Brad DeLong:
Indeed, back in 2000 it was Ben Bernanke who had written that central banks with sufficient will and drive could always, in the medium-run at least, restore full prosperity by themselves via quantitative easing. Simply print money and buy financial assets. Do so on a large-enough scale. People would expect that not all of the quantitative easing would be unwound. Thus people would have an incentive to use the extra money that had been printed to step up their spending.
The goal, see, was to get people to "step up their spending". But, as DeLong says, the result "has been unexpectedly disappointing".
I think that's why central banks these days are thinking about going cashless. It's the next logical step in the plan to get people to step up their spending.
The trouble is, it's not a good plan. It's a major change to life as we know it -- to life as we've known it for millennia, I guess, since cash money was first invented.
It's a major change, tacked on as an afterthought to a plan that didn't work, the plan to get us to step up our spending. It's an afterthought tacked on to a plan that didn't work.
If we're going to abandon cash, shouldn't we put a little more thought into it than that?
13 comments:
You don't forge ahead with a plan that didn't work. You stop. You back up. You reconsider your assumptions. You think things through, more carefully this time, and consider the knowledge you've gained from the failure.
If you're smart, you come up with a better plan. Maybe, a plan that does not require that we abandon cash. If you're smart.
Claiming that Bernanke said QE would bring prosperity is extraordinarily dishonest.
What Bernanke did say was that if interest rates fell to zero and deflation started to take hold of the economy, that the central bank could prevent the total collapse of the payment system that followed deflation and low interest rates during the Great Depression.
http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm#f18
And the articles about low interest rates discouraging the use of wallet cash is also nonsense. It is high interest rates that discourage the use of currency in favor of other forms of money and payment that pay interest.
Brad DeLong's words "Ben Bernanke who had written", quoted by me above, in the original were linked to this 18-page PDF:
http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf
I omitted the link, foolishly thinking the omission would be harmless.
In that PDF Bernanke does not provide a section called "Conclusion". The last section is titled Needed: Rooseveltian Resolve. In that section he writes:
"Franklin D. Roosevelt was elected president of the United States in 1932 with the mandate to get the country out of the Depression. In the end, his most effective actions were the same ones that Japan needs to take—namely, rehabilitation of the banking system and devaluation of the currency. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—in short, to do whatever it took to get the country moving again."
The explicit objectives Bernanke has in mind are "to get the country out of the Depression" and "to get the country moving again." I think we could say his objective is to "bring prosperity" as you put it, Jim.
Two paragraphs earlier, he says:
"A nonstandard open-market operation without a fiscal component, in contrast, is the purchase of some asset by the central bank (e.g., long-term government bonds) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (e.g., by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect ..."
There's the QE, asset purchases by the central bank, its stated purpose being to "stimulate spending".
So I'm thinking: Claiming that Bernanke said QE would bring prosperity is not extraordinarily dishonest.
Oh, and at the end of the Franklin D. Roosevelt paragraph I quoted in my prior comment, Bernanke adds this:
"Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done."
Well, don't you know, that is pretty much exactly the idea I expressed in my remarks of 4:21 AM: You don't forge ahead with a plan that didn't work... If you're smart, you come up with a better plan.
I think it is fair to say that QE produced the results Bernanke predicted it would. Misrepresenting what he predicted and then claiming the predictions failed is dishonest.
The problem in Japan was the same as in the US only it came 20 years earlier. The country was on the brink of a total economic collapse due to debt deflation.
Roosevelt may well have promised "prosperity" but seven years after he was elected the Great depression still hadn't ended. Bernanke praised Roosevelt because he did what was necessary to prevent things from getting worse. Prior policy had failed to do that.
I for one am thankful that the 2008 collapse didn't result in another great depression. It very easily could have.
My only problem for the most part with Bernankes comment is that he continues to play the "expectations" card. To him and the vast majority of economists our prosperity is all a psychological game. They really believe that it is ALL in our minds. They are believers in willing things into being. Regarding Roosevelt "...specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—in short, to do whatever it took to get the country moving again"
So specific policies aren't important, just be aggressive and do something......in fact do whatever it takes...... but we can never know what worked because we aren't doing specific policies .... we are just getting things moving
It is totally frikken bizarre
Greg,
In economics there is certainly some validity to the idea that it all comes down to what people believe. Banks are solvent only as long as their depositors believe they are solvent. It can all fall apart pretty quickly when beliefs are shaken. Central bankers seem to understand that. Many economists tend to be fairly ignorant of banks and finance.
Jim: "In economics there is certainly some validity to the idea that it all comes down to what people believe. Banks are solvent only as long as their depositors believe they are solvent. It can all fall apart pretty quickly when beliefs are shaken."
And yet it is the events that shake beliefs that are the driving force behind the falling apart.
Jim, you write like someone who only knows economic decline.
Art, I don't understand what your reply means, so I can't respond .
The original discussion was about the role of the Federal Reserve.
The way I see it the Fed was created to prevent financial panics. Before the Fed was created, the economy was plagued by periodic panics. After the Fed was created, there has only been one panic that it has failed to quell.
I think it is completely unrealistic to assign to the Fed responsibility of making sure the economy is prosperous. In my opinion, it is not even certain that the Fed will always be able to perform the lesser more realistic goal for which it was created.
I don't know what you or Delong think the Fed should have done differently, but whatever it is probably would have only made things worse. In my opinion, the fact that things did not get worse for very long was by itself a remarkable accomplishment.
" Banks are solvent only as long as their depositors believe they are solvent."
Not true, if a bank is solvent it can meet all its depositors requests. Its an accounting relationship of assets to liabilities Every one with a checking account could move it to another bank on the same day and their solvency wouldn't change, in fact it would reduce their liabilities. A checking account is something they OWE. Where the monetarists go wrong is they assume that a bank run means everyone wants cash, but if they don't want cash and simply want to move their deposit to another bank.... no problem. Yes it would affect some of the ways a bank earns money if all their checking account holders moved elsewhere (fees etc) but there are banks/lenders who don't even have depositors...... how do they stay solvent if depositors and their expectations are so key??
Greg,
It is curious that you believe that a bank could arrive at a position where it has a balance sheet that is pure assets by dumping its depositors. If such a world existed the bankers would be doing everything in their power to make depositors unwelcome so that they would leave.
The fact is when deposits are withdrawn from a bank, that bank must borrow from other sources to cover the transfer of funds. The cost of funding such borrowing tends to be in direct proportion to the banks need for such funding. A bank that has a major exodus of deposits would see its borrowing costs rise to the point it would quickly become insolvent.
What happened in the last quarter of 2008 was a widespread liquidity crises - meaning that loan sources for banks (and other institutional lenders) dried up (or became very expensive). In theory the Federal reserve's overnight lending facility can plug the holes and keep banks liquid, but banks can't be kept on life support forever. They are expected (by statute) to find stable funding sources and if they can't they are shut down by regulators.
The cheapest funding source for banks is deposits. Any loss of confidence in a bank by its depositors will produce a proportionate loss of confidence by other funding sources.
Non-depository lenders are also in the same boat. Like deposit facilities they are in the business of maturity transformation of borrowing short and lending long and making a profit on the spread of what they collect and pay on interest. They too will quickly go belly-up if if their short term investors pull out.
Greg wrote: "Where the monetarists go wrong is they assume that a bank run means everyone wants cash, but if they don't want cash and simply want to move their deposit to another bank.... no problem. "
Perhaps it would help if you think of it this way:
When a depositor writes a check that is deposited in a different bank it
has the same effect as if the depositor withdrew the money in cash, carried it over to another bank and deposited the cash in the other bank. Check writing is just a convenience that spares you that hassle of converting to cash and delivering it.
"It is curious that you believe that a bank could arrive at a position where it has a balance sheet that is pure assets by dumping its depositors. If such a world existed the bankers would be doing everything in their power to make depositors unwelcome so that they would leave. "
I can see how you interpreted my comment this way so let me try and be clearer.
Undoubtedly deposits for a bank are a liability, it is something they owe to the depositor. And solvency is a simple arithmetic relationship between levels of assets and levels of liabilities. That is how solvency is defined. Now, its also true that many assets banks hold have values which float so the asset level today can be totally different from yesterday without having any more or fewer depositors. Banks don't need me or anyone else to open a checking account in order to conduct the real money making activities of banks which are loans. It is certainly true that a run on a bank where people liquidated their accounts and moved them to another bank would have a cost to the bank but the bank could very well still be solvent. A run on a bank, if done irrationally e.g. to a bank that was incorrectly thought to be insolvent, would not create an insolvency. Would it affect profitability of the bank? For sure. The expectations of solvency/insolvency by the depositors are not the determinant of solvency. Yes the spread that banks make on their loans and the costs they incur from their depositors is affected by the behavior of depositors, they certainly don't like when people run in at once and want to move their money. Its bad for business.
Bank runs are a completely unnecessary and irrational act. All deposits should be 100% insured by the govt. There is no reason why a depositor should have to fear that they cannot get their money if some bank makes stupid loans. Its completely unnecessary in the reality of modern fiat money
"The fact is when deposits are withdrawn from a bank, that bank must borrow from other sources to cover the transfer of funds. The cost of funding such borrowing tends to be in direct proportion to the banks need for such funding. A bank that has a major exodus of deposits would see its borrowing costs rise to the point it would quickly become insolvent."
Not necessarily if the Fed does its due diligence and acts as lender of last resort.
Today banks are earning interest on excess reserves AND paying less than 1% to most depositors. Its pretty cheap to be in the banking business today. The problem they are having is finding enough people who want to go more into debt.
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