There is a psychological bias to believe that exceptional events eventually give way to a return to “normal times.” But the world economy is far from a return to pre-2008 normality, with most of the obstacles to more robust recovery to be found on the demand side.Project Syndicate
The Normalization Delusion
Adair Turner
Adair Turner
5 comments:
Hey have to get the RBS back down to $1Tish and rates back up to 5%ish and then things will be back towards "normal"....
Turner was head of the UK’s Financial Services Authority prior to and during the start of the bank crisis in 2007. Like other incompetents in high places around the world he failed to see the crisis coming. Why anyone listens to these people who clearly made a mess of their job is a mystery.
Turner has not caught up with MMT. As MMTers, or at least the more clued up ones have explained, a country which issues its own currency has complete control of aggregate demand and interest rates. Thus Turner’s rambling article about when interest rates will return to normal is nonsense: any monetarily sovereign country can return interest rates to normal if it so wishes, though the above mentioned incompetents in high places clearly don’t know how to do it.
Assuming raised interest rates are desirable, they can be raised by feeding more base money into the private sector. That raises demand. Enough of that ploy will raise demand too much, and that can be countered by raising interest rates.
But raising rates just because that constitutes a “return to normal” is idiotic. The crucial question, which Turner fails to address is: what’s the OPTIMUM or GDP maximising rate of interest? My answer to that is “the free market rate”. And that can be achieved by the Warren Mosler / Milton Friedman policy, namely having the state cease issuing interest yielding liabilities, and instead just issue non-interest yielding liabilities, i.e. base money (and in whatever amount brings full employment). Interest rates can then be left to their own devices.
Turner has not caught up with MMT.
Hunh? He caught up over eight years but couldn’t convince Gordon Brown. That’s why Brown overlooked him as new Bank of England head and hired a Canadian instead.
A year ago, Turner wrote:
”Faced with a slowing global economy, a number of observers – including former US Federal Reserve Chair Ben Bernanke and Berkeley economist Brad DeLong – have argued that money-financed fiscal expansion should not be excluded from the policy toolkit. But talk of such “helicopter drops” of newly printed money has produced a strong counterattack, including from Michael Heise, the chief economist of Allianz, and Koichi Hamada, the chief economic adviser to Prime Minister Shinzo Abe […] I disagree with Heise and Hamada, but they rightly focus on the central issue – the risk that allowing any monetary finance will invite excessive use.”
Taylor was arguing years ago for what we Americans call FISCAL policy. Your Eton club man thought he was full of shit so, as I said above, he hired the Canadian.
Adair Turner in defense of helicopter money
https://www.weforum.org/agenda/2016/05/adair-turner-in-defense-of-helicopter-money
”Willem Buiter, one of the original interest-rate setters from 1997, says central banks should “stick to their knitting” and confine themselves to setting interest rates and acting as a lender of last resort. At the other end of the spectrum, Adair Turner has argued that in certain circumstances the government should instruct the Bank to print money for public spending or tax cuts.”
https://www.theguardian.com/commentisfree/2017/may/04/the-guardian-view-on-the-bank-of-england-independence-and-accountability
The crucial question, which Turner fails to address is: what’s the OPTIMUM or GDP maximising rate of interest? My answer to that is “the free market rate”. And that can be achieved by the Warren Mosler / Milton Friedman policy, namely having the state cease issuing interest yielding liabilities, and instead just issue non-interest yielding liabilities, i.e. base money (and in whatever amount brings full employment). Interest rates can then be left to their own devices.
The the Warren Mosler / Milton Friedman policy ?!?!?
What orifice did you pluck that out of? They couldn’t have been further/farther apart.
How many times have Warren, Bill Mitchell, Scott Fullwiler, Stephanie Kelton, and Randy Wray said that the sole operational purpose of US bond sales since we went off the gold standard domestically in 1933—what you call interest yielding liabilities—is to help our central bank hit its overnight interest rate target (called the fed funds rate here in the US). The market doesn’t set the interest rate here—least of all some “free-market rate; that’s Alan Greenspan lunacy—the Fed does.
Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, and prevents overnight rates from rising.
The central banks of England, Canada, Japan, and Australia handle things differently, although I don’t know the ins and outs, but that’s the purpose here.
MRW, I agree Turner caught up with the virtues of helicopter money some time ago. But he hasn’t got my above points about interest rates.
Re Mosler, Mitchell, etc’s point that the purpose of bond sales is to enable the Fed to hit the interest rate target, all they’re saying is that is how the EXISTING SYSTEM works. They’re right there.
However Warren also advocated a permanent zero rate here (quite rightly, I think):
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
Re Friedman’s support for the same idea, he advocated it his 1948 American Economic Review paper “A Monetary and Fiscal Framework for Economic Stability”. To be exact, he argued (like Mosler) that governments should issue no interest yielding liabilities, though he thought those liabilities might be justified in war-time.
"Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, and prevents overnight rates from rising."
This statement is not fully descriptive of the effects of Fed purchases.....
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