“El momento que atraviesa la región, con recursos naturales y humanos impresionantes, sin conflictos raciales ni religioso, es un momento único y creo que Argentina y los argentinos están ante una oportunidad sin precedents.”
“The present time [the region, Latin America] is going through, with its impressive natural and human resources, devoid of racial and religious conflicts, is a unique moment, and I believe that Argentina and Argentines are at the doorstep of an unprecedented opportunity.”
—Cristina Fernandez de Kirchner, October 29, 2006
Argentina’s history has been marked by perplexing cycles of opportunity and crisis. In recent months, Argentina’s currency is plummeting and inflation is soaring. Average Argentines, as Ignacio de los Reyes of the BBC (Argentina peso crisis: Testing times ahead) writes, are feeling the burden:
"People are tired," Emanuel, a young banker from Buenos Aires, told de los Reyes. "One week, the government put restrictions on online shopping and now they allow the purchase of dollars; it does not follow a pattern, they contradict each other all the time," …
“One day, Argentines went to sleep with a plummeting peso and tight exchange controls. The next day, the country awoke to a radical change in the government of Cristina Fernandez de Kirchner’s foreign currency policy. After more than two years of increasing restrictions on the purchase of dollars, like taxing credit card transactions abroad or restricting online commerce on foreign websites, Ms Fernandez’s chief of staff, Jorge Capitanich, announced that buying dollars for savings accounts would be legal again.”
The latest crisis follows a tumultuous 200 years of excessive borrowing, defaults, and long-term economic decline as detailed by Boris Korby and Katia Porzecanski (Argentina Bust Lures Investors After 200 Years of Defaults):
“The South American nation has stiffed creditors seven times since independence from Spain in 1816, and following the latest default, in 2001, Argentina has yet to work out a settlement with all its financiers.”
“[T]he trouble .. stems from the decisions Mrs. Kirchner and her government have championed for years. She describes her politics as “national and popular,” referring to efforts to promote national interests and industry, and to put in place policies that reach out to the masses. ..
Generous social spending after the economic collapse, like freezing household electricity rates, has widened Argentina’s budget deficit, encouraged energy consumption and increased the country’s dependence on energy imports, eroding the central bank’s hard currency reserves.”
For more theoretical insight and discussion, we refer our readers to the work of Alexandre Lamfalussy, the eminent international banking expert, who has studied the impact of financial globalization on financial fragility. His 2000 book, Financial Crises in Emerging Markets (Yale University Press),is a gem —-an outstanding example of behavioral research in investments and asset pricing.
“This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised.”
—Dani Rodrik, in the article "Death by Finance"
“The worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings.”
— Pope Francis, Evangelii Gaudium, “The Gospel of Joy.”
Since his election in 2013, Pope Francis has captured the imagination of popular consciousness. Stories on his apparent success in shifting the conversation away from doctrinaire impasses and toward a message of mercy frequently appear in popular news sites, reaching a highpoint in his further “election” as Time’s Man of the Year. Time and again, Pope Francis has brought into dialogue individuals, groups, and ideas that were traditionally outside the familiar religious circle.
Though it was not the principal message of his first papal writing—the apostolic exhortation titled Evangelii Gaudium, or “Gospel of Joy”— the pope’s condemnation of economic inequality caught international attention. Last week, it was the dominant theme at the World Economic Forum in Davos. This week, it stands central in President Obama’s State of the Union address.
Now, to state the obvious, Evangelii Gaudium is a sermon, not an economic treatise, but it has been criticized as such by many, including Sarah Palin— "He’s had some statements that to me sound kind of liberal,"—and Rush Limbaugh—"It’s sad, because .. he doesn’t know what he’s talking about when it comes to capitalism and socialism.”
These critics view the Pope as overstepping traditional boundaries and wading into a field in which he is either misinformed or altogether wrong; the ire he has gained from conservative Catholics in the religious sphere for his comments on homosexuality, communion for divorcees, and a great role for women in the church is now shared by paleo- and neo-conservative economists, who see in his commentary a nascent form of “Marxism.”
But others, like Chris Kelly in the Scranton Times Tribune, answer Limbaugh’s claim that someone has “gotten to him”:
“Rush is right. Somebody has gotten to Pope Francis. Somebody named Jesus Christ. The Jesus of Scripture, not the Trickle-Down Jesus of Aw-Shucks Hucksters and Wall Street banksters selling the “Gospel of Prosperity.”
Jesus has been co-opted by the very powers he sought to supplant. In their version of the Gospel, the Good Samaritan tells the roadside victim to help himself. The poor, sick and elderly are left to fend for themselves. Black Friday is held holier than Good Friday…
Trickle-Down Christians are sore at Pope Francis because he has dared to point out that much of what ails the world today is analogous to the world Jesus walked. The power and prosperity of the planet is hoarded by a tiny percentage of the population while billions go hungry, sick and unheard…
The Jesus of Scripture challenged us to look critically at ourselves, to peer into the dark corners of our hearts and minds and hold ourselves accountable for our thoughts and actions. He challenged us to see what is and say what should be, to speak truth to power, no matter the consequences.”
The Pope’s message is just the latest in a growing series of clarion calls for action on the systemic problems with the current financial system. David Simon—the creator of the Wire—recently made an impromptu speech about the threat of widening inequality and the need for reform:
“People are saying I don’t need anything but my own ability to earn a profit. I’m not connected to society. I don’t care how the road got built, I don’t care where the firefighter comes from, I don’t care who educates the kids other than my kids. I am me. It’s the triumph of the self. I am me, hear me roar.
That we’ve gotten to this point is astonishing to me because basically in winning its victory, in seeing that Wall come down and seeing the former Stalinist state’s journey towards our way of thinking in terms of markets or being vulnerable, you would have thought that we would have learned what works. Instead we’ve descended into what can only be described as greed. This is just greed. This is an inability to see that we’re all connected, that the idea of two Americas is implausible, or two Australias, or two Spains or two Frances…
And so in my country you’re seeing a horror show. You’re seeing a retrench-ment in terms of family income, you’re seeing the abandonment of basic services, such as public education, functional public education. You’re seeing the underclass hunted through an alleged war on dangerous drugs that is in fact merely a war on the poor and has turned us into the most incarcerative state in the history of mankind…
I’m utterly committed to the idea that capitalism has to be the way we generate mass wealth in the coming century. That argument’s over. But the idea that it’s not going to be married to a social compact, that how you distribute the benefits of capitalism isn’t going to include everyone in the society to a reasonable extent, that’s astonishing to me. .. [C]apitalism is about to seize defeat from the jaws of victory all by its own hand. That’s the astonishing end of this story, unless we reverse course.”
It is not just artists, journalists, and the faithful who see a need for reform and more emphasis on ethics. A new report of the Economist Intelligence Unit—“A crisis of culture and ethics in financial services”— detailed data and research on the matter. The report “examines the role of integrity and knowledge in restoring culture in the financial services industry and in building a more resilient industry.” It suggests that adhering to ethical standards can halt or slow down career progression in the financial industry.
Reinforcing this report are personal accounts of many financial professionals, e.g., Chris Arnade in a Guardian article “Here’s why Wall Street has a hard time being ethical.” Arnade writes:
“My first year on Wall Street, 1993, I was paid 14 times more than I earned the prior year and three times more than my father’s best year. For that money, I helped my company create financial products that were disguised to look simple, but which required complex math to properly understand. That first year I was roundly applauded by my bosses, who told me I was clever, and to my surprise they gave me $20,000 bonus beyond my salary…
I rationalized that our group was careful by Wall Street standards, trying to stay close to the letter of the law. We tried to abide by an unwritten “five-point rule”: never intentionally make more than five percentage points of profit from a customer… Some competitors didn’t care about the rule. They were making 7% or 10% profit per trade .. , selling exotic products loaded with hidden traps. I assumed they would eventually face legal charges, or at least public embarrassment, for pushing so clearly away from the spirit of the law … They didn’t. Rather, they got paid better, were lauded as true risk takers, and offered big pay packages. ”
At what point does the moral momentum reach a tipping point? What can be done in practice? Evangilii Gaudium does not include a policy manual for instant economic reform. Still, Pope Francis makes it clear that the status-quo is as unbearable as it is unsustainable.
“How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? .. Today, everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. .. [M]asses of people find themselves excluded and marginalized: Without work, without possibilities, without any means of escape.”
— Pope Francis, Evangelii Gaudium, “The Gospel of Joy.”
— Pope Francis, Evangelii Gaudium, “The Gospel of Joy.”
Thanksgiving in the United States is a time to pause, reflect, and give thanks for all that we have. But after a decade of war, financial crisis, and corruption scandals, and with public trust at an all-time low, is there much to give thanks for?
Good news! "The world is not going to hell in a handbasket" according to two recent articles by Allister Heath in the Telegraph. In fact, the world has never had it so good.
"Contrary to what environmentalists, anti-globalization campaigners and other economic curmudgeons like to think, the world is not going to hell in a handbasket….
… [H]umanity as a whole is doing better than it ever has: the world is becoming more prosperous, cleaner, increasingly peaceful and healthier. We are living longer, better lives. Virtually all of our existing problems are less bad than at any previous time in history.”
In fact, according to Danish political scientist Bjorn Lomborg’s book How Much Have Global Problems Cost the World, “on almost all important metrics, the human condition is improving at a dramatic rate; his thesis is backed up by oodles of other data and research.”
Lomborg’s research indicates that from War…
"There were fewer battle deaths (including of civilians) in the first decade of the 21st century than at any time since the Second World War."
"In 1900, one person in 550 globally would die from air pollution every year, an annual risk of dying of 0.18pc. Today, that risk has fallen to 0.04 pc, or one in 2,500; by 2050, it is expected to have collapsed to 0.02pc, or one in 5,000."
… things are getting better. According to Heath, “thanks to capitalism, globalization, technology and a reduced tolerance for violence, humanity has never had it so good.”
While public trust in the financial insitutions is at all time low, Heath hasn’t given up. He has a plan. "My plan to save big business and bring back public trust" outlines a few ways the corporate world can regain the trust of consumers.
This includes focusing on customer service, rejecting corporatism and re-embracing genuine free markets, supporting competition, reforming the tax code, increasing transparency, and address ethics and fraud.
"Crucially, corporate Britain’s response must not be solely defensive. Companies must never apologise for making profits or seeking to enrich shareholders through legal means. They should not give money or cave in to those who seek to undermine them. Instead, they should constantly explain how they contribute economically.
Last but not least, business needs its customers to understand financial concepts. They need to help promote numeracy and an understanding of basic business and economic ideas.
There are no miracle cures; but for all of our sakes British businesses must urgently begin to take their critics seriously, up their game and begin the fightback before it is too late.”
This Wednesday, October 9, Mario Draghi, president of the European Central Bank, spoke at the Harvard Kennedy School in Cambridge, Massachusetts. Draghi discussed what the 1999 decision of European policy-makers to create a single market (supported by a single currency, the Euro) implies for national sovereignty and how today’s efforts to form a banking union reinforce the single market.
Draghi emphasized that a single market is not a free trade area because it is a permanent union managed at the supranational level. The supposed loss of sovereignty is of little concern as long as citizens benefit. (Indeed, under the principle of subsidiarity, this idea is embedded in the European Union Treaty.) That the single currency adds to the economic gains from the single market, Draghi simply does not doubt.
Without a banking union, location matters in borrowing and lending. Hence, there is no single market for capital. A banking union is desirable because it helps to break “the two-way interaction between sovereign distress and bank distress.”
Draghi ended his talk with reflections on the current state of the economy in the U.S. and the Euro area. Fiscal and monetary policies are intertwined. In his view, the new right of the European Commission to inspect national budgets —- a power that the U.S. Federal Government does not have over the 50 states —- is a big step forward. Draghi also called attention to the fact that, since 1999, the Euro area has created 600,000 more jobs than the U.S. Many Anglo-Saxon commentators have seriously misjudged the success of the Euro and the commitment of European nations to closer integration.
You can read the transcript of the speech at the European Central Bank’s website below:
“Why does Camelot lie in ruins? Intellectual error .. squarely lies with the economists. The “academic scribbler” who must bear substantial responsibility is Lord Keynes, whose thinking was uncritically accepted .. The mounting historical evidence of the ill-effects of Keynes’s ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites to spend and spend without the apparent necessity to tax.”
—James M. Buchanan, 1919-2013, Winner of the Nobel Prize in 1986
Privacy is usually thought of as being a moral issue. But what happens with the value of privacy affects the bottom line?
Alan Holmes ("NSA spying seen risking billions in US technology sales") details the ironic turn of events when the United States own blacklisting of a technology firm over privacy concerns backfires.
A congressional committee’s effective blacklisting of Huawei Technologies Co.’s products from the U.S. telecommunications market over allegations they can enable Chinese spying may come back to bite Silicon Valley.
Reports that the National Security Agency persuaded some U.S. technology companies to build so-called backdoors into security products, networks and devices to allow easier surveillance are similar to how the House Intelligence Committee described the threat posed by China through Huawei.
This concern over back-door NSA spying in U.S. technology may make a huge impact on the United States technology industry:
Just as the Shenzhen, China-based Huawei lost business after the report urged U.S. companies not to use its equipment, the NSA disclosures may reduce U.S. technology sales overseas by as much as $180 billion, or 25 percent of information technology services, by 2016, according to Forrester ResearchInc., a research group in Cambridge, Massachusetts.
“The National Security Agency will kill the U.S. technology industry singlehandedly,” Rob Enderle, a technology analyst inSan Jose, California, said in an interview. “These companies may be just dealing with the difficulty in meeting our numbers through the end of the decade.”
The economic backlash isn’t just theoretical. Several governments are already in the process of banning U.S. backed services.
Germany’s government has called for home-grown Internet and e-mail companies. Brazil is analyzing whether privacy laws were violated by foreign companies. India may ban e-mail services from Google Inc. and Yahoo Inc., the Wall Street Journal reported. In June, China Daily labeled U.S. companies, including Cisco, a “terrible security threat.”
The reports that the NSA built back doors into U.S. technology is just the newest revelation in “the summer of Snowden Leaks.” Kashmir Hill writes in Forbes ("How the NSA revelations are hurting business"):
It’s yet another revelation in the “summer of Snowden leaks” that’s making life difficult for American businesses. Princeton technologist Ed Felten — who used to be government-employed at the Federal Trade Commission — writes, “This is going to put U.S. companies at a competitive disadvantage, because people will believe that U.S. companies lack the ability to protect their customers—and people will suspect that U.S. companies may feel compelled to lie to their customers about security.”
“I can’t imagine foreign buyers trusting American products,” says security expert Bruce Schneier. “We have to assume companies have been co-opted, wittingly or unwittingly. If you were a company in Sweden, are you really going to want to buy American products?”
Hill continues, describing how “it’s not just experts and analysts” weighing in on the financial impact of NSA spying.
“This bodes ill for the US economy, as the rest of the world will turn its back on U.S. Internet companies,” says Phil Zimmermann, the author of Pretty Good Privacy — a form of encryption — and co-founder of Silent Circle, a company that offers secure text and chat. “The NSA policies will cause enormous collateral damage to our economy.”
Zimmermann says the encryption used by Silent Circle has not been cracked by the NSA. “If you do a good job on the design, like we did, the crypto will be safe,” he says. He notes that PGP was acquired bySymantec SYMC +0.16% in 2010, that all of his friends subsequently left the company, and that he doesn’t know who is taking care of it these days. “I think they still publish the source code, so it’s probably OK,” he says by email.
Meanwhile, Google, Yahoo and Facebook have all filed petitions with the government asking for the right to be more transparent about the requests for information they are getting from the intelligence community. Their argument is not that NSA activity itself is hurting their businesses but that the agency’s secrecy is leading them to be hung out to dry in the press as “misleading” articles get published.
Advocates for these technology companies are fighting back, detailed in an article in the Huffington Post and the Guardian by Dominic Rushe ("Melissa Mayer, Mark Zuckerberg sound off about NSA surveillance.")
Mark Zuckerberg of Facebook and Marissa Mayer, the CEO of Yahoo, struck back on Wednesday at critics who have charged tech companies with doing too little to fight off NSA surveillance. Mayer said executives faced jail if they revealed government secrets.
Yahoo and Facebook, along with other tech firms, are pushing for the right to be allowed to publish the number of requests they receive from the spy agency. Companies are forbidden by law to disclose how much data they provide.
Perhaps in yet another twist of irony, Zuckerberg—whose own Facebook is no stranger to privacy concerns and criticisms—said that “the government had done a ‘bad job’ of balancing people’s privacy and its duty to protect.”
"Frankly I think the government blew it," he said.
He said after the news broke in the Guardian and the Washington Post about Prism, the government surveillance programme that targets major internet companies: “The government response was, ‘Oh don’t worry, we’re not spying on any Americans.’ Oh, wonderful: that’s really helpful to companies trying to serve people around the world, and that’s really going to inspire confidence in American internet companies.”
"I thought that was really bad," he said. Zuckerberg said Facebook and others were pushing successfully for more transparency. "We are not at the end of this. I wish that the government would be more proactive about communicating. We are not psyched that we had to sue in order to get this and we take it very seriously," he said.
The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate. .. It is no longer firmly grounded in systematic empirical investigation .. A modern market economy with its ever finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the workings of markets and firms .. The reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics .. [K]nowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.
Ronald Coase, 1911-2013
Nobel Laureate in Economics
Harvard Business Review (December 2012)
In honor of Labor Day, we comment on what is happening in the U.S. labor market. It is a frightening place.
Robert Samuelson says in the Washington Post ("In today’s world, workers are scared," September 2.) that
.. American workers face a buyers’ market. Employers have the upper hand .. What looms, at best, is a sluggish descent from high unemployment (7.4 percent in July) and a prolonged period of stagnant or slow-growing wages. Since 2007, there has been no gain in average inflation-adjusted wages and total compensation .. The weak job market has a semi-permanence unlike anything seen since World War II.
Samuelson offers a historical synopsis. He references three labor regimes since 1900. The first regime was nearly devoid of regulation:
[It] featured “unfettered labor markets,” as economic historian Price Fishback of the University of Arizona puts it. Competition set wages and working conditions. There was no federal unemployment insurance or union protection.
The second came after World War II and, as a Hegelian anti-thesis of the first regime, saw increased regulation:
[L]abor relations became more regulated and administered .. The Wagner Act of 1935 gave workers the right to organize; decisions of the National War Labor Board also favored unions. By 1945, unions represented about a third of private workers, up from 10 percent in 1929.
Finally, the current regime is a confusing mix of old and new:
The private safety net is shredding, though the public safety net (unemployment insurance, Social Security, anti-poverty programs, anti-discrimination laws) remains. Economist Fishback suggests we may be drifting back toward “unfettered labor markets” with greater personal instability, insecurity — and responsibility. Workers are often referred to as “free agents.”
Karen McVeigh in the Guardian ("Fast food workers continue fight against low wages," The Guardian, August 29) discusses the movement to increase the minimum wage, and notes how the U.S. lags behind the U.K.
..where the minimum wage is £6.11 ($9.50), Australia, where it is 15.96 Australian dollars, ($16.91), France, €9.43($12.68), and Tokyo,$9.10. And while the U.S.’s nearest neighbour, Canada, doesn’t have a minimum wage, the lowest provincial wage in Alberta is $9.73 in US dollars.
According to those striking in a nationwide protest, this is a question of social justice. Pastor WJ Rideout the III of Detroit is part of a campaign for a minimum wage of $15. He says that
People can’t survive off $7.25 an hour .. A gallon of milk is almost $5 today .. Every thing has gone up significantly but the minimum wage has not. People are crazy to think you can live on minimum wages. Fast-food jobs are no longer starter jobs, they are mom-and-pop jobs, even senior citizens jobs. We call them survivor jobs now, because all people are doing is surviving.
For a statistical profile of the working poor, we refer our readers to an April 2013 US Bureau of Labor report.
In sharp contrast to McVeigh, the August 30 editorial of Investor’s Business Daily ("Doubling fast-food workers’ wages will kill jobs," ) focuses on economic efficiency, not justice.
With last week’s one-day strike, fast-food workers sent a clear message .. But they should be careful what they wish for; they just might get it. .. It isn’t hard to see what a doubling of the minimum wage would do in an industry that pays out an estimated 70% of revenue to workers: Hundreds of thousands would lose their jobs overnight.
So who will do their jobs, you ask. A more apt question is what will do their jobs. Because they may go to robots. Or computers. Don’t laugh. When labor costs rise, technological substitutions suddenly make economic sense.
It’s already happening in Europe, where it costs a lot to hire a worker, McDonald’s has installed 7,000 new ATM-style machines that take orders and payments. No muss, no fuss, no arguments, no misunderstandings — and no minimum wage ..
"The U.S. government may trust the U.S. government. That is not a trust the world shares, and recent polls indicate that it may not be a trust American people share as well."
Center for Strategic and International Studies
Financial Times, August 29, 2013
Since the start of the financial crisis, much has been said about inequality in income and wealth, how the 1% earn and possess so much more than average Americans. Less has been said about the societal mechanisms that are a barrier to equal opportunity and that keep economic mobility low, e.g., admission policies to Ivy League universities, and cronyism in hiring.
Now, Andrew Ross Sorkin writes in the New York Times that the recent SEC investigation whether JPMorgan Chase hired the children of Chinese government officials “to help the bank win business” is “sending shudders through Wall Street.”
"[If] JPMorgan Chase is found to have violated [1977 Foreign Corrupt Practices Act] by hiring the children of the elite, then the entire financial services industry is probably in a heap of trouble,”
Sorkin says, listing numerous examples of how common the hiring of the children of the elite really is. Access to a network of powerful friends and relatives has obvious value. So, profit-maximizing firms pay for it. In the process, the market system reproduces past disparities. It also joins the economic and political elites, since wealth buys political influence, and influence can be cashed out.
But, if cronyism is a “time tested practice here in the United States,” Sorkin asks, what’s the problem?
"[In] truth, it is the way of the world. It is hard to fault a business for hiring someone who has better contacts than someone else .. As hard to defend as the phrase may be, it is a reality of life, “It’s not what you know, but whom you know.”
Sorkin’s wraps this type of nepotism up in a form of meritocracy:
"… Given that many of the children of the elite have some of the best educations and thriving networks of contacts, it is hard to see how businesses are supposed to not seek them out, let alone turn them away."
In other words, if the market system has an inherent tendency to produce great inequality, then it is less objectionable. Recent papers by Gregory Mankiw, Steve Kaplan and Joshua Rauh, published in the Journal of Economic Perspectives, appear to follow a similar line of reasoning.
One more academic companion piece to Sorkin’s article is a recent empirical study in the American Sociological Review by Lauren Rivera, a cultural psychologist at Northwestern University, titled “Hiring as cultural matching: the case of elite professional service firms.”
Rivera finds that "[h]iring is more than just a process of skills sorting: it is also a process of cultural matching between candidates, evaluators, and firms… Evaluators implicitly gravitated toward and explicitly fought for candidates with whom they felt an emotional spark of commonality… Moreover, evaluators tended to favor extracurricular activities associated with the white upper-middle class and that were acquired through intense, prolonged investment of material and temporal resources not only by job applicants but also by their parents…. In many respects, they hired in a manner more closely resembling the choice of friends or romantic partners than how sociologists typically portray employers selecting new workers.”
Rivera notes the long-run dangers of these practices. Perhaps, we should not be surprised that, as Charles Murray states in Coming Apart (Crown Forum, 2012), the upper and lower classes in American society have diverged so far in core values and behaviors that they barely recognize one another.
“No matter how corrupt, greedy, and heartless our government, our corporations, our media, and our religious & charitable institutions may become, the music will still be wonderful.”
— Kurt Vonnegut
Paul Volcker writes a lengthy opinion piece in the New York Review of Books.
"I have been struck by parallels between the challenges facing the Federal Reserve today and those when I first entered the Federal Reserve System as a neophyte economist in 1949.
Most striking then, as now, was the commitment of the Federal Reserve, which was and is a formally independent body, to maintaining a pattern of very low interest rates, ranging from near zero to 2.5 percent or less for Treasury bonds. If you feel a bit impatient about the prevailing rates, quite understandably so, recall that the earlier episode lasted fifteen years.”
He continues to draw strong parallels between the past and the present, and it is precisely a need for this “reading of history” that Volcker believes is critically at issue.
I do not doubt the ability and understanding of Chairman Bernanke and his colleagues. They have a considerable range of instruments available to them to manage the transition, including the novel approach of paying interest on banks’ excess reserves, potentially sterilizing their monetary impact. What is at issue—what is always at issue—is a matter of good judgment, leadership, and institutional backbone. A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’sDNA.
Those are not qualities that can be learned from textbooks. Abstract economic modeling and the endless regression analyses of econometricians will be of little help. The new approach of “behavioral” economics itself is recognition of the limitations of mathematical approaches, but that new “science” is in its infancy.
A reading of history may be more relevant. Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often, the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.
It is a thought provoking article and well worth a read.