I will end for now the talk on the importance of the public sector. Remember, the costs of Medicare and Medicaid deemed to be several hundred billion dollars a year had half of that amount lost to health industry fraud. So, the cost of allowing all to access a developed world level of health care is not too much. Stop letting them lie about these issues.
Since Maryland is a conservative state with voters easily convinced that anything public is socialism I want to repeat-----simply having a public sector does not make an economy socialist for goodness sake.
IT IS WHERE YOUR VOICE AND ABILITY TO HOLD POWER ACCOUNTABLE LIES!
Today I want to talk again about public banking. I took to task the public sector unions for using credit union financing to fund Wall Street development rather than main street small businesses. It is Wall Street that uses fraud to steal pension funds, public worker's assets, and drives the privatization of all that is public----WHY ARE YOU PARTNERING WITH THEM? Everyone understands government would never have gone back to Wall Street after the exposure of systemic fraud sucking our government treasuries dry---the fact they did so shows your politicians are corrupt. The first thing a REAL progressive Democrat would have done is fuel the creation of small community banks and open public banking to allow citizens a safe place for their financial dealings.
Below you see what is the start of the financial collapse that will be far worse than 2008. Those reading my blogs for several years know this was all planned---and when government sets citizens up to be defrauded----it is public malfeasance. The FED knew from the start its policy would implode the bond market. The FED has a mission of a stable economy with full employment. The policy these several years did the opposite even as they claimed otherwise. So, media printed unemployment is down and the economy is buzzing when none of that is happening. I will revisit those facts a little later. What the FED did was manipulate inflation rate figures and created a super-heated bond market with the help of Obama and Clinton neo-liberals in Congress just so the coming crash would take out the public sector and they designed this crash just so it would be huge----a depression level crash. This was done to use as an excuse of government debt the dismantling of all public programs and Trusts....and to move global corporations from overseas under Trans Pacific Trade Pact to take the US to an Asian-level of third world autocracy.
I sat at a Maryland Assembly committee meeting where a Prince George's pol stated----CINDY WALSH IS TELLING EVERYONE ----SHE IS TELLING EVERYONE. So, if you think your pol is innocent -----you need to wake up----
THESE POLS HAVE BEEN PUT INTO PLACE THESE FEW DECADES BY CLINTON NEO-LIBERALS JUST TO MOVE THIS NEW WORLD ORDER THROUGH AND THESE POLICIES ARE ALL DESIGNED TO DO THIS.
Remember, the unemployment rate in the US is over 25% and the real inflation rate is 5-7%----the FED is lying and simply manipulating the data.
Federal Reserve: Rate hike likely before year-end
By Ylan Q. Mui June 17 Federal Reserve: Economy not ready for rate hike(1:17) Federal Reserve Bank Chair Janet Yellen said Wednesday that the central bank wants to see further gains in the job market and higher inflation before raising interest rates. (AP) The Federal Reserve on Wednesday signaled that the U.S. economy is nearly ready to stand on its own but sought to assure investors that the process would be gradual.
Officials at the nation’s central bank voted unanimously to leave the benchmark federal funds rate unchanged at zero during their regular policy meeting in Washington. But their own economic forecasts show most believe they will raise it for the first time in nearly a decade sometime this year, according to documents released Wednesday.
The fed funds rate influences the cost of borrowing for everything from buying a new home to building a new factory. Since 2008, it has been at virtually zero in the hopes that easy money would stimulate demand among consumers and businesses and bolster the recovery. Raising the rate would amount to a vote of confidence in the country’s economic health.
“My colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained,” Yellen said in a press conference after the Fed's meeting.
In its official policy statement, the Fed pointed out that the economy is creating jobs at a faster clip, the housing sector is improving and that consumers are spending moderately more money. The central bank also acknowledged that businesses have been wary of investing and exports are weak. But it noted that the fall in energy prices, which weighed on inflation, have stabilized.
The Fed’s cautious optimism comes despite downgraded forecasts for the economy this year. The central bank lowered its forecast for growth to just between 1.8 and 2 percent, below its spring projection of 2.3 to 2.7 percent. Meanwhile, it raised the forecast for the unemployment rate to 5.2 to 5.3 percent from 5 to 5.2 percent in the spring. Estimates of inflation held steady at 0.6 to 0.8 percent.
The revised numbers reflect the stumble in the recovery during the first quarter, but central bank officials have largely written it off as temporary. Their projections for growth, employment and inflation next year were virtually unchanged.
Officials’ expectations for the fed funds rate this year also drifted lower. In the spring, forecasts ranged up to nearly 2 percent by year end. Wednesday’s data showed officials nearly evenly divided between just under 1 percent and slightly above 0.25 percent — reflecting debate over the exact timing of liftoff.
More officials believe the Fed should only raise interest rates once this year, the forecasts suggest. Still, the median estimate for the fed funds rate remained unchanged at 0.625 percent, implying two increases. Two officials believed the Fed should not move at all until 2016.
Most economists believe the Fed will move when it meets in September, though markets show the most likely month as December, according to prices on fed funds futures before Wednesday’s announcement.
The Fed has cautioned that the timing of its decision to hike interest rates will depend on how the recovery unfolds. If economic data comes in better than expected, the central bank may move more quickly and more aggressively. If the recovery is weak, it can delay or slow down the process.
“Our actual policy decisions over time will depend on evolving economic conditions," Yellen said.
The Fed also believes that the precise timing of the first increase matters mainly to Wall Street and makes little difference in the broader economy. Inside the central bank, the debate has shifted to the pace of subsequent rate hikes. The median estimate for the target rate at the end of 2016 is lower than in the spring, suggesting a shallower path of increases.
"Although policy will be data-dependent, economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases in the federal funds rate," Yellen said.
But the Fed has cautioned that markets should not expect an smooth elevator ride back to normal. Officials have been walking a fine line between assuring investors that the process will likely be slow and well telegraphed while preparing them for a potentially bumpy transition.
There is "no plan to follow any type of mechanical approach to raising the federal funds rate," she said. Later, Yellen added that "we cannot promise there will not be volatility" in the markets.
In 2013, when the central bank tried to signal that it would soon stop pumping money into the recovery, markets shuddered and Main Street suffered. Interest rates spiked, forcing the Fed to move gingerly when it finally began to wind down its purchases of long-term bonds the next year.
'Fed officials have steadily lowered their forecasts for how high rates ultimately need to rise to 3.75 percent, from as high as 4.25 percent in January 2012. The overnight target rate has been close to zero for more than six years'.
Keep in mind----the interest rate we see on main street is many times that of the FED interest rate-----so 4% FED interest rate will see our interest rates soar. That is why all of the credit debt being sold to Americans-----from credit card to auto and home loans----will again cripple people trying to simply pay interest on these loans.
No doubt all these pols at the state and local level are being sold they are going to keep their wealth and maximize it but they will lose----the FED times these economic crashes to Presidential elections just so the new President and Congress must downsize government and install all the policies bring TPP and global corporate rule to the US. The FED HAS TO RAISE INTEREST RATES because it can no longer manipulate the numbers....so they are only timing when the crash will happen. The reason the economy and bond market will crash with the raising of FED interest rates? The US has sold these Federal and State bonds around the world---as it did subprime loans----and everyone is going to dump bonds when interest rates rise.
EVERYONE KNEW THIS WOULD HAPPEN IN 2009 WHEN CONGRESS AND OBAMA WITH THE FED INSTALLED THESE POLICIES.
When interest rates rise so too does inflation and the FED will no longer be able to hide the fact that they are lying when they say inflation is less than 1%. So, if inflation is going to rise considerably when the FED raises interest rates----and inflation is really 5-7% NOW-----inflation will hit above 10% likely-----WHICH IS HUGE. A healthy economy keeps inflation around 3-5% and that has been the history of inflation in the US for over a century----until Clinton neo-liberals and Bush neo-cons allowed the FED to manipulate these figures all with the goal of imploding the economy. The rich earn tons on the market as it goes from bust to boom----and they leave the market and buy credit default swap insurance to protect them when it crashes. The American people and their pensions and 401Ks are invested in the worst of investments and lose everything. This coming crash is designed to completely gut the American people's investment wealth---AND CORRUPT POLS AT STATE AND LOCAL LEVELS WILL COME WITH US!
What Bush neo-cons did last decade was super-sized by Clinton and Obama neo-liberals this decade all with the goal of moving all American wealth to the few while installing the global corporate rule governing structures under the guise of government debt.
THIS IS SOVEREIGN DEBT FRAUD BECAUSE THESE POLS KNOW IT CRIPPLES A NATION'S ECONOMY AND WEALTH. IT IS THE SAME SOVEREIGN DEBT FRAUD THAT MADE EUROPE'S ECONOMIC CRASH SO DEEP IN 2008.
Bond-Market Crash Has Wall Street Divided on What’s Next
by Cecile GutscherLiz McCormick May 17, 2015 — 7:30 PM EDT Updated on May 18, 2015 — 1:00 PM EDT
Have Riskier Assets Become the New Safe Haven?
Don't Miss Out -- Follow Bloomberg On Maybe, just maybe, this whole bond rout is ending.
The global selloff that’s set investors on edge finally slowed last week, and some analysts are saying the worst is over. Treasuries look fairly valued given the outlook for inflation and interest rates, according to Bank of America Corp. -- although with plenty of caveats. In Germany, options traders convinced a bund-market crash was all but inevitable less than two weeks ago have scaled back most of those bets.
Goldman Sachs Group Inc. warns that government debt is still expensive, but a growing number of investors are finding value after the four-week exodus sent yields soaring. Prudential Financial Inc.’s Robert Tipp is buying because tepid U.S. growth will keep the Federal Reserve on hold, while Europe remains too weak to sustain higher yields.
And don’t forget about central banks in Europe and Japan, which are buying billions of dollars in bonds each month.
“There’s a good chance people will look back at this as having been a good buying opportunity,” Tipp, the chief investment strategist at Prudential’s fixed-income unit, which manages $560 billion, said from Newark, New Jersey.
Ten-year U.S. notes posted their first weekly gains since April 17, while German bunds pared some of their losses.
That lessened the pain of a selloff that lopped off hundreds of billions in market value from sovereign debt in the developed world, data compiled by Bloomberg show.
Long ShotThe retreat first began in Europe as signs of inflation emerged with the ECB’s most-aggressive quantitative easing yet. Yields surged, especially in markets such as Germany where negative rates prevailed, then quickly spread around the world as DoubleLine Capital’s Jeffrey Gundlach and Federal Reserve Chair Janet Yellen suggested bonds were overpriced.
Yields on 10-year Treasuries, which reached a low of 1.82 percent in April, rose to 2.36 percent on May 12 before ending the week at 2.14 percent.
The yield was at 2.21 percent at 12:45 p.m. in New York.
In Germany, where average yields for the entire market dipped below zero for the first time ever last month, 10-year bund yields soared to 0.78 percent before ending last week at 0.62 percent. The yield rose back to 0.65 percent on Monday.
The speed and magnitude of those losses still pale in comparison to previous market meltdowns, including the “taper tantrum” that then-Fed Chairman Ben S. Bernanke touched off in May 2013. And there’s little chance of a repeat now, even if yields jump further in the near-term, according to Priya Misra, Bank of America’s head of U.S. rates strategy.
Not only has a raft of U.S. economic releases -- from retail sales to consumer confidence and factory production -- been so disappointing, the data hasn’t nearly been strong enough to trigger the kind of inflation what would prompt bond investors to demand much higher yields.
“For the bull market to be over, we need robust global growth and inflation,” said Misra, who forecasts 10-year yields will end the year at 2.35 percent. “Fundamentals don’t argue for much higher yields.”
Misra points to the “term premium” metric, which measures the extra yield that 10-year debt offers over short-term rates. In mid-April, it was minus 0.35 percentage point, a mis-pricing that suggested yields were too low. It’s now closer to zero, enough to compensate buyers in a world where inflation is weaker than at any time in a quarter century.
Some analysts remain unconvinced. Last week, Goldman Sachs boosted its year-end yield forecasts for both Treasuries and German bunds, saying the “valuation gap is still sizable” and will only grow as the global recovery takes hold.
The firm now sees the 10-year U.S. note ending at 2.75 percent, from 2.5 percent before, and comparable bund yields at 0.9 percent, versus its prior estimate of 0.5 percent.
“There is no question that rates are going to be going higher,” based on our forecasts for U.S. growth and Fed rates, as well as a more stable Europe, said Eric Green, the head of U.S. economic research at TD Securities USA.
Lower inflation and tepid growth in the U.S. still mean there’s less room for the Fed to surprise the market, unlike in 2013. That’s when Bernanke shocked investors with his comments about reducing the Fed’s bond buying and prompted them to move up their projections for when near-zero rates would end.
Based on Morgan Stanley’s analysis of futures trading, traders have pushed back their bets for the Fed’s first rate increase to January, from September just a month ago.
‘Tinder Keg’Fed officials have steadily lowered their forecasts for how high rates ultimately need to rise to 3.75 percent, from as high as 4.25 percent in January 2012. The overnight target rate has been close to zero for more than six years.
“The Fed is making its way to a well-telegraphed rate hike at the same time the economic data is weak,” Tipp said. “You don’t have the same tinder keg as you had then.”
In Germany, alarm over deeper declines have dissipated. The relative cost of bearish options versus bullish contracts on bund futures has plunged since reaching an unprecedented high on May 7, data compiled by JPMorgan Chase & Co. show.
BNP Paribas SA said the euro-area bond slump is nearing an end, while Societe Generale SA said higher-yielding sovereign debt in the region will recoup much of its losses.
To David Ader, the head of government-bond strategy at CRT Capital Group, the latest bout of selling had more to do with panic-stricken buyers fleeing the same trades they all crowded into, rather than a change in the underlying economic outlook.
While deflation worries have ebbed in Europe, economists surveyed by Bloomberg expect consumer prices this year to rise 0.1 percent for the 19 nations that share the euro.
That, plus the fact the ECB plan to keep buying sovereign debt through September 2016 means yields will remain anchored.
“It was a panic, vomitous, puke of positions,” Ader said. Now, “we’re reversing course.”
How does the coming bond market and economic crash fit with public banking? When Wall Street is allowed to create these financial instruments we know the US will crash taking with it the funds in a public bank. That is what happened to Spain ----their leader really through them under the bus partnered with Wall Street and DeutscheBank to take out their public banks.
From Wikipedia, the free encyclopedia A public bank is a bank, a financial institution, in which a state or public actors are the owners. It is a company under state control
The answer lies in how Wall Street will claim all of the credit bond defaults in states around the nation. A public bank would not confiscate public money to meet losses. A public bank would not be able to super-size leverage beyond a reasonable risk. A public bank would have an interest in investing in ways that are in public interest and not in ways to use the public as an ATM. The article below is one reason I have a little hope Bernie Sanders will not be a poser if elected. Vermont has many localized public operations----these can be corrupted as well as Wall Street---but they are most able to be built for stability. Look where they say they can leverage like a Wall Street bank---I would not want to see this policy at a public bank at these unstable times. All states should have built public banks and public unions should have joined these public banks in investing in small business and local development------and this is what should happen after this coming economic crash regardless of the amount of damage.
Congress passed laws a few years ago that will allow the FED and FDIC to confiscate money in bank accounts to stabilize the economy----meaning Wall Street banks at time of stress. They did this knowing the bond market crash is coming. All this premeditation is aiding and abetting crime----WE MUST HAVE RULE OF LAW TO REVERSE THIS AND RECOVER.
Vermont Votes for Public Banking
John Nichols on March 9, 2014 - 11:45 AM ET
The Vermont State House, courtesy of Wikimedia Creative Commons.
When the prairie populists of the North Dakota Non-Partisan League swept to power a century ago, with their promise to take on the plutocrats, one of the first orders of business was the establishment of state-run bank.
They did just that. And in just a few years the Bank of North Dakota will celebrate a 100th anniversary of assuring safe stewardship of state funds, providing loans at affordable rates and steering revenues toward the support of public projects.
After the 2008 financial meltdown, and the failure of Congress to regulate “too-big-to-fail” banks, activists and progressive legislators across the country began to explore the idea of replicating--or even expanding upon—the North Dakota model in other states.
But would the voters go for that?
Vermonters for a New Economy decided to test the idea.
This year, the group urged citizens to petition to place the public-banking question on the agendas of town meetings across the state—distributing information outlining a proposal to turn the Vermont Economic Development Authority (VEDA) into a state bank. Under the plan, the group explained, “the State of Vermont would deposit its revenues into the state bank. The bank would use these funds in ways that would create economic sustainability in Vermont by partnering with community banks to make loans and engaging in other activities that would leverage state funds to promote economic well-being in the state. The interest from these loans would be returned to the bank instead of out of state interests and would be available for further investment in the local economy or could be transferred to the state general fund. The bank would not invest in the risky financial instruments that the megabanks seem to love. The bank’s activities would be open and available for public inspection.”
Last week, at least twenty Vermont town meetings took up the issue and voted “yes.”
In many cases, the votes were overwhelming.
Vermont is not the only state where public banking proposals are in play. But the town meeting endorsements are likely to provide a boost for a legislative proposal to provide the VEDA with the powers of a bank.
The bill would create a “10 Percent for Vermont” program that would “deposit 10 percent of Vermont’s unrestricted revenues in the VEDA bank and allow VEDA to leverage this money, in the same way that private banks do now, to fund…unfunded capital needs” outlined in a recent study by the University of Vermont’s Gund Institute for Ecological Economics. The legislation would also develop programs, often in conjunction with community banks, “to create loans which would help create economic opportunities for Vermonters.”
Among the most outspoken advocates for the public-banking initiative is Vermont State Senator Anthony Pollina, a veteran Vermont Progressive Party activist and former gubernatorial candidate, who argues that it “doesn’t make any sense for us to be sending Vermont’s hard-earned tax dollars to some bank on Wall Street which couldn’t care less about Vermont or Vermonters when we could keep that money here in the state of Vermont where we would have control over it and therefore more of it would be invested here in the state.”
The problem for the American people with public banking is many states-----like Maryland have such a high level of public corruption in state assemblies and city halls that they would no doubt treat our public banks like Wall Street does. So, efforts to get rid of Wall Street must be partnered with GETTING RID OF CLINTON GLOBAL CORPORATE NEO-LIBERALS AND THESE CORRUPT POLS----BY BEING THE CANDIDATES IN ALL PRIMARY ELECTIONS!
Can Public Banking Finance the New Economy? The Bank of North Dakota offers a model for public banking that could stabilize the economy.
By David Brodwin Sept. 27, 2012 | 3:20 p.m. EDT US News and World Report.
The Bank of North Dakota's headquarters sits in west Bismarck, N.D. The bank recently received an improved rating from the Standard & Poor's ratings agency, which its president says will make it better able to assist private banks with loans and government agencies with financing public works projects. David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
North Dakota shines like a bright star in the dark night of America's Great Recession. It stands out for two reasons: First, it led the United States in sustaining a strong economy and high employment through the last four years. Second, it is the only state in the union with a publicly-owned bank. Many believe the Bank of North Dakota played an important role in stabilizing the state's economy, and they would like to replicate public banks nation-wide. It will be a tough fight, and an important one.
What Is a Public Bank?
A public bank is a bank that is controlled and initially funded by a government entity rather than by private investors. The Bank of North Dakota is, in essence, an extension of state government. The state deposits all its revenue in the bank and sometimes borrows from the bank. The CEO of the bank does not report to a board of directors, as he would in a private bank. Instead he reports to a commission composed of the governor and other officials. (A professionally-produced documentary of the impact and 90-year history of the bank can be viewed below or on YouTube. It's a fascinating and colorful story.)
As this article written in 2009 stated-------Bernanke's interest in what caused the Great Depression was steeped in wanting to recreate THE GREAT DEPRESSION. Indeed, that is what all of the FED policy and the Bush and Obama Congressional policies have had as a goal-----building government to such a level of debt to have it collapse. This is why Obama and Congress allowed the tens of trillions of dollars in corporate fraud stay with the corporations----this is the $20 trillion in national debt--------
THIS COMING BOND MARKET CRASH HAS THE SOVEREIGN DEBT BOND MARKET SO SATURATED IN DEBT AS TO CREATE A GREAT DEPRESSION.....IT IS WHY O'MALLEY AND MARYLAND ASSEMBLY CREATED SO MUCH CREDIT BOND LEVERAGE DEBT AND WHY BALTIMORE IS LEVERAGED TO THE GILLS IN BOND MARKET DEBT-----IT WAS ALL PLANNED TO TAKE OUT THE NATION. THIS WAS A BUSH NEO-CON CLINTON NEO-LIBERAL EFFORT SO MARYLAND'S LARRY HOGAN WILL NOT DO ANYTHING TO REVERSE ALL OF THIS BOND DEBT.
'Having dismissed–and barely even comprehended–the best contemporary explanation of the Great Depression, Bernanke is now trapped repeating history. It is painfully obvious that the real cause of this current financial crisis was the excessive build-up of debt during preceding speculative manias dating back to the mid-1980s. The real danger now is that, on top of this debt mountain, we are starting to experience the slippery slope of falling prices.
In other words, the cause of our current financial crisis is debt combined with deflation–precisely the forces that Irving Fisher described as the causes of the Great Depression back in 1933'.
The idea that these neo-liberal economists are so naive as to believe in equilibrium in markets and not that they started out wanting to duplicate the causes of the last Great Depression because the goal was to bring America down so as to restructure for global corporate tribunal rule is TOO MUCH TO ASK!!!
"Bernanke an Expert on the Great Depression??"
Posted on January 14, 2009 by Yves Smith Naked Capitalism
One of the reasons I am partial to Australians is that they are critical thinkers, not easily cowed by authority or conventional wisdom.
In the US, one of the reasons that Fed chair Ben Bernanke is given so much deference (aside from the fact that we treat people in positions of power with kid gloves) is that he is regarded as an expert on the Great Depression, and has also studied Japan’s Lost Decade.
Steve Keen, author of Debunking Economics and professor at the University of Western Sydney, has taken a look at some of Bernanke’s writings on the Great Depression and finds them wanting, Serious wanting. I’ve read some of Bernanke’s work on Jaoan, and quite a few of his speeches, and was bothered by some of the assumptions and omissions. Keen tears into Bernanke with a gusto that I find refreshing.
This is a long excerpt from a much longer and worthwhile post (hat tip reader Tom):
A link to this blog….reminded me of Bernanke’s book Essays on the Great Depression, which I’ve been aware of for some time but have yet to read. I’ll make amends on that front early this year; fortunately, an extract from Chapter One is available as a preview on the Princeton site (I couldn’t locate the promised eBook anywhere!; in what follows, when I quote Bernanke it is from the original journal paper published in 1995, rather than this chapter). To put it mildly, Bernanke’s analysis is not promising.
The most glaring problem on first glance is that, despite Bernanke’s claim in Chapter One “THE MACROECONOMICS OF THE GREAT DEPRESSION: A Comparative Approach” that he will survey “our current understanding of the Great Depression”, there is only a brief, twisted reference to Irving Fisher’s Debt Deflation Theory of Great Depressions, and no discussion at all of Hyman Minsky’s contemporary Financial Instability Hypothesis.
While he does discuss Fisher’s theory, he provides only a parody of it–in which he nonetheless notes that Fisher’s policy advice was influential:
Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed. He then readily dismisses Fisher’s theory, for reasons that are very instructive:
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. ” (Bernanke 1995, p. 17) This is a perfect example of the old (and very apt!) joke that an economist is someone who, having heard that something works in practice, then ripostes “Ah! But does it work in theory?”.
It is also–I’m sorry, there’s just no other word for it–mind-numbingly stupid. A debt-deflation transfers income from debtors to creditors? From, um, people who default on their mortgages to the people who own the mortgage-backed securities, or the banks?
Well then, put your hands up, all those creditors who now feel substantially better off courtesy of our contemporary debt-deflation…
What??? No-one? But surely you can see that in theory…
The only way that I can make sense of this nonsense is that neoclassical economists assume that an increase in debt means a transfer of income from debtors to creditors (equal to the servicing cost of the debt), and that this has no effect on the economy apart from redistributing income from debtors to creditors. So rising debt is not a problem.
Similarly, a debt-deflation then means that current nominal incomes fall, relative to accumulated debt that remains constant. This increases the real value of interest payments on the debt, so that a debt-deflation also causes a transfer from debtors to creditors–though this time in real (inflation-adjusted) terms.
Do I have to spell out the problem here? Only to neoclassical economists, I expect: during a debt-deflation, debtors don’t pay the interest on the debt–they go bankrupt. So debtors lose their assets to the creditors, and the creditors get less–losing both their interest payments and large slabs of their principal, and getting no or drastically devalued assets in return. Nobody feels better off during a debt-deflation (apart from those who have accumulated lots of cash beforehand). Both debtors and creditors feel and are poorer, and the problem of non-payment of interest and non-repayment of principal often makes creditors comparatively worse off than debtors (just ask any of Bernie Madoff’s ex-clients).
Having dismissed–and barely even comprehended–the best contemporary explanation of the Great Depression, Bernanke is now trapped repeating history. It is painfully obvious that the real cause of this current financial crisis was the excessive build-up of debt during preceding speculative manias dating back to the mid-1980s. The real danger now is that, on top of this debt mountain, we are starting to experience the slippery slope of falling prices.
In other words, the cause of our current financial crisis is debt combined with deflation–precisely the forces that Irving Fisher described as the causes of the Great Depression back in 1933.
Fisher was in some senses a predecessor of Bernanke: though he was never on the Federal Reserve, he was America’s most renowned academic economist during the early 20th century. He ruined his reputation for aeons to come by also being a newspaper pundit and cheerleader for the Roaring Twenties stock market boom (and he ruined his fortune by putting his money where his mouth was and taking out huge margin loan positions on the back of the considerable wealth he earned from inventing the Rolodex).
Chastened and effectively bankrupted, he turned his mind to working out what on earth had gone wrong, and after about three years he came up with the best explanation of how Depressions occur (prior to Minsky’s brilliant blending of Marx, Keynes, Fisher and Schumpeter in his Financial Instability Hypothesis [here’s another link to this paper]). In his Econometrica paper, Fisher argued that the process that leads to a Depression is the following:
“(1) Debt liquidation leads to distress selling and to
(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
(4) A still greater fall in the net worths of business, precipitating bankruptcies and
(5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
(7) Pessimism and loss of confidence, which in turn lead to
(8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
(9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.” (Econometrica, 1933, Volume 1, p. 342)…
In its own way, this is a very simple process to both understand and to model…
So why didn’t Bernanke–and other neoclassical economists–understand Fisher’s explanation and develop it?
Because an essential aspect of Fisher’s reasoning was the need to abandon the fiction that a market economy is always in equilibrium.
The notion that a market economy is in equilibrium at all times is of course absurd: if it were true, prices, incomes–even the state of the weather–would always have to be “just right” at all times, and there would be no economic news at all, because the news would always be that “everything is still perfect”. Even neoclassical economists implicitly acknowledge this by the way they analyse the impact of tariffs for example, by showing to their students how, by increasing prices, tariffs drive the supply above the equilibrium level and drive the demand below it.
The reason neoclassical economists cling to the concept of equilibrium is that, for historical reasons, it has become a dominant belief within that school that one can only model the economy if it is assumed to be in equilibrium.
From the perspective of real sciences–and of course engineering–that is simply absurd. The economy is a dynamic system, and like all dynamic systems in the real world, it will be normally out of equilibrium. That is not a barrier to mathematically modelling such systems however–one simply has to use “differential equations” to do so. There are also many very sophisticated tools that have been developed to make this much easier today–largely systems engineering and control theory technology (such as Simulink, Vissim, etc.)–than it was centuries ago when differential equations were first developed.
Some neoclassicals are aware of this technology, but in my experience, it’s a tiny minority–and the majority of bog standard neoclassical economists aren’t even aware of differential equations (they understand differentiation, which is a more limited but foundational mathematical technique). They believe that if a process is in equilibrium over time, it can be modelled, but if it isn’t, it can’t. And even the “high priests” of economics, who should know better, stick with equilibrium modelling at almost all times.
Equilibrium has thus moved from being a technique used when economists knew no better and had no technology to handle out of equilibrium phenomena–back when Jevons, Walras and Marshall were developing what became neoclassical economics in the 19th century, and thought that comparative statics would be a transitional methodology prior to the development of truly dynamic analysis –into an “article of faith”. It is as if it is a denial of all that is good and fair about capitalism to argue that at any time, a market economy could be in disequilibrium without that being the fault of bungling governments or nasty trade unions and the like.
And so to this day, the pinnacle of neoclassical economic reasoning always involves “equilibrium”. Leading neoclassicals develop DSGE (”Dynamic Stochastic General Equilibrium”) models of the economy. I have no problem–far from it!–with models that are “Dynamic”, “Stochastic”, and “General”. Where I draw the line is “Equilibrium”. If their models were to be truly Dynamic, they should be “Disequilibrium” models–or models in which whether the system is in or out of equilibrium at any point in time is no hindrance to the modelling process.
Instead, with this fixation on equilibrium, they attempt to analyse all economic processes in a hypothetical free market economy as if it is always in equilibrium–and they do likewise to the Great Depression…
At first, Fisher was completely flummoxed: he had no idea why it was happening, and blamed “speculators” for the fall (though not of course for the rise!) of the market, lack of confidence for its continuance, and so on… But experience ultimately proved a good if painful teacher, when he developed “the Debt-Deflation Theory of Great Depressions”.
An essential aspect of this new theory was the abandonment of the concept of equilibrium.
In his paper, he began by saying that:
We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, to ward a stable equilibrium. In our classroom expositions of supply and demand curves, we very properly assume that if the price, say, of sugar is above the point at which supply and demand are equal, it tends to fall; and if below, to rise. However, in the real world:
New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium. Therefore in theory as well as in reality, disequilibrium must be the rule:
Theoretically there may be—in fact, at most times there must be— over- or under-production, over- or under-consumption, over- or under spending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.” (Fisher 1933, p. 339; emphasis added) He then considered a range of “usual suspects” for crises–the ones often put forward by so-called Marxists such as “over-production”, “under-consumption”, and the like, and that favourite for neoclassicals even today, of blaming “under-confidence” for the slump. Then he delivered his intellectual (and personal) coup de grâce:
I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price- level disturbances. While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together…
Thus over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation.
The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. (Fisher 1933, pp. 340-341. Emphases added.)
From this point on, he elaborated his theory of the Great Depression which had as its essential starting points the propositions that debt was above its equilibrium level and that the rate of inflation was low. Starting from this position of disequilibrium, he described the 9 step chain reaction shown above.
Of course, if the economy had been in equilibrium to begin with, the chain reaction could never have started. By previously fooling himself into believing that the economy was always in equilibrium, he, the most famous American economist of his day, completely failed to see the Great Depression coming.
How about Bernanke today? Well, as Mark Twain once said, history doesn’t repeat, but it sure does rhyme. Just four years ago, as a Governor of the Federal Reserve, Bernanke was an enthusiastic contributor to the “debate” within neoclassical economics that the global economy was experiening “The Great Moderation”, in which the trade cycle was a thing of the past–and he congratulated the Federal Reserve and academic economists in general for this success, which he attributed to better monetary policy:
“In the remainder of my remarks, I will provide some support for the “improved-monetary-policy” explanation for the Great Moderation.”
Good call Ben. We have now moved from “The Great Moderation!” to “The Great Depression?” as the debating topic du jour.
On that front, his analysis of what caused the Great Depression certainly doesn’t imbue confidence. This chapter (first published in 1995 in the neoclassical Journal of Money Credit and Banking [ February 1995, v. 27, iss. 1, pp. 1-28]–the same year my Minskian model of Great Depressions was published in the non-neoclassical Journal of Post Keynesian Economics [Vol. 17, No. 4, pp. 607-635]) considers several possible causes:
A neoclassical, laboured re-working of Fisher’s debt-deflation hypothesis, to interpret it as a problem of “agency”–”Intuitively, if a borrower can contribute relatively little to his or her own project and hence must rely primarily on external finance, then the borrower’s incentives to take actions that are not in the lender’s interest may be relatively high; the result is both deadweight losses (for example, inefliciently high risk-taking or low effort) and the necessity of costly information provision and monitoring)” (p. 17); Aggregate demand shocks from the return to the Gold Standard and its effect on world money supplies; and
Aggregate supply shocks from the failure of nominal wages to fall–”The link between nominal wage adjustment and aggregate supply is straightforward: If nominal wages adjust imperfectly, then falling price levels raise real wages; employers respond by cutting their workforces” (p. 21).
None of these “causes” includes excessive private debt–the phenomenon that I hope now even Ben Bernanke can see was the cause of the Great Depression–and the reason why he and neoclassical economists like him are no longer discussing “The Great Moderation”.