Archive for the ‘economics of John Maynard Keynes’ Category

When it comes to macro-economic forecasting, LSE failure breeds LSE success

July 8, 2013

“During a briefing on 5 November 2008 – conducted with big wall-chart graphs – about the ongoing ‘financial crunch’, the Queen dropped a (bombshell) question on the assembled throng of academics. ‘If these things were so large, how come everyone missed them?’ The venue (the LSE) was certainly a highly pertinent place for the Queen to ask the question about macroeconomic forecasting, as in the previous year (2007-8) the LSE had been the largest single institutional recipient of UK taxpayer finance for economic/econometric research funnelled via the Economic and Social Research Committee (ESRC a quango, 100% taxpayer-financed). Moreover, it is now openly admitted by a leading (and Nobel laureate) economist at the LSE, Professor Christopher Pissarides, that he and others at the LSE (and elsewhere) had failed to foresee the nature, timing and severity of the crunch.

what has the ESRC actually done?…at an (announced) cost to taxpayers of 5 million pounds sterling, it has set up a new Centre for Macroeconomics, based on LSE and chaired by Christopher Pissarides, but also encompassing (we are told) University College, London, Cambridge University, the Bank of England, the NIESR, and ‘other leading global institutions’ (read a charmed circle of selected insiders’. John Burton, http://

LSE has learned well how to make big money out of its major intellectual failures. Would this happen if the monies had to be raised from private sources? What do you think, dear readers.

Lieutenant Ben (Bligh) Bernanke attempts to round Cape Horn

June 29, 2013

In 1787, Lieutenant William Bligh set sail from England on the cutter Bounty, headed first for Tahiti, where he was to pick up breadfruit trees and ferry them to the Caribbean where they might produce food for the growing slave population. To save time, Bligh steered the Bounty to Cape Horn, rather than taking the calmer passage around the Cape of Good Hope.

After a month of unremitting turbulence, during which the Bounty was tossed like flotsam by the waves and gale-force winds, Lieutenant Bligh recognized that he would never round the Horn. Instead, he was forced to change direction and to steer his vessel to the Cape of Good Hope. Though reaching Tahiti, and loading his ship with bread fruit trees, Bligh never reached the Caribbean. Instead, his crew mutinied and set him loose on a long-boat allowing him plenty of time to rue his initial directional decision.

Chairman Ben Bernanke now confronts the dilemma of Lieutenant Bligh. Having pursued a relentless path of monetary expansion, designed to socialize U.S. financial markets, this week he determined to round Cape Horn in order to speed up the path to monetary stability. Immediately, Bernanke confronted the savage turbulence of dangerous financial waters together with gale-force political winds from the Obama administration and Democrats in Congress.

In an uncanny projection of the fate of Lieutenant Bligh, President Obama has assumed the role of the Master’s Mate, Fletcher Christian, in signaling mutiny. Ben Bernanke now has no chance of reappointment to a third term. 2014 is to be the end of the line for this loyal servant of the President. In the mean-time, Ben Bernanke has already blinked. After one month of unremitting turbulence, Chairman Bernanke will adjust the rudder and follow the compass to the more peaceful waters of continued monetary expansion.

However, have no doubt that Fletcher Christian will take him down well before the 2014 elections.

Britain leads the world in bank reform

June 26, 2013

During the 2008 financial crisis, the governments of Britain and the United States failed the test that confronted them. Many of their largest banks had leveraged themselves excessively in mortgage securities and confronted bankruptcy as the U.S. housing market bubble finally burst.

The rational solution to such mis-behavior was to allow the die to fall where it may, specifically to allow insolvent banks to go under and thereby to cleanse an unhealthy financial sector of its least worthy members. The governments led by Prime Minister Gordon Brown (the Scottish cyclops), and President George W Bush (the compassionate conservative) lacked the moral courage to allow free markets to do their work, and introduced the concept of ‘too big to fail’ into the English language.

Since that policy nadir, Britain has forged ahead of the United States with respect to bank reform, as U.S. politicians, from president down to most lowly congressman, have become corporatists, equating the success of an industry with the interests of large companies.

The British government of Prime Minister David Cameron has not succumbed to this fundamental national socialist error, recognizing that the crucial issues lie in the structure of the banks themselves. The government has led the way by concluding that it is not so much that British banks are too big, but that they are too complex.

“Their combination of activities creates conflicts of values, of interests and of objectives. A culture of investment banking that is dominated by trading is incompatible with the requirements of reliable retail banking Central banks have flooded banks with funds to support domestic lending, but the balance sheets of these bans remain dominated by transactions with other financial institutions.” John Kay, Britain is leading the world when it comes to bank reform’, Financial Times, June 26, 2013

The British government gradually has recognized the need for structural change. The Vickers Commission, which reported in 2011, put forward the crucial reform: the separation of retail and investment banking. The Parliamentary Commission on Banking Standards, which reported in June 2013, has proposed criminal sanctions, including jail-time, for bankers who recklessly pursue their own interests ahead of those of the banks they control. Both bodies demand more competition in banking and the government is moving towards the parking of legacy assets in a bad bank. The Bank of England, under the able leadership of Governor Mervyn King, has been the leading source of skeptical thinking on the future of the British financial sector.

In the meantime, under the left-liberal influence of President Barack Obama and the hydraulic Keynesian influence of Ben Bernanke at the Federal Reserve, the American financial sector is returning to its old bad, bonus-boosting habit of excessive leverage, now secure in the knowledge that ‘too big to fail’ is the post-2008 nirvana.

Bernanke has now burst price bubble in long-term Treasuries

June 21, 2013

When socialist bureaucrats are finally done with meddling in financial markets, turbulence is inevitable, as Vladimir Bernanke is now discovering.

Investors who do not understand the nature of a Federal Reserve-driven Treasury price bubble will have experienced severe headaches last night. Those who do not understand the herd instinct, and who hold on to their long-term bond portfolios in coming weeks, in the expectation that the bond market will recover, will wake up six months from now with more than severe headaches.

Inevitably, Bernanke’s signal that the socialist experiment is coming to an end, has hit stocks significantly, with the Dow down 4 per cent or so from its peak in May 2013. However, as long as the real economy does not take a hit – and that is to be determined – stock prices will return. Investors may hold on to their stock portfolios with a degree of confidence.

However, Treasuries are an entirely different matter. Yields on long-term Treasuries will now rise significantly, albeit with a degree of volatility, as QE3 tapers and eventually disappears. If 10-year Treasuries show yields of 5 per cent, say in one year’s time, an investor who bought say $100,000 of those Treasuries at 1.6 percent some months ago, will wake up to find that portfolio valued at $32,000. Only by holding those bonds for ten long years to maturity can such investors avoid that huge loss of capital. And if they do so, they will live in a 1.6 percent per annum yield environment while those who come after them earn 5 per cent per annum.

Suffice it to say that Vladimir Bernanke will not walk the streets safely at night when large-scale government bondholders wake up to the harm that he has wrought.

The bull is throwing Bernanke around like a piece of flotsam

June 20, 2013

I predicted that Ben Bernanke would have a tough time dismounting the market bull. Well, as things go, Bernanke may be quickly thrown by the bull and gored to a nasty exit.

The Dow has lost 500 points in two days.Ten year Treasury yields have risen from 1.6 per cent at the end of May to 2.46 per cent today. Bond prices have fallen accordingly.If this goes on, just watch for the political fall-out. After all the 2014 elections are getting closer by the day.

Thus always ends the fatal conceit. Bernanke may act as though he is the master of the universe. In reality, he is just a piece of helpless flotsam in the rodeo arena.

Ben Bernanke finds difficulty in dismounting the bull

June 19, 2013

Ben Bernanke eagerly mounted the market bull in the wake of the 2008 financial crisis. Using monetary expansion as a device for refueling the market economy, Bernanke and his colleagues at the Federal Reserve have massively increased the magnitude of base money. By purchasing long-term Treasuries and mortgage securities, the Fed has driven long-term interest rates well below their underlying market equilibrium, imposing significant costs on seniors relying on fixed interest receipts to fund their golden years.

Mounting that bull was easy, cheered on as Bernanke was by almost everyone who had suffered capital losses during the financial meltdown. There is, however, no such thing as a free lunch. Sooner or later, those who mount and ride the bull must figure a way how to dismount without imposing a significant setback to a sluggish economy.Bernanke now confronts exactly that quandary in determining when and how to taper the current QE4 monetary expansion.

The eternal problems confronting the bull dismount are timing and political will. The timing to some extent is under his control. The political will lies elsewhere at higher levels in the political system. Bernanke is already learning the import of the second factor. Earlier this week, President Obama strongly hinted that 2014 is the end of the line for this would-be rodeo star. Wall Street has it that Janet Yellen will be Obama’s chosen successor. And she will ride the bull into hyper-inflation if that is what it takes to keep all the bubbles from bursting.

If Bernanke wishes to dismount the bull before he is ejected by the Big Man, he has little wiggle-room available. After all, he has all but promised near-zero rates into mid-2015 and he oversees a Fed balance sheet that has all but quadrupled in five and a half years to some $3.4 trillion.

Interest groups in Washington and on Wall Street are already urging him that it is too soon to dismount, and dangerous to signal any reduction in Fed bond buying in the near to less-near term. The housing recovery may be on its way, they say, but it is fragile indeed. The jobless rate may be falling, but at the pace of a snail. Deflation, they say hovers on the immediate horizon, and would make its dangerous presence felt should QE4 taper out.

My advice to Ben Bernanke is simple. Dismount now, while you still have some control over the bull. Recovery has been fragile over four years of monetary expansion. Much harm has been done to the economy by the manipulation of interest rates and the socialization of risk. Move monetary policy back to neutral and allow the real economy to breathe and adjust to market forces. I know that this asks a lot for a hard-bitten Keynesian such as you. But surely, by now, you understand that we do not live in a Keynesian world.

Hat Tip: ‘Bernanke Rides the Bull’, The Wall Street Journal, June 19, 2013

Lois Lerner, IRS division head, pleads the Fifth Amendment

May 23, 2013

President Obama’s key IRS lackey, Lois Lerner, heads the IRS division accused of targeting conservative groups and individuals in the run-up to the 2012 presidential elections. Yesterday she was required to attend a hearing of the House Oversight & Government Reform Committee. She did so reluctantly, looking and outfitted like any senior bureaucrat in Stalin’s USSR. Her demeanor and stance left little doubt about which party she votes for in any national election.

‘I have not done anything wrong’, Ms. Lerner told the committee, in an opening statement. Nevertheless, she declined to answer questions under oath, invoking her Fifth Amendment right against self-incrimination.She stated that she would not testify because lawmakers had accused her of making false statements to Congress about IRS targeting of conservative groups. This statement alone – which arguably constituted a waiver of her Fifth Amendment right – may constitute grounds for recalling Ms. Lerner and requiring her to testify before the Committee at a later date.

Although pleading the Fifth is not itself conclusive evidence of misbehavior, it is widely regarded as such. It is commonplace in criminal trials involving Mafia dons and other low-lives who mingle criminal with non-criminal behavior. Increasingly, the Imperial Presidency is morphing into the Cosa Nostra as it engages in threatening behavior right on the edges of the law. Middle range enforcers such as Lois Lerner are usually the first to fall before the FBI reaches upwards to those right at the top of the pyramid.

Like Cosa Nostra, the White House has developed a convenient strategy for evading ultimate responsibility for such behavior:

“President Obama’s former senior adviser, David Axelrod, told MSNBC recently that his guy was off the hook on the IRS scandal because ‘part of being President is there is so much beneath you that you can’t know because the government is so vast.” ‘The Unaccountable Executive’, The Wall Street Journal, May 23,2013

President Nixon once used the same defense. However, once all the president’s men collapsed like dominoes, as the investigstion advanced, Tricky Dick finally decided to take the fall and boarded Air Force One for one last time, heading out to San Clemente while relying on phlebitis and President Ford to protecty him from further probes.

President Obama may find himself in the same predicament, as his second term stumbles on, unless he chooses to admit wrong-doing and stops playing around on the outer edges of the law.

Francois Hollande and the French economy both down the drain

April 27, 2013

Francois Hollande is down and out in Paris, his popularity rating as President having fallen faster and further than that of any other president since the Fifth Republic began in 1958.

The reason for his decline and fall is the progressive socialist agenda that he touted during the election campaign and that he has attempted clumsily to pursue since gaining office. The French economy has seized up in response to his anti-business rhetoric, unemployment now stands at 11 per cent, and the targeted reduction in the budget deficit to 3 per cent of gross domestic product by the end of 2013 has already been abandoned. That target will not be achieved during a progressive’s presidency.

The 75 percent top marginal income tax rate that he imposed immediately upon accessing the Elysee Palace succeeded in driving a number of top companies and a number of top celebrities into exile in other grateful European Union countries. The increased tax rate failed to generate any net revenue as tax avoidance and tax exile escalated in response to what is widely considered to be government theft.

In December 2012, France’s constitutional council provided Francois Hollande with a second chance when it ruled that the 75 per cent tax rate was unconstitutional and noted that no individual tax should exceed 66.6 per cent. Alas! progressives are not to be deterred by such rulings. Caught between political betrayal and folly, Mr. Hollande naturally chose folly.

On March 28, 2013, Hollande announced that the 75 per cent tax rate would still be imposed on incomes in excess of E1 million, but that they would be paid for by firms rather than their employees. Clearly this stupid man has no understanding of the nature of tax incidence, in particular of the conditions required for an income tax increase imposed on an employer not to be passed on in a salary reduction to an employee.

Why are progressives always so ignorant of basic economics? My former colleague Gordon Tullock explained the lacuna by noting that no good economist could ever be a progressive.

Larry Summers emits methane gas across Harvard Yard

February 11, 2013

In one matter we can be quite sure. Larry Summers is the most loyal Obama-sycophant of them all. He is, if you like, Heinrich Himmler to Adolf Hitler, loyal at least to the point in time when the Russian tanks were right outside the Berlin Reichstag.

Unsurprisingly, therefore, one day prior to his Master’s State of the Union Address, Loyal Larry’s syndicated column emits some vintage methane gas across Harvard Yard. There are only two ways to interpret Larry’s message: either the man is a seriously poorly-educated hydraulic Keynesian has-been, or he is a mendacious purveyor of White House snake oil.The two interpretations ultimately are entirely consistent. So I am not accusing Larry of outright hypocrisy.

Here in a nutshell is Larry’s message:

1. The U.S deficit is not a near-term priority. The debt problem should be kicked well down the road yet another time.

2. Budget-cuts implicit in the fiscal sequester due to take effect on March 1 should be thinned out over a much longer period of time. We simply cannot afford $85 billion in spending cuts when the 2013 budget deficit is running at a mere $1 trillion.

3. Fannie Mae and Freddie Mac should be right back in the mortgage market-place subsidizing lenders to support the housing market. House price bubble and junk mortgage bonds? The more the merrier. Government-agency bail-outs? Sure, since the government can always ensure that they are too big to fail.

4. The transformation of the North American energy sector must be accelerated.In particular,let us accelerate the obsolescence of all coal-fired sources of energy.

5. Unlike deficit reduction, where all the choices are painful, government measures to spur growth can benefit all Americans. There is such a thing as a free Keynesian lunch.

Readers may remember that Larry emitted an earlier vintage of methane gas in 2009. That vintage ended up as Stimulus I, quickly dissipating on the Massachusetts wind. Perhaps this time, Larry Summers, like Adolf Hitler, has gone vegetarian, in the hope that denser gas particulates find there way through the wind to a safe Keynesian harbor.

Hat Tip: Lawrence Summers, ‘There must be more to US policy than the deficit’, Financial Times, February 11, 2013

Roofs or ceilings?: two Nobel Prize winners offer a lesson to the Federal Reserve

January 29, 2013

In 1945, when millions of Americans returned home after service during World War II, the San Francisco housing market manifested a massive shortage of available housing. The reason for this apparent market dislocation, however, had nothing to do with a failure of market forces. It had everything to do with the socialization of the housing market. The City had imposed a tight ceiling on the rents that could be charged by those who owned the housing stock.

In a 1946 essay, with the catchy title of “Roofs or Ceilings”, two future Nobel Prize winning economists, Milton Friedman and George Stigler exposed the true nature of the problem. If a city desires to secure more roofs over the heads of returning veterans, the best route to do so is to remove the ceiling on rentals. Eventually, San Francisco government saw the light, and the housing shortage immediately disappeared.

Since the 2008 financial crisis, the Federal Reserve has blindly followed the immediate postwar example of the City of San Francisco. It has essentially socialized the market for bank loans by imposing a ceiling on the interest rates that banks can effectively charge when making business loans. As a direct consequence, borrowers desire more loans than in a true market (because interest is too low) and lenders supply fewer loans than in a true market (because interest is too low). The short end of the market always rules. So too few loans are consummated. The economically uneducated (Paul Krugman is a prime example) then rant that the economy is in a liquidity trap.

In reality, the Federal Reserve has chosen ceilings over roofs, thereby imposing severe harm on the economy.It has done so by maintaining a near-zero federal funds rate while ratcheting up its purchases of mortgage-backed and U.S. Treasury securities in order to hold short and long-term rates well below market levels. Effectively the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low.

There is little economic incentive for lenders to extend credit, especially to risky borrowers, at that rate. The decline in credit availability reduces aggregate demand, which tends to increase the rate of unemployment. This is a classic unintended consequence of such a policy. The policy is a classic form of behavior on the part of Keynesian economists such as Paul Krugman and Ben Bernanke.

Hat Tip: John B. Taylor, ‘Fed Policy is a Drag on the Economy’, The Wall Street Journal, January 29, 2013