Friday, January 31, 2014

Frances Coppola — Why the Fed should not taper alone

My latest post at Forbes endorses Raghuram Rajan's call for there to be permanent co-operation between the central banks of the G20. Business is global: financial markets operate across borders. Countries no longer have genuinely independent monetary policy. Monetary policy needs to be co-ordinated internationally, with the Fed as "first among equals". Whether intentionally or not, the Fed has become the de facto central bank of the world. It is time it behaved like it.
Coppola Comment
Why the Fed should not taper alone
Frances Coppola

It would say rather we need to address the issue of central banking and global organizations like the IMF and World Bank, not to mention the BIS as the central banks's bank, as instruments of global policy based on neoliberalism, which is antithetical to democracy.

The idea of central banks at the head of a global command economy under the rubric of "free markets, free trade, and free capital flows" is an oxymoron. It is the antithesis not only of democracy but also capitalism.

In fact, I regard this as one of the greatest dangers facing humanity as we enter the global age. It is recipe for greater centralization and crystallization of a power structure based on class structure, opening the door to a totalitarianism of capital aka fascism.

I am all for international cooperation but not on the basis of technocracy that supersedes democracy. The devil is in the details.

The first thing that needs to be done is to ditch the unrealistic assumptions that underlie the neoliberal view of the world and the socio-economic models that are used to justify it, such as free markets, free trade and free capital flow leading automatically to optimal social, political and economic outcome because it is assumed that they are based on laws of nature. That has no basis in reality.


Detroit Dan said...

Wow, that was very well said, Tom. Evernoted!

Dan Lynch said...

I am a big fan of Frances Coppola, but at the same time I occasionally disagree with her, and this was one of those times.

What Frances proposes is some sort of "New World Order" to manage the economy. Americans have a long history of distrusting "new world order" type arrangements and rightly so. I just don't see American voters, who already distrust the Federal Reserve, giving the Fed even more power, or agreeing to let other countries influence the Fed.

Not that there is anything wrong with having a utopian vision, but my idea of utopia is a bit different than Coppola's. :-)

Other options:

-- Argentina could divorce itself from the dollar and turn to Keynesian/MMT policies to support its economy, rather than relying on exports and foreign investment.

-- instead of relying on interest rates to "tune" the US economy, we could lock in interest rates forever and ever and instead use fiscal policy to tune our economy.

As some guy named Minsky once said, "What the Federal Reserve and the Treasury do to contain crises and abort deep depressions leads to inflation, and what the Federal Reserve and the Treasury do to constrain inflation leads to financial crises and threats of deep depressions."

NeilW said...

Typical of the big hug club.

More centralisation, more conformity in a world that is getting ever more fragmented in every other walk of life.

We need to have a distributed design that allows the world to function with independent nations.

Ralph Musgrave said...

The problems caused in developing countries by QE and its tapering or unwinding does not demonstrate a need for international cooperation: it demonstrates the flaws in QE and the merits in the form of stimulus advocated (I think) by most MMTers: that’s simple creating fiat money and spending it (and/or cutting taxes).

QE shovels money into the pockets of the asset rich or investors. Their obvious response is to seek yield anywhere in the world, hence the flows of hot money into or out of developing countries. In contrast, if fiat money is simply created and paid to US pensioners, or spent on infrastructure or education etc within the US, most of that money stays within the US. Same applies if the new fiat money is distributed via tax cuts for the average household.

BTW, there's no link to Coppola's article above is there?

Brian Romanchuk said...

I am in agreement with the above.

I do not really know enough about the economies outside the developed world, but from what I see is that they have a more difficult task for policymaking. Developed world economies have big equity and bond markets, and the equity market valuations can absorb cross-country shocks. However, they developed those markets behind the walls of capital controls.

Emerging markets lack that capacity for shock absorbing. And the locals do some "suboptimal" responses, like hoarding gold with prices near all time highs. (The developed markets have gold bugs as well, but their buying is not big enough to move the needle on aggregate trade flows.) To deal with thse problems, you need policymakers who understand how the monetary system works. And guess what? They don't. I may be a pessimist by nature, but I do not see emerging market crises going away any time soon.

googleheim said...

The laws of nature are a utopian hippy trip pipe dream selling us on what will be so great but selling out our souls since the reality is that we are out of Eden and our great intentions will only open the door to the snake of aristocratic expectations.

This lady sounds like a baroness of anti-sovereignty currencies.

Argentina has tried everything and the current lady president tried to keep dollars outside to keep the peso high but now the problem is that there is not enough dollars to mitigate inflation.

So Argentina needs dollars ultimately.

It is beyond MMT

Matt Franko said...


Do you have a summary of what is going on down in Argentina?

I was of the opinion like you imply that they shouldnt be having this type of problem with the policies put in by their current admin, but now something is allegedly going wrong.... rsp,

Ryan Harris said...

I don't know if you read Spanish Matt, but the problem in Argentina is that same problem that they have always had. Their Banks lend in USD. Mortgages are done in USD. The payments are at a fixed exchange rate. The government doesn't require lending to be done in their own currency.

This is the largest bank in Argentina:

Here is the google translate on their mortgage lending...
Credit for permanent occupation and family housing only .

Exchange rate : Fixed at weights up to 20 years .
Minimum amount : $ 50,000
Maximum Amount: $ 500,000
Funding: 70 % of the appraised value of the property or purchase price (whichever is lower ) .
• Nominal Annual Rate 19.90 % (1 ) to 120 months.
• Nominal Annual Rate 21.50% ( 2) from 121-240 months.

We offer more and better conditions . To make it easier to own than they imagined.


googleheim said...

Yes Matt
Supposedly Frau Kirchener cooked the books given her presentations to the IMF over the years with her power points which aimed to keep her peso strong but was based on keeping dollars out to prevent exposure like Menem created with the flood of dollars which were loaned first at low interest rates then exploded when Clinton balance budget raised interest rates.

So she also ramped up exports over the years relying on taxing farmers
Which is the sole driver since meat n wheat are king as well as GMO
Corn soy etc

Pres got money into the hands of poor and middle class. The prevented deflation.

So they lost the vulture fund case in NY. Just a couple of years ago they had 18 months reserves for paying the existing U $ D liabilities which were from 2001 but for only 1 or 2 provinces. They were until recently covered on the old debt.

Meanwhile inflation has been building ... while the rest of the world is in a deflation spiral. The black market for dollars has eroded the peso first 1:4:5 to 1:5:7 to 1:6:10 where the ratio is USD:PESOfficial:pesoBLACK

So redistribution, sovereign peso push, exports worked until the vulture fund was decided in favor of the banks.

Now the official peso is supposed to be merged with the blue black peso.

From perspective of Mosler n Norman ... they export too much.
They could hunker down and stop exporting to US and EU, feed the mercosur only under peso exchanges then drive up prices sky high like thr Saudis did with oil in 1970$ and the 1980$ ...

This would be a variation to piigs using old currencies locally and euro in ez.

Maybe now cut taxes to farmers to win them back politically so that if farmers reduce yield , drive up global pricez, feed the poor then deflation domestic to Arg will help

The chinese are telling everyone move away from the U $ D
But the chinese do not have a currency to bring to the table when

Tom Hickey said...

Thanks for the heads up on the link, Ralph. Fixed now.

Frances pointed out in a previous post that QE takes safe assets off the table and drives speculation in riskier assets, increasing global risk. Now we are seeing the results.

QE acted as a tax when the Fed was fighting disinflation, therefore, was dumb on that score. In addition, it increased risk in an environment in which there is already too much risk. Dumber.

Fiscal was the way to go, as you point out. And if the Fed had wanted to set the 10yr rate, it could have done so by setting price and the market would have fallen into line since traders know that the cb has control over quantity and can always hit its target.

Dan Kervick said...

Don't we need more risk-taking now? Corporations in the US have tons of assets locked up in the form of money and other liquid "safe assets". Pushing the babies out of their low-risk cribs might be called for.

The incentive we somehow want to create is not an incentive to reach for yield that consists only in swapping low-risk financial assets for other higher-risk financial assets, but using those low risk assets for real capital development: hiring people, buying resources, buying equipment, building new firms, expanding production.

Frances Coppola said...

I think those who say I am calling for some kind of "new world order" are missing the point. The Fed has been the world's de facto central bank ever since the US dollar became the world's reserve currency. Being the producer of the world's reserve currency means that the US does not have the balance of payments and fiscal constraints that other countries do. So far the US has never accepted the responsibility that goes along with that privilege, namely that it is - whether it likes it or not - responsible for global monetary policy, not just for domestic.

However, I am not throwing the Fed to the wolves. I am suggesting that ALL central banks should take account of global conditions when setting monetary policy. The EMs are far from blameless in this. In the wake of the 2008 financial crisis, there was briefly a period of cooperation among central banks. Sadly that now seems to have ended, and we are returning to the beggar-my-neighbour policies that got us into this mess in the first place. I am calling for cooperation among central banks to be a permanent feature, rather than a crisis measure.

This is not "calling for a new world order". Rather, it is accepting the world order we already have, and trying to make it work a bit better. Others can discuss whether there should be a different system. That was not my concern in this post.

Brian Romanchuk said...


What fiscal constraints do you think exist for the democracies with free floating currencies? Japan hardly looks like it is constrained, and almost nobody holds yen. The only constraints that appear are due to fiscal phantoms that are conjured up to by politicians to justify austerity policies.

The closest thing to a constraint is the tendency for a currency to appreciate if has a positive carry advantage. For example, this factor has kept the Bank of Canada on the sidelines. But this is a pretty murky constraint; Australia has had higher interest rates than the rest of the developed world without blowing up.