Friday, January 29, 2016

Can Fed Chair beliefs really be this fantastical?

In this piece byb Mike Konczal: Is Ted Cruz Right About the Federal Reserve and the Great Recession? I noticed this crazy line:

"Ben Bernanke recently showed that interest rates would have had to go to about -4 percent to offset the Great Recession at the time."

Which refers to this blog by Ben Bernanke: The Taylor Rule: A benchmark for monetary policy?

So here's two problems with this:

1) Does Bernanke really believe this? I mean does he seriously believe that if banks were taxed 4% on their "excess" reserves they would create the $10's of trillions of dollars in bank lending that would be needed to convert the $4 trillion in "excess" reserves due to QE in to "required" reserves? Does he really believe that banks would pay people (negative mortgage rates) to take out loans? Does he really believe that what the American private sector really needs to get back to health is 10's of trillions in new debt that must be serviced with stagnant real incomes? If your economic theory or model requires you to answer yes to any of these questions, then you are not only wrong, you are not qualified to head the world's largest and most important bank.

2) Appeals to authority. I dont know if Konczal himself actually believes that a 4% tax on bank reserves would have led to economic nirvana, but the language he uses is telling.....'Bernanke shows'.....Bernanke didnt demonstrate that the Taylor rule is operative in real life, he just solved for the variables in an equation. But how can that equation accurately reflect macro-economic reality if it requires "yes" answers to some of the ridiculous questions I asked above. And there is no way a rational analysis of banking and accounting mechanics could lead anybody to answer yes to those questions. This "Bernanke shows" nonsense leads uninformed readers to conclude that Bernanke is not stating an ideological position with precious little in evidence or logic to back it up, he's demonstrating "Truth" as a scientist who is intimately familiar with the subject. After all, there were equations that got "solved". So laypeople can repeat Bernanke's myth of a mechanical relationship between interest rates and the economy without hesitation, perpetuating these clearly ridiculous and failed ideas that the mainstream of economics peddles.

All of this is simply to say that the state of economic understanding and commentary is extremely poor. If this is the kind of ridiculous crap that passes for "wonkery" then we are still in a pre-enlightenment phase of economics closer to Copernicus than Galileo even after all of these decades of "studying the science of economics" Laughing My Fucking Ass OFF.


23 comments:

Tom Hickey said...

If this is the kind of ridiculous crap that passes for "wonkery" then we are still in a pre-enlightenment phase of economics closer to Copernicus than Galileo even after all of these decades of "studying the science of economics" Laughing My Fucking Ass OFF.

Sounds more like witchcraft and bloodletting to me.

Wave the interest rate magic wand.

Neil Wilson said...

"Does he really believe that banks would pay people (negative mortgage rates)"

A 4% excess reserve charge to banks would simply be passed onto borrowers in the form of *higher loan rates*.

It's unlikely to go to depositors because they have the option of buying bonds or other government certificates of deposit (including of course cash).

The whole concept is a triumph of belief over the reality of the way banks actually work.

Auburn Parks said...

Neil-

In the case that commented was directed at me, of course I know that which is why I pointed out how ridiculous a concept it was.

In the case that comment was directed at everyone, then carry on :)

Matt Franko said...

Hey Auburn youre risking your left-wing credentials here by taking issue with Konczal and Bernanke...

The point of the piece was to take a shot at right-winger Cruz...

Get with the program...

Brian Romanchuk said...

As always, Bernanke's views are non-falsifiable. I have come to appreciate that this is the secret sauce behind DSGE macro. If there appears to be predictive content behind the theory, it is based on non-measured variables that appear to move in such a way that the model predictions cannot be falsified.

I have decided that the only way to understand this is via anthropology. There is no point in worrying about theoretical validity; these guys (and gals) "fail upward".

I read David Graeber's new book, "The Utopia of Rules". I probably learned more from that book about economics than I would have from reading hundreds of mainstream books. Graeber may or may not be right, but at least he poses interesting questions.

Auburn Parks said...

Matt-

Right. Konczal "proved" that Ted Cruz was wrong by "showing" bernanke's work. As if bernanke were "showing" anything other than his mythological belief system.

Yeah, I'm not real popular on the left because they cant stand someone pointing out when they are wrong, ignorant, or just plain dishonest. They know how to deal with right wing ideological "facts" but when you hit them with objective reality, they dont know how to respond other than to lash out. They are often much more interested in talking about how bad the Repubs are then examining their own flawed ideology, beliefs, policies and conventional wisdom.

Trade deficits = bad WRONG
Corporate taxes = bad WRONG
FICA tax = good WRONG
lower taxes = bad (because then we cant afford it) WRONG WRONG WRONG!!!!!!!!

Neil Wilson said...

Just a general 'shouting into the ether' comment, Auburn.

It's does feel like we're acting out some bizarre version of Catch 22.

Auburn Parks said...

Should read "corporate taxes = Good" WRONG

I disagree with Neil on the "corporate taxes are good because you can hide them from voters concept."

I like simple and transparent as often as I can get it when it comes to public policy since the the vast majority of voters seem to have "below average" opinions and knowledge.

Roger Erickson said...

"the the vast majority of voters seem to have "below average" opinions and knowledge"

That feature is exactly what fraudulent elites depend upon, to extend their rule.

“5% of the people think;
10% of the people think they think;
and the other 85% would rather die than think.”
― Thomas A. Edison

http://www.goodreads.com/quotes/tag/willful-ignorance

More than ever, I'm convinced that Orthodox Economics is simply a propaganda tool invented long ago by Quisling academics, to please aristocrats, & now to please nouveau elites. It's a tool for managing "their" assets, not for optimizing aggregate growth.

Ignacio said...

Thanks Brian for mentioning that book, will ad it to the list. last one from him was pretty good.

JKH said...

This is a complete misrepresentation of what Bernanke actually said.

Try reading it - instead of channeling Konczal.

Neil Wilson said...

"I like simple and transparent as often as I can get it when it comes to public policy since the the vast majority of voters seem to have "below average" opinions and knowledge."

How very noble of you. I'd avoid a career in sales.

For the left the best thing is for voters not to see taxes. Then they can put them up when they feel like it - particularly if they have neutralised corporations power via job guarantees etc.

For the right the best thing is to make sure voters see taxes wherever they go. Then they will vote for those most likely to remove them.

Note that both concepts remove taxes from people who vote - but the former removes them quicker.

I don't expect the left to pick up on this quickly.

Auburn Parks said...

JKH-

Because I respect your commentary I went back and actually read Bernanke's whole piece, and you're correct. Bernanke does not support a -4% rate. With that said, all the criticisms I leveled at the mechanics of negative rates and how they would supposedly impact bank lending and the economy are valid. bernanke does not claim that negative rates wouldnt work because of the reasons I outlined, he is just inserting different numbers into the equation to get a different result on the supposed appropriate interest rate given how the Taylor rule works.

So Bernanke says "If the Taylor rule predicts a sharply negative funds rate, which of course is not feasible,"

why is it not feasible? Is it because there is no way for the transmission mechanisms to work because taxing banks doesnt lead to banks "lending out" their reserves?
Is it because we already have extremely high private debt levels historically and there is no way to force people to take on more debt if they dont want it?
Is it because banks would never give out negative rate mortgages?
Is it because using the wicksellian natural equlibirum interest rate as a model for how the economy works an inherently flawed concept?

No, he doesnt say any of those things. My guess is that he believes its not feasible because he thinks the "everyone will just withdraw their cash" is a thing that would become a widespread problem at -4%?

So again, my bad for the sloppiness in positioning my commentary at the beginning as if he advocated for -4%. Thats clearly false and my bad. But the entire economic paradigm (of which he is a member) that uses interest rates uber alles which leads to 25% of world GDP being governed by negative rates is truly a fairy tale version of reality. And I dont apologize for that part of my comments.

Random said...

Neil, you are being too subtle.

Matt Franko said...

Auburn I assume Neil looks at a VAT or sales tax as a form of "corporate tax"... The firms collect it and deposit it...

I dont think Neil is advocating for like a corporate income tax per se like we have here in USA as his option #1.... iirc Neil has mentioned things like a VAT which is technically a 'corporate tax"....

Auburn Parks said...

Matt, how is a sales tax hidden? Its right there on the receipt~!!!

Seriously though, I hear what you're saying. Hard to know which conflicting POV should win out here:

ON one hand I subscribe to the general principle that corporations arent people. They are jjust legal entities that real value and employ people, so society should want our businesses to succeed (not defined just by profit or revenue growth levels and rates). The best way to make sure our businesses succeed is:

1) Great pool of human capital (maximum education and health levels)
2) great physical infrastructure
3) low tax burden
4) simple regulatory and legal structure

So the way I see it is that #3 is easy. Just eliminate all corporate taxes and you have a competitive advantage on the whole world.

So thats where I'm coming from.

How the concept of hiding taxes in order to shift the propaganda (I love propaganda aka marketing, not a term of derision IMHO) in our direction ties in to these priorities. How do I fit that framework into this framework? Should I revise #3, is it not that important. Many questions and few answers thus far on this specific idea of Neil's.

Matt Franko said...

Its "hidden" in that it typically doesnt appear in the "P&L" so to speak...

Its different than if you have to compute the tax after sales minus expenses are achieved...

You wouldnt include it as part of sales or expenses... its just added at the "point of sale"...

Matt Franko said...

Trump is proposing heavy import tariffs these would be a form of what imo Neil is talking about...

The only people who would really bitch about it are ideologue libertarian morons all into "free trade!" and BS like that... the corporate business unit people wouldnt really care...

Matt Franko said...

A,

Its like a political thing... you have people busting butt to get sales and hammering vendors over the head and cracking employees skulls to keep costs down and you work yourself into a profit via blood sweat and tears and then the govt comes in and takes a bunch of that...

People cant f-ing stand that....

So if instead you would just have to tack an addtional sales tax of 10% onto whatever price you come up with to send to govt its not as bad...

Matt Franko said...

A,

Its like a political thing... you have people busting butt to get sales and hammering vendors over the head and cracking employees skulls to keep costs down and you work yourself into a profit via blood sweat and tears and then the govt comes in and takes a bunch of that...

People cant f-ing stand that....

So if instead you would just have to tack an addtional sales tax of 10% onto whatever price you come up with to send to govt its not as bad...

Auburn Parks said...

Lets put some numbers out there:

$3T in tax revenue as a target

So no progressive income tax? Just some on extremely high earners? Do $3T in sales taxes? how much would that increase prices if at all? What would the rate gave to be? Not really that familiar with the VAT system, how much of total revenue does it generate in "over there"?

Ignacio said...

Hint: VAT is not popular over here.

No such thing as popular tax.

Bob said...

Except maybe for lotteries.