Sharmini Peries, Exec. Producer, TRNN interviews Michael Hudson. Video and transcript.
IMF Meeting Review – Austerity to Cost
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City
9 comments:
The Federal Reserve here and the central bank in Europe lowered interest rates way down to almost nothing. It’s one-tenth of a percent in the United States. That means that banks can borrow cheaply from the Fed to make loans. What they’ve been lending for is for corporate takeovers and for stock buybacks. In the stock market in the last year, one-third of all of the stock transactions in the United States were corporate buybacks. .... Low interest rates are creating a new stock market bubble.
I wonder how Hudson feels about Mosler's proposed ZIRP policy? Hudson, Harrison, and Keen seem to take a dim view of ZIRP because it encourages speculative bubbles.
In theory you may be able to reduce some of the speculation with regulations, but chances are that people will eventually find away around the regulations?
While I sympathize with the post-Keynesian view that interest rates are not a great policy tool, I'm wondering if, insteading of setting rates at zero forever, it might be better to set rates at say 4% forever?
Just a thought.
Warren's proposal is ZIRP forever, unlimited liquidity to solvent institutions, 100% unlimited deposit guarantee, max 90 day T-bills, and banking and financial reform including bank regulation from the asset side. Warren proposes getting rid of financial "innovation" that serves no productive purpose, as well as eliminating criminogenic environments and control fraud.
Then use functional finance to address inflation along with the MMT JG to achieve full employment and establish a price anchor in terms of labor.
Low interest rates encourage malinvestment and financial speculation only if banks are allowed to lend against dodgy collateral and for speculation. For example, it's simpler and more targeted to address leverage through margin requirements in financial markets and prudent lending standards for housing instead of the current system of tightening credit after loosening credit results in a crash.
Most money creation is through bank credit so the obvious place to address issues lies in prudent lending practice, requiring it to the degree that the financial sector is unable to police itself. The recent record of self-regulation under a hands-off approach to regulation has been abysmal.
Agree about the need for regulation, but then there is shadow banking and offshore banking that is difficult to regulate.
Easy to say get rid of financial innovation that serves no productive purpose but perhaps difficult to actually do.
A 4% interest rate would not eliminate leveraged speculation, but would at least put a cost on it.
I mean, if money is free (and if the CEO gets a golden parachute when the sh*t hits the fan) then why not speculate, even if returns are small? And that is exactly what has happened under ZIRP.
And then there is this from WM: with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation!
If WM is implying that X% interest rate creates X% inflation, then shouldn't we target 4% inflation (as Uncle Milt suggested) rather than 0% inflation?
Francis Coppola recently blogged about the role of offshore banks and shadow banks in the 2007 meltdown:
http://coppolacomment.blogspot.co.uk/2014/10/european-banks-and-global-banking-glut.html
According to WM, the relation between interest rates and inflation is direct, whereas the conventional wisdom is inverse, so naturally the viewpoints will be opposed to each other.
According to MMT, conventional wisdom gets the causality backward on a number of such relationships.
But the fundamental disagreement is over whether demand is the main control point, or interest rates. MMT says demand whereas conventional economics says interest rates.
Based on what WM has said about it previously, I think he would say a 4% base rate rather than 0% could make investment more expensive, including housing through higher mortgage rates and monthlies; it could lead to demand leakage by encouraging saving, and it could affect goods price level or asset prices by increasing $NAFA through higher payouts on government securities, — or it could increase investment too, but the higher borrowing cost works against that.
Agree with the focus on demand rather than rates, still, if we are going to talk about permanent interest rates, I'd like to at least throw out for discussion the possibility of fixing the rate at a modest positive number rather than 0%.
FIRP (Four % permanent) instead of ZIRP. ;-)
If FIRP resulted in 4% inflation, then the effective interest rate would be 0%, and perhaps rational behavior would be the same as ZIRP with 0% inflation?
But I suspect there will always be some variation in prices (oil prices, crop failures, foreign stuff, strikes, wars, measurement error, productivity changes, etc.).
The advantages to 4% inflation:
-- it's better than deflation
-- everyone likes getting a nominal raise each year
-- savers like getting a nominal return on their savings
-- the 99%'s debts are eroded by inflation (even with ZIRP the 99% still have to pay interest).
Geoff Tily's book "Keynes Betrayed" is all about that betrayal of Keynes's belief that interest rates should be kept as low as possible because higher interest rates encourage investment in more risky enterprises leading to greater economic instability. In addition the higher the interest rate the greater the reduction in consumer demand to repay larger mortgage repayment sums (most people's principal investment), etc. Tily's view is this was the main thrust of Keynes's economic views not merely government deficit spending in times of recession.
Thanks for bringing Tily to my attention, Schofield. I haven't read his book but I did find a Tily paper on Keynes' monetary theory, at the link below.
From the paper:
Keynes’s primary concern was the arrangement of domestic and international monetary
systems to permit the full and stable utilisation of resources, and to prevent crisis, rather than
the use of fiscal policy in the event of crisis.
It sounds like Tily is trying to paint Keynes as a monetarist rather than a fiscalist?
There is, surely, overwhelming evidence that even the present reduced rate of 3 1⁄2 per cent on long-term gilt-edged stocks is far above the equilibrium level –
meaning by ‘equilibrium’ the rate which is compatible with the full employment of our resources of men and equipment.
Sounds like Keynes believed in IS/LM & such a thing as equilibrium full employment?
Changes in the complex of interest rates, with a view to controlling the trade cycle and to offset inflationary or deflationary trends, should not be precluded, but should affect the shorter-term rather than the longer-term, issues, and should, as a rule be regarded as secondary to the technique of rationing the volume."
Sounds like Keynes would agree with Uncle Milt about controlling the supply of money rather than the price of money? But it's not clear how one would do that?
Tily: As he saw as early as 1930, the cause of the Great Depression was dear money.
Then I would say Keynes misdiagnosed the cause of the Great Depression. :-/
Nonetheless, it is interesting that Keynes proposed a permanent interest rate.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078944
That was Keynes in 1923.
Dan you're throwing up strawmen you need to read Tily's book "Keynes Betrayed" it's a very interesting take about what Keynes came to believe and how his beliefs were distorted by his opponents particularly those who wanted to cling to a "loanable funds" view of of economics.
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