What, if anything, does Kevin Warsh understand?

I came across this article by Kevin Warsh that appeared in the Wall Street Journal last August, 2016. The article was re-posted by GATA.ORG.

As you may know, Warsh is the currently the favorite to take over as Fed Chair when Janet Yellen's term expires next February.

If you read the article you will find that Warsh sort of understands that Fed policy is confused and focused on either the wrong things or, things which the Fed has no set of tools to accomplish. On the other hand he seems to lack any ideas of his own on how to reform the Fed or, even what policies outside of monetary policy would be useful. In addition he appears to not understand the primary function of the Fed as rate setter.

First he says,

"Can't explain current inflation readings below their targets."

He might be alluding to himself here. That's because Warsh was spectacularly wrong back in 2008 and 2009 when, as a board member of hte Bernanke Fed, he predicted soaring inflation as a result of ZIRP and Quantitative Easing. It was almost as if Warsh was reading from one of Peter Schiff's scripts at the time. He's still really confused on this.

Next

"A numeric change in the inflation target isn't real reform. It serves more as subterfuge to distract from monetary, regulatory, and fiscal errors. A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed's tools, strategies, communications, and governance."

Warsh gets this correct. Central banks seem to conflate inflation with growth. Inflation targets are not the same as growth targets. The Bank of Japan is a good example. It's been on a 25 year quest to bring inflation up. It's growth that they need in Japan, not inflation. Meanwhile all of the BOJ's policies are deflationary, such as negative rates and trillions upon trillions in asset purchases.

He makes this observation, which is a an obvious and good observation.

"Two major obstacles must be overcome: groupthink within the academic economics guild, and the reluctance of central bankers to cede their new power."

He its the nail on the head with the "groupthink" within the academic guild as he calls it. Unfortunately, he is a card carrying member of that guild.

"First, the economics guild pushed ill-considered new dogmas into the mainstream of monetary policy. The Fed's mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable."

He's correct here, too. The Fed looks at data, which is notoriously lagging. Furthermore, there's not much the Fed can do other than set prices via the interest rate channel and make loans. It needs to use those tools in a leading fashion to whatever extent they can help achieve its mandate. The "data" follows.

"The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously -- an impossible task with the free flow of capital."

With this statement he appears completely ignorant of the Fed's rate setting role. He sounds like Jim Rogers or, Schiff, again. He thinks the market sets rates. Does he not understand that all the Fed has to do would be to set the fed funds rate at zero, permanently, and all rates along the term structure would converge there? It has nothing to do with capital flows. (Whatever that means.) Similarly, negative rates would strengthen the dollar while high interest rates would fuel inflation and erode the dollar's  exchange value.

"The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word."

For a Harvard trained lawyer his wording is quite colorful here. A bit flowery even. However, it's true that the Fed is a slave to the markets. Yellen won't do anything unless Fed fund futures tell her to do it. Bernanke would "poll"  market participants as to the size of QE the Fed should perform.

I come away with the sense that Warsh knows the Fed needs reform, but he doesn't know in what fashion, exactly. He also doesn't understand the Fed's power as a monopolist. He mentions "fiscal errors," but doesn't say what they are. He probably thinks too much debt and deficits.

Bottom line is, we can make a lot of money off this guy if he gets in.

Bill Mitchell — More fun in Japanese bond markets

The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots....

Bill Mitchell – billy blog
More fun in Japanese bond markets
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

When this happens buy the ruble

Russia's central bank chief, Elvira Nabiullina, is thinking about cutting rates. When she jacked rates up to 17%, like, overnight a little over a year ago she actually did much of the work of pushing inflation way up, which was a problem she was supposedly trying to fix. However, she doesn't understand that. The ruble plunged. Another thing she was trying to avoid.

Finally, she is now considering lowering rates. When that happens by the ruble. (There are futures contracts on the CME.)

Rate cuts are price cuts: they lead to lower, not higher inflation. Currencies rally. (Eventually, after the clueless first sell. Take their money please.)

Rate hikes on the other hand are price hikes, that's why the dollar is falling and you saw gold take off out of its four year bear market the mintue the Fed hiked rates back in December. The gold rally literally started on the day the Fed did that.

Jesse Livermore — Fiscal Inflation Targeting and the Cost of Large Government Debt Accumulation

The insight that fiscal policy can be used to manage inflation, in the way that monetary policy is currently used, is not new, but is attributable to the founders of functional finance, who were the first to realize that inflation, and not the budget, is what constrains the spending of a sovereign government. Advocates of modern monetary theory (MMT), the modern offshoot of functional finance, notably Scott Fulwiller [sic] of Wartburg College, have offered policy ideas for how to implement a fiscally-oriented approach. 

My view, which I elaborated on in a 2013 piece, is that the successful implementation of any such approach will need to involve the transfer of control over a portion of fiscal policy from the legislature and the treasury to the central bank. Otherwise, the implementation will become mired in politics, which will prevent the government’s fiscal stance from appropriately responding to changing macroeconomic conditions. 

There are concerns that such a policy would be unconstitutional in the United States, since only the legislature has the constitutional authority to levy taxes. But there is no reason why the legislature could not delegate some of that authority to the Federal Reserve in law, in the same way that it delegates its constitutional authority to create money. In the cleanest possible version of the proposal, the legislature would pass a law that creates a special broad-based tax, and that identifies a range of acceptable values for it, to include negative values–say, +10% to -10% of earned income below some cutoff. The law would then instruct the Federal Reserve to choose the rate in that range that will best keep inflation on target, given what is happening elsewhere in the economy and elsewhere in the policy arena.

Ultimately, the chief obstacle to the acceptance and implementation of fiscal inflation targeting is the fear that it would lead to the accumulation of large amounts of government debt. And it would, particularly in economies that face structural weakness in aggregate demand and that require recurrent injections of fiscal stimulus to operate at their potentials. But for those economies, having large government debt wouldn’t be a bad thing. To the contrary, it would be a good thing, a condition that would help offset the weakness.

The costs of large government debt accumulation are not well understood–by lay people or by economists. In this piece, I’m going to try to rigorously work out those costs, with a specific emphasis on how and in what circumstances they play out. It turns out that there is currently substantial room, in essentially all developed economies that have sovereign control over credible currencies, to use expansive fiscal policy to combat structural declines in inflation, without significant costs coming into play.

The reader is forewarned that this piece is long. It has to be, in order to make the mechanisms fully clear. For those that want a quick version, here’s a bulleted summary of the key points:

Philosophical Economics
Fiscal Inflation Targeting and the Cost of Large Government Debt AccumulationJesse Livermore
ht Phillipe in the comments

Another central banker who is clueless. Czechs intervene to weaken their currency.

Czech Republic is a member of the EU, but it still has it's own currency, the koruna. It intelligently never went to the euro.

So while Germany and the other two members of the "Troika" destroy Europe for their own ends, you'd think that the Czechs would just sit back and enjoy watching the show, after all, the koruna's appreciation against the euro equates to better real terms of trade for the Czech people. It also equates to a rise in  their standard of living relative to their neighbors in the Eurozone.

What's wrong with that?

Apparently everything according to the Czech central bank, as in, they'll be damned to let that happen. They intervened in currency markets--selling the Czech koruna and buying euro--to maintain a fixed exchange rate of 27 koruuna to the euro.

"The central bank is ready to “automatically intervene for an unlimited time and in unlimited volumes to keep the koruna rate close to the level of 27 per euro,” Bartuskova said separately in an e-mailed statement. “The CNB only acts against exchange-rate appreciation beyond the declared level."

This is to affect what you may be wondering? To sustain exports. Of course this is the only way to grow in the minds of these Austrian lunatics. They're literally taking their citizens' money to support the economic arson that is going on in the Eurozone.

It's totally pathetic. The world goes to floating exchange rates, but central bankers still can't get away from trying to fix them. All this, of course, due to the abandonment and fiscal policy...branding it as bad.

Thrilling Race To The Bottom At Draghi Downs.

   (Commentary posted by Roger Erickson)



It's just astounding that such polar opposite views can exist at this level, in one profession. 

Draghi on the euro

Is it a mistake to let academic economists and/or politicians/oligarchs with ZERO commercial/reserve banking experience try to manage a Central Bank?

Does any MiddleClass anywhere have a horse in this race anymore? Which Horse Are YOU Betting On? The one with the MMT saddle, or the one with Draghi Do-wrong riding backwards in the saddle?

Brian Romanchuk — What Is A Government Bond?

This article is an introduction to some core concepts of Modern Monetary Theory (MMT). Although I associate this explanation with MMT, it is clear that it was foreshadowed by earlier economists, such as Abba Lerner. I am currently not in a position to say who was the first to do this mode of analysis.

MMT versus loanable funds explained with respect to bonds, interest rate, and yields.

Bond Economics
What Is A Government Bond?
Brian Romanchuk

Brad DeLong — Malinvestment In The Recession?

I think Daniel Kuehn mistakes Evan Soltas's point. Soltas is arguing not against the fundamentalist Austrians and their claims that the depression is caused by previous malinvestment in the boom. Soltas is arguing against the Martin Feldstein's who claim that interest rates need to be high during the bust in order to guard against additional malinvestments committed then.

Grasping Reality
Malinvestment In The Recession?
J. Bradford DeLong | Professor of Economics, UCAL Berkeley

Ashwin Parameshwaran — Implementing The Helicopter Drop

Speaking of helicopter drops. 

Ashwin proposes a way to counter irrational expectations.

Macroeconomic Resilience
Implementing The Helicopter Drop
Ashwin Parameshwaran

Warren Mosler — Japan Finance Minister Confirms an understanding of fiat money and Modern Monetary Theory

In the Yahoo Japan article below, Tara Aso, the Finance Minister (and Deputy PM) of the country with the largest debt/GDP ratio in the developed world indicated that Japan could just print yen to pay off its debt. This is exactly what I stressed in my book Soft Currency Economics....

Soft Currency Economics
Japan Finance Minister Confirms an understanding of fiat money and Modern Monetary Theory
Warren Mosler

Neil Wilson — The Consolidated Government Sector

The key analytic technique that MMT uses that sets it apart from most others, is that it uses a consolidated government sector in its analysis (although apparently the mainstream is slowly catching on). This allows it to cut through the obfuscating political constructions between the various government departments and institutions and concentrate on the essence of what is happening

This is entirely consistent with accepted accounting practice, using a technique known as group accounting - which produces consolidated financial statements (income, balance and cash) amongst a related group of entities. The international accounting standard for that is IFRS 10 'Consolidated Financial Statements' which requires that entities under common control present a consolidated set of accounts so that external users can obtain a 'true and fair view' of the actual underlying economic transactions.

The Central Bank in all sovereign jurisdictions falls under the definition of control by the Treasury - often de facto by the operation of law (Bernanke: "Our job is to do what Treasury tells us to do"), but also de jure, e.g in the Sterling area HM Treasury actually owns the entire shareholding of the Bank of England. The control model in IFRS 10 is elaborate to try and catch all those little tricks that entities use to avoid having to consolidate accounts and is worth studying to see the various 'Wizard of Oz' methods that control can be imparted even though the public face is supposedly independent.

Given the control relationship, consolidated financial statements are entirely appropriate and correct accounting which reveals the essence of the underlying transactions. Therefore in your model you should be able to swap out the detailed entities and replace them with the consolidated entity and nothing about the response should change. If it does then it is likely your model is wrong.

3spoken
The Consolidated Government Sector
Neil Wilson

Andrew Lainton — Government Debts and Treasury Bonds – Neither Keynesian or Inflationary

This matters because treasury bonds are exactly like corporate bonds, these are in the first instance transfer payments between balance sheets of the existing monetary stock, unlike bank (including central bank) money which involves money creation through crediting of accounts.

This is the key because a ‘Central Bank bond’ adds to monetary base and so the net credit induced demand {change in debt – change in saving)(this is a simplification as any increase in bank lending may require additional capital which requires saving which must then be leveraged) whereas a treasury bond is simply a transfer payment, there is no net increase in money or effective demand. There is no net change in the monetary base – the increase in debt is exactly offset by the increase in saving to purchase the bond.

He mistakes the function of the monetary base and tsys as a reserve drain having to do with central bank interest rate setting and doesn't take into account the difference between consolidated non-government net financial assets in aggregate and endogenous credit-debt relationships in non-government, which necessarily net to zero.

Decisions, Decisions, Decisions,
Government Debts and Treasury Bonds – Neither Keynesian or Inflationary
Andrew Lainton

John Carney — Deflation Is 'Persistent Risk': Money Manager Dan Arbess

[At the Milken Institute Global Conference] the Wednesday morning presentation by Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, was startling because of how deeply it broke from the standard narrative.

We've been wrong to assume that the economic crisis is over, Arbess said. We stopped the crisis from reaching Great Depression levels through drastic fiscal actions such as TARP and the Obama administration's fiscal stimulus. But almost as suddenly as we started, we stopped these efforts, which Arbess says has resulted in us being "mired down" for the past four years.

What's kept us afloat has been monetary policy, but that's now reaching its limits, according to Arbess. The threat of deflation is once again rearing its head.

"The persistent risk in our economy is deflation not inflation," Arbess said....

His proposed solution is that we start directly funding government expenditures through the central bank. That is, we should stop relying on taxes or further debt issuances to finance government—or at least reduce our reliance on taxes and bonds. Just let the Federal Reserve pay the government's bills by exercising its money creation powers.

John points out that Arbess was clearly influence by Adair Turner and this recommendation has academic precedent in a 1948 paper by Milton Friedman. This is the genuine "helicopter money" (fiscal) rather than QE (monetary).

CNBC
Deflation Is 'Persistent Risk': Money Manager Dan Arbess
John Carney | Senior Editor

John Aziz — A Visual Representation of the Zero Bound

Azizonomics
A Visual Representation of the Zero Bound
John Aziz

The monetarists hold that this is only because negative real rates are ruled out in the existing system. If it were possible to charge for reserves instead of paying interest on them, then you would see how they are right. Sure could fool me looking that that chart.

Joshua Wojnilower — The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets

Woj analyzes Ashwin Parameshwaran's Helicopter Money Is Not Dangerous, All Macroeconomic Policy Is Dangerous in terms of the real interest rate and the real wage, showing why a monetary approach is too blunt an instrument, so that a targeted fiscal approach is needed.

Bubbles and Busts
The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets
Joshua Wojnilower

What's it Say When a Fiat-Currency-CB Promotes Microfinance?

commentary by Roger Erickson

That there's a 2-tier approach to national liquidity?

This, from the Central Bank of a country that endorsed fiat currency 80 years ago? We need to send the entire St. Louis Fed back in their own WayBackMachine, to visit Marriner Eccles.

Maybe they could pick up on the concept of increasing the income of all citizens, so we could all use the banking system we already have?

If we have a system for providing liquidity to all citizens with real options, why not use it? Is the St. Louis Fed acknowledging that our existing banking system is - in practice - only for "high-income" people?

In a fiat-currency system, admitting that we have endorsed low-fiat and high-fiat Americans equates to constrained and unrestrained Americans, as a point of logic. That is both class based and system-non-science idiocy of course, since it ignores the logic of both sexual and cultural recombination. Since we have no predictive power, we need to practice exploring fully open Options Recombination, at breakneck speed - or else. Anything less is cultural suicide. If we don't explore our options, some other nation will.

Screw the Merchant Lobby. Free Options = National Liquidity = Managed International Trade.  We need liquidity and Free Options far more than Free Trade.  The Free Trade lie is promoted by a Merchant Lobby wielding only microintellect, but plenty of propaganda. Who's fooling whom, America?  Patriotism is NOT promoting your local merchant channeling Benedict Arnold.

***

Today: St. Louis Fed ‏@stlouisfed Video: See how microfinance can work for low-income Americans

They're revisiting their own review from Sept 2011, here's the

St. Louis Fed: Lessons from Bangladesh: How Microfinance Can Work in America

SEPTEMBER 2011

Daniel Davis, former community development specialist with the St. Louis Fed, traveled to Bangladesh in the winter of 2010/2011 to examine the impact microcredit has had on the developing nation.

While there, he had the opportunity to spend time with leaders of some of the world's most innovative microfinance institutions, including Dr. Muhammad Yunus, a Nobel Prize-winning economist from Bangladesh and founder of the nation's Grameen Bank. Davis' insights are shared here.

Related Article:
"All I Really Needed To Know about Microfinance I Learned in Bangladesh," by Daniel Davis, spring 2011 issue of Bridges | PDF presentation

Related Video:
Interview with Microfinance Expert and Kiva Co-Founder Jessica Jackley, May 2011

The Economist — Platinomics

Must-read. The cat is out of the bag. TPC has done its job. The explanation is now in the mainstream. No economist or financial professional can read this and not get it. This is a really succinct and clever account that cuts to the chase. The last mile is really closing fast.

The Economist | Free Exchange
Platinomics
G. I. | Washington
(h/t y in the comments)

Randy Wray — Bond Vigilantes And Math Sustainability Of Fiscal Deficits

(Part 1): Does Sovereign Government Set Its Own Interest Rates?

Last week we began our series exploring where MMT parts company with “Keynesian” macroeconomics. This is a response to Ed Dolan’s useful post here: http://www.economonitor.com/dolanecon/2012/11/28/what-does-it-mean-for-fiscal-policy-to-be-sustainable-mmt-and-other-perspectives/

Economonitor | Great Leap Forward
Bond Vigilantes And Math Sustainability Of Fiscal Deficits
L. Randall Wray | Professor of Economics, UMKC

Race to The Bottom Enters the Gun Lap?

And is someone, somewhere preparing for onset of the Drone Wars? (Is Cheney back in his secret location?)

Yen Falls to 6-Month Low as Japan’s Abe Calls for Easing

Abe "called for the central bank to provide unlimited stimulus"

No mention of more fiscal stimulus & lower taxes (=> easiest path to Increased Public Initiative, aka, "fiat deficit" ).

This comes on the heels of people musing that "Japan's politicians and institutions may not be up to the task" of keeping up with the current pace of events.   Name me a country where politicians are up to that task!!

If existing governments don't allow electorates to use their own, sovereign currency (their liquidity tool), those electorates will find alternative, less efficient outlets for public initiative. The bigger deficit, everywhere, is the deficit in situational awareness and hence thinking, and the abysmally slow decision cycles.