Monday, August 24, 2015

Brad DeLong — **Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.

The problem is that the global economy is on the cusp of the second leg down in the GFC. Central banks have already shot off their bazookas and it hasn't resulted in the expected recovery other than a very tepid one in the US, assisted by fiscal policy.

By and large neoliberal conservative forces are in power in most of the economies that count, which either means a preference for austerity or a bridle on stimulative fiscal policies. Conservatives now argue that austerity has not really been tried effectively and central banks need to tighten, fiscal policy needs to be more austere to become expansionary by forcing greater wage flexibility to get investment going — and everyone needs to export, export, export, even though that is impossible in a closed global economy. 

So we are standing on the brink of 1937, and while history doesn't repeat, we all know what happened after that. Let's hope history doesn't rhyme in this case.

Think fiscal, fiscal, fiscal. "It's the demand, stupid."

This is serious. If it is not handled correctly in a prompt way, a global debt deflationary spiral is in the cards and things begin to unravel. Which will be just fine with the liquidationists.

Grasping Reality
**Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.
Brad DeLong | Professor of Economics, UCAL Berkeley

If the effects of the crash cannot be reversed with monetary policy, that leaves fiscal policy — that old, neglected, unpopular tool — to fight any breakouts of deflation or mass unemployment.
Or it leaves central banks to try really radical policies that emulate the directness of fiscal policy, like literally throwing money out of helicopters or OMFG. [Overt Money Financing]
Correction or Crisis?
John Aziz


Michael Norman said...

What you are saying is true, Tom, and it has been bothering me as well.

However, here in the US the Feds are still spending nearly $4.3 trillion annually. China's growth is 7.0% and they are likely offsetting the negative effects of devaluation by spending more domestically. Europe is the same as it has been for 5 years with elections coming up in Spain, Britain, Portugal, Denmark, Finland, Poland, later in the year. Japan's export of deflation via a weak yen may come to an end soon as they restart their nukes and stop running big trade deficits.

I hear ya about the conservatives and the austerians being in power. It's a problem, but I'm watching with my fingers crossed.

Joe said...

Why did fiscal policy become so disliked and monetary policy crowned king? Seems obvious to me that fiscal policy is really the only effective tool. Monetary policy is wholly constrained by demand for credit (hasn't the last 8 years proved that beyond any doubt at all?) Plus, private sector debt is trading consumption now for reduced consumption in the future as you pay back your debt. Fiscal policy has no such hangover.

Seems to me that it has roots in class issues and financier self-interest. Encouraged people to load up to their eyeballs in debt, when they don't want anymore, lower the interest rate. Then when you have most of the population fearing bankruptcy, they'll quit demanding higher wages, better working conditions, etc. Didn't Greenspan one time quip that debt solved the labor problem?