate, labor force participation, and trend multifactor productivity.”

    3. Driving the fall in potential GDP since 2007 in the US has been “an unusually slow pace of capital deepening—a factor whose contribution to growth should pick up substantially over time as the recovery in business investment and the broader economy proceeds.”

    If you calculate the private investment ratio (as a per cent of GDP) you find that its most recent peak was in 2000 (19.8 per cent) and in 2014 was 16.4 per cent having risen from a recent low of 13 per cent in 2009.

    4. Why has potential GDP fallen? The authors find that:

    The largest contribution to the slowdown in potential output growth is from trend labor productivity … the trend growth rate of labor input … has also slowed in recent years … and a steepening of the trend decline in the labor force participation rate … Even with the estimated slowdown in potential growth, the model’s estimate of the cycle … is consistent with a sharp drop in resource utilization in 2008 and 2009 and only a gradual and still-incomplete recovery thereafter.

    In other words, the great recession caused the fall in potential GDP.

    The authors identify the “supply-side damage in labor markets”, which they say carries “special significance in light of the full-employment leg of the Federal Reserve’s dual mandate”.

    They identify “three potential sources of labor market damage”:

    (1) difficulties in reallocating labor across different segments of the economy (industry, occupation, or geographic) associated with the distribution of the demand shock caused by the financial crisis and deep recession; (2) a more general deterioration in the efficiency of the matching process between available workers and available jobs; and (3) long-term damage in labor markets (often referred to as hysteresis) associated with the substantial rise in the number of long-term unemployed and a possible reduction in the employability of affected workers.

    To be clear, the research is indicating that these typical ‘structural’ characteristics are being driven by the aggregate economic spending cycle, rather than non-cyclical impediments, which are usually identified by mainstream economists as the source.

    They find that “the industry-specific shocks to labor demand in the recent recession were more persistent than in the past” given the severity of the recession.

    In turn, this meant that it was much harder for workers to move from declining industries and/or regions to areas where there might have been better opportunities. There was a generalised malaise in the US labour market which caused the usual mobility of workers to stall.

    Further, the “rate of permanent job loss … rose sharply during the recession” and was much higher than the previous recessions (1982 and 2000). This is sometimes interpreted in terms of a rise in ‘structural unemployment’ but the authors suggest that “further improvements in economic activity and job opportunities will lead to further reductions” in the pool of workers impacted.

    In other words, long-term unemployment is not necessarily an impediment or bottleneck to non-inflationary growth. Expanding the economy with more spending also can absorb those workers who suffered permanent job loss (their jobs, firms, etc disappeared)."

  9. I have commented before on my reservations about CBI, notably that it denies the inherently political nature of decisions such as interest rates that affect distribution, and that it provides cover for politicians to disclaim responsibility for action to resolve the crisis. Here I want to comment on the question of capacity utilisation.

    As Geoff Tilly from the TUC ( has observed, ignoring the impact of low demand on the labour market encourages a perception that the output gap is smaller than it really is. Low macroeconomic demand (which Tilly attributes to austerity economics) reduces total labour income, which in the UK with its precarious labour market has meant downward pressure on wages even while employment has grown. If we see capacity utilisation has not just employing resources but doing so effectively, then we can see that the output gap is larger than is often claimed.

    Higher demand would indeed put upward pressure on wages but at present that would be highly desirable, not just for its immediate gain for workers but because it would stimulate investment and reallocation to more productive employment, as rising wages squeeze out low productivity work with high demand creating opportunities elsewhere. This would be inflationary but a return to moderate inflation is required as without it the economy will continue to underutilise its available resources. It is only when inflationary pressure risks becoming unmanageable that we could truly talk of the output gap having vanished and we are a long way from that today.

  10. I don't buy the argument that these errors will erode support for central bank independence. Support for a systematic approach seems very strong. Replacing one discretionary authority with another (central bank vs government) doesn't really guarantee fewer errors will be made and I think it would be hard to sell...

    I think you might see a change in the mandate but so far the reaction to the first 2 mistakes is giving central banks more and not less power. Even helicopter money seems to be a way to move fiscal policy under central bank mandate.

    At the end of the day the only alternative to central bank independence is direct government control. But the errors you cite are government errors as well.

    The first is only easy to see ex-post: the reaction to the crisis was very strong. For example the no cut in 2008 followed by an emergency cut few days later was a bad mistake, but congress rejected the stimulus as well. So that's really a draw.

    The second is mostly a government error.

    On the last one the jury is still out, but it's still linked to government fiscal restraint.

  11. So, should economists have seen the Financial Crisis coming?

  12. As Martin Sandbu points out, while the first and the third criticism may be right, the second is wrong: (read the April 11 article)

    1. And Martin is wrong. Unconventional monetary policy, almost by definition, is untested and is therefore (given lags) unreliable. Fiscal policy by contrast has much more certain impacts. That was the point that monetary policy makers should have made, and did not.

  13. Hi,

    I've got a few questions about a PQE policy directed at a National Investment Bank, which you've discussed in the past. Would it have to encompass "helicopter money" per se or could it be more like "standard" QE with the Bank of England holding some kind of asset in the NIB which they could potentially sell back at a later date to bring the money out of circulation? (Possibly with some kind of compulsory buy back by the Government to keep the assets in public hands).

    Is there any absolute reason why this could only be used at the ZLB or could it be used to manage the money supply in quote "normal times," while maintaining interest rates at a slightly higher level?


    1. I think the key point here is that the government, not the central bank, should be deciding how much resources a NIB has.

    2. Do you mean exclusively? Or would it be sufficient for the government to be able to "add in" at will either from tax revenues or by ordinary sovereign borrowing.

  14. Can we be less clear?

    They examine in ancient times the entrails of chickens. And still we hire those who just might speak truth to the entertained. Well-diluted by distraction and propaganda. Being paid-for, our conflicts of interest unspoken. Claims to be above excepted.

    Endless is the scope for invention and research and public debate around straws in the wind, claims of value in offers of leadership and expansion of claims as to the negligence of others. None bear comparison with the brute facts of inequality, of fear and corruption, of misery and worse in our unemployment, under-employment and mis-employment, directed against conscience or to the death of conscience by the power we give or allow to self-concentrating Money and its quislings.

    Our markets should be working, can only work 'for us', within the framework of real democracy, driven by our agreed securely equal votes, our full equal-income citizenship being agreed conditional only on our good-standing in the exercise of conscience, any penalties only on judgement by our peers, with due care, on findings from any charges of laziness or criminality, to include any findings of malice and perjury and wilful economy with the truth.

    Imagine, if applicants for work turned-up 'already paid', employers able to bid for their agreed service, all fees high or low for that service going to the labour agency, each fee subject to continuous micro-adjustment to ensure an aggregate national-hire for macroeconomic steadiness, against wind and tide and all other vicissitudes.

    With equal partnership, informed and agreed, what could go wrong?

  15. On 1.:
    It is not bank leverage but private leverage that should be the warning sign. The bank leverage destabilized banks only because private borrowing turned sour, just as the increasing private leverage turned Great Moderation spining.
    Without critical private leverage banking leverage could go on increasing indefinetly without problems given the safety of the underlying loans to PRIVATE sector.

    On 2. Spot on. They should have been much more honest about their helplessness and only Ben Bernanke was vaguely honest about it in Congressional inquery.

    On 3.
    As monetary policy is helpless bellow 2% interest rate because banks do not offer such rates to private sector, why would be raising up to that level be more effective?
    Interest rate income is the answer.
    Even tough such income is predominantly to banks but Pensioner's claim is not without a base.

    Interest rate up to 2% is not going to change banking rates offered to private sector for loans but it would for savings.
    The spread will become smaller and with it a real interest rate.

    1. On 1. In the UK it is pretty clear that the banks had to be bailed out because of their own investments overseas, not excessive private sector borrowing.

    2. And again European banks bought homeowners debt which turned sour first which caused banks to turn sour.
      So, again, if you watch private agents leverage it should show warning signs before banks colapse.
      In Big Short movie it showed how long they hid homeowners high leverage and colapse from admitting it to balance sheet of banks.
      Everything would be fine for banks if there was no private sector leverage going too high and then collapsing.
      But, yes, banking leverage allowed for homeowner leverage.

    3. And i just came across split of government debts. 1/3 is to foreign gov.
      1/3 to government agencies (to itself)
      1/3 to local gov and banking which includes pensioners and other funds.
      Total of 14% of federal debt is held by pensioners and individual holders.

      So raising the interrest rates up to 2% where is not affecting rates to private borrowers would have some miniscule impact on idividual income, but still some impact.

  16. CB independence is lingue used to be used exclusively for colonies. Before that it meant independent to pursue monetary policy unrestrained by fix to gold.

    Floating FX and debt only in own currency countries do not have any use of the term Independent CB.

    You adopted colonial lingue for your own empire. That is so funy. Drinking your own colonial poison. Political independence is sold to colonies as some form of independence to mask monetary dependence on the empires.

  17. It’s undeniable that errors on financial leverage, austerity and capacity are not confined to economists working in central banks, which is why I think you are sometimes over-defensive of ‘mainstream economics’. So there is indeed no guarantee that moving responsibility for monetary policy operation would lead to better results, but there are important questions of accountability here.

    In the UK, CBI is supposed to entail a clear distinction between government responsibility to define the mandate (such as an inflation target) and the BoE’s responsibility to take the operational decisions to deliver the objectives defined in that mandate. I accept that such an arrangement is not inherently undemocratic but neither side seems to be living up to what is expected of them.

    On the government side, politicians need to review the mandate to keep it appropriate in changing circumstances. There is a risk that continual fiddling would bring us back to the election cycle for economic decision making (although the costs of this are often exaggerated, certainly compared to those of the crash and austerity). This could be avoided by obliging government to confirm or revise the mandate within the first year of a Parliamentary session, with any change after that difficult and with political cost. My aim here is to prevent politicians hiding behind CBI.

    On the Bank side, we also need more accountability. So I propose that the Governor should be obliged to draft a letter of resignation for the Chancellor to consider, whenever a mandated target is missed for three consecutive months, unless the Governor had earlier notified the Chancellor that he did not possess the tools to achieve it. Here I want to force admission of the limits of monetary policy.

    So perhaps we don’t need to drop ‘central bank independence’ but we need to change how it works.

  18. The central bank cutting interest rates *is* fiscal consolidation.

    First and foremost, banks lend based on income. Interest rates are not as big a consideration as the mainstream makes them out to be.

    Second, lower rates directly reduce government spending and the budget deficit.

    Third, the propensity of savers to spend their interest income is greater than borrowers borrowing to spend. And on top of that, the economy as a whole is a large net saver holding lots of government bonds.

    Fourth, lower rates imply lower storage costs for businesses, dragging down inflation.

    As a result of these reasons, lower interest rates directly reduce demand and total spending in the economy, and are categorically not inflationary in any sense.

    The natural rate of interest is zero, and it should be left there forever. Without central bank manipulation of the interest rate market, the "interest rate" will always drift back to 0%.


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