Thursday, January 26, 2012

John Carney — Why Does Bernanke Lie to Us? Why Can't He Just Admit What the Problem Is?

Read it at CNBC NetNet
Why Does Bernanke Lie to Us? Why Can't He Just Admit What the Problem Is?
by John Carney | Senior Editor

John explains correctly (from the POV of MMT) that this is a "balance sheet recession" in the sense that the issue is excessive leverage as a hangover of the financial crisis and that the private sector continues to deleverage. The increased saving and deleveraging results in demand leakage, and debt-adversity creates reluctance to borrow. Moreover, the financial crisis has resulted in tighter credit, fewer qualified loan applicants, and a reluctance to borrow in the face of adversity or uncertainty.

All well and good. However, John cites Reinhart & Rogoff as a chief piece of evidence. But R&R is about public debt, whereas the issue is excessive private debt applying the analysis of Irving Fisher and Hyman Minsky. Moreover, R&R is a flawed study as many have pointed out.

Richard Koo, Paul Krugman, and the MMT economists, as well as Post Keynesians like John T. Harvey all cite private debt as the issue and say that the government's fiscal balance has to increase to make space for increased private desire to save in the face of the external sector saving as well. This means larger government debt, since deficits are required by law to be offset with tsy issuance. 

While deficit doves warn that the budget must be balanced over the business cycle, MMT economists dismiss this as unfounded. See Scott Fullwiler on the intertemporal government budget constraint (IGBC) in "Interest Rates and Fiscal Sustainability."

So John is correct that Bernanke and the Fed are not coming clean, but the issue is private sector indebtedness and saving-deleveraging rather than public debt, either presently or in the foreseeable future owing to a supposed IGBC.


Anonymous said...

LOL! So it's all on J6P once again even though he's been put through the ringer for the last 30 years. In order to help J6P the govt. must spend, what have they been doing?, in order to help the little fella.

30 years of the govt. spending orders of magnitude above GDP, and you still think the answer is more debt. I'm guessing you think those intra-governmental bond holding by the SS Admin. are money good as well even though they are non-marketable securities. New Treasury paper will have to be issued even though we paid this tax once already through our payroll deductions.

Exponential math is gonna kick our asses with a certainty that only math can provide, and you think it's the answer. ROFLMAO!

Dan Kervick said...

To me the elephant in the room is not private sector debt. It is the stagnation of household income, which actually means large declines in household income for substantial segments of the population.

The household debt-to-GDP ratio has now fallen back to the level it was at in 2004 or so. So why hasn't consumer spending behavior returned to pre-recession levels? Because 100 million people have permanently adjusted their willingness to spend downward, in the knowledge that their nominal incomes are not rising, and their real incomes are falling. They expect a gradually diminishing standard of living, capped off by lower retirement income. The future is dark.

The current elite macroeconomic strategy in the US export-driven. Our political and business leaders seek make our workforce more "competitive" on the international labor market by depressing real wages. So exports are up a bit. But that also means these worker/consumers are poorer, and are going to continue to get poorer. And they know it. This is obviously going to be a persistent drag on the domestic economy, though not on the personal economies of the privileged class of winners who do their business abroad, or do business mainly with the affluent, and care only about costs on the domestic side, or consumption among the rich, not middle class consumption.

The reason we're in a balance sheet recession to begin with could with justice be called "too much borrowing." But it could with equal justice be called "too little income." The income of the middle class is the broad foundation of the payment flows that support the credit industry. As the gap between income and debt grew larger, the house of credit became a house of speculation and then a Ponzi house of cards.

And income flows to the middle class declined because we have gone through three decades of shifting income away from the bottom and the middle and toward the top of our society. The rich hijacked our wealth; and now they successfully lobby to follow a strategy designed to make sure they can keep what they have collected, and keep the rest of us in our places.

As I have said before, the current chapter in US economic history should be called The Great Income Crash.

Tom Hickey said...

@ Dan K

True. The reason that private debt was run up is that profit from productivity increases was not distributed so that the middle and bottom had to increase debt to maintain lifestyle.

But a great deal responsibility also falls on the American consumer for maintaining an unaffordable lifestyle and even expanding it lavishly.

The answer is not only adjusting income and wealth distribution more equitably, but also changing the culture to reduce eccessive consumerism, which really got out of hand. Of course, there is more to it that than that, but mindless consumption was a big issue. Hopefully, the US over that, but somehow I don't think so. It's a cultural thing now. But we'll see. Perhaps the younger generations will take a different tack based on rising consciousness.

Brinn aka The Banker said...

Carney's article is from June of last year. Not sure when John's conversion to the church of MMT began but I'm willing to bet that he would make some significant changes to that article if he was to rewrite it again today. John is a sharp guy and he's shown a willingness to learn. I'm willing to cut him some slack on the R&R issue.

Woj said...


Thanks for all your work and effort on this site. I tend to agree that private sector, especially household, debt plays a significant role in restricting demand as consumers deleverage. As I understand the MMT argument, using sectoral balances, the public sector must run deficits to allow the private sector to save more.

My question/concern is that private sector saving, as defined in those terms, does not necessarily imply that household or private sector debt is decreasing. Looking at data for the US and Japan appears to show periods where the private sector was running a surplus while increasing debt. If that's true, then grater private saving is not required for the private sector to deleverage (reduce debt).

I assume that I'm missing something or using the term deleveraging in a different way than intended. Any thoughtful responses to this question would be greatly appreciated. Thanks.

Tom Hickey said...

@ Woj

It is necessary to decompose the aggregate numbers to see who is saving, who is deleveraging, and who is going deeper into debt.

The private sector includes households and firms and firms are sitting on about two trillion in highly liquid assets rather than investing.Those in the upper income brackets who are the largest recipients of income and holders of wealth are also increasing savings (financial wealth). The middle class is deleveraging from the housing crisis, and many in the middle class and the bottom are using credit for both cash flow and also to maintain lifestyle.

So while the aggregates are important at the macro level wrt sectoral balances, what happens at the micro level depends on factors not reflected at the macro level. As a result, for example, the aggregate figures are not good predictors of future behavior. One has to examine the microfoundations.

Tom Hickey said...

@ Brinn aka The Banker

Maybe he'll update it. :)

Anonymous said...

MMT = More.Monetary.Treason?

Calgacus said...

Anonymous, your mathematics - isn't. Your reasoning - isn't. Your facts, your history - aren't. You don't understand money, what it is, how it works. Why not make the effort?

30 years of insufficient government spending - gross overtaxation of working people, while increasing welfare-for-the-rich, is what caused this mess.