Thursday, August 27, 2015

Bill Mitchell — US Federal Reserve should not increase interest rates

Greetings from London in the early morning! If we went back a few years and dug out all the predictions and scare campaigns that were being issued by mainstream economists and their conservative ‘think tank’ conduits about the impending disaster that would accompany the near zero interest rate regimes that the US Federal Reserve Bank had implemented it would make a great comedy sketch. There should be no surprise with the massive predictive failures of the mainstream economists in this regard. They clearly did not understand the underlying dynamics that govern the way the central bank interacts with the commercial banks. The problem is that these conservative forces are so dumb they don’t have adaptive learning mechanisms and so even in the fact of evidence contrary to their Groupthink they keep pumping out the same nonsense. The other problem is that they tend to be well funded by the right-wing establishment that they exhibit disproportionate influence on the public policy debate. That influence has turned to demands that the US Federal Reserve Bank (the central bank) increase interest rates and reverse its quantitative easing – apparently because hyperinflation is just around the corner. Nothing could be further from the truth. At present the US economy is some way into a very slow and relatively tepid recovery. But it has still some way to go and while interest rate changes have a relatively weak impact on overall growth any anti-growth noise is undesirable. It is also not justifiable given the central bank’s own logic.…

Bill Mitchell – billy blog
US Federal Reserve should not increase interest rates
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

8 comments:

Ralph Musgrave said...

The 2nd sentence of this Bloomberg article says “All 15 central banks of the 34 countries in the Organization for Economic Cooperation and Development that raised interest rates since the 2008 financial crisis ended up cutting again.”

http://www.bloomberg.com/news/articles/2015-08-25/lesson-for-yellen-trigger-happy-central-bankers-reversed-course

That gives you faith in the competence of central bankers, doesn’t it (ho ho).

Neil Wilson said...

Yes. I'm stunned that anybody should be pushing the idea that central banks should decide whether to do 'helicopter drops' and certainly any idea that they should have authority to say 'no' to the legislature because they disagree with their spending plans is really stupid. Because they haven't a clue what they are talking about.

It's time to put central bank governors and their team of cronies back in their box. They are not Solomon. They are naked emperors.

Matt Franko said...

An interest rate increase at this point is the best hope we have for any meaningful increase in fiscal from the UST ... I hope they raise...

of course volatility in the equities and forex will increase if they do... but it will be better for the US economy if they raise...

Ignacio said...

I agree with Matt, but at the same time I wish one day central bankers came out and said: From now on, our only function will be to stop the collapse of payment systems and keep liquidity up when needed; we won't be trying to micro-manage the economy throught interest rates hikes or cuts. We announce that the interest rates will be determined, from now on, by the market, and we will provide liquidity at zero interest rates for the institutions that comply with the regulations and laws established.

Just let the market set the interest rates and keep rates at zero all the time. It's not a proper tool to shape or manage the economy, that's what fiscal and trade policy is for. Monetary policy is just an hoax, unless you are willing to go from one extreme to the other (very high to near-zero and the other way around), and then the consequences are unknown on the long run.

Fortunately for anxious central bankers, the private sector can expand (and does) endogenously when it needs to, and can find endless ways to create liquidity and leverage without the help of central bankers. Rising rates is not going to stop that. Only regulations and laws can stop that (if needed, like financing asset bubbles).

John said...

Ralph and Neil,

Central banks should be constrained, but until government does its job, the central banks hand is forced. Governments have become so dysfunctional that they will not do what is necessary. Indeed, they'd only make things worse by trying to balance the budget or run a surplus. Since there is almost no chance in the foreseeable future of electing sensible politicians, let's not be too hard on central banks.

It's not as if the central banks wanted to be in a position of the only thing standing between total economic collapse. They found themselves in a position of having to patch things together while hoping that government would wake the f**k up. But more than seven years into a crisis as serious as the Great Depression all major political parties are promising to run surpluses. As it is, I'm happy to take my chances with the unelected central bankers than the various Tory parties on offer.

Jose Guilherme said...

I wish one day central bankers came out and said: From now on, our only function will be to stop the collapse of payment systems and keep liquidity up when needed;

It's ironic that in the case of the ECB its function has been the precise opposite: it crushed Greece by cutting off liquidity to banks, thus triggering chaos in the payment system.

The ECB is the most powerful weapon in the euro arsenal to prevent rebellions against the system and keep complaining nations under full control. Let us please not underestimate the enormous power of central banks.

Neil Wilson said...

"Governments have become so dysfunctional that they will not do what is necessary."

So have central banks. The ECB saying that the Greek banks were solvent on the one hand and refusing to supply last resort liquidity on the other - due to some trumped up interpretation of the 'rules' was clearly designed to enforce political change in a country.

So be careful what you wish for. These things are run by the enemy.

Anonymous said...

Exactly, Neil. Liberals today are so soft-headed and spineless. Almost as if they all had a bit of dementia. As if the Fed were not on the side of the 1% always, and as if deception were not part of below-the-belt politics.