This major theft and release of information from the UK Climate Research Unit has validated long-held suspicions about the AGW story. It’s a look behind the veil at the Global Warming propaganda campaign. More broadly, this shows the power of the Internet, and (using John Robb’s phrase) super-empowered individuals. Information can be liberated and disseminated by a […]
I don’t spend a lot of time trying to police the economic news media — Dean Baker and Brad DeLong are much better on that — but I found myself reading a two-week-old Newsweek column by Robert Samuelson that enraged me enough to type this out. (I read it on old-fashioned paper, but here’s the […]
The International Economic Crisis and the Failure of Internal Corporate Controls: Has the Time Arrived for New Corporate Concepts & Private Regulatory Bounty Hunters
Mankind and states are generally change-adverse. Yet when financial and other crises occur, there is a widespread response that action has to be taken. The course of conduct selected may be impulsive and not properly address the underlying problems, but passivity or inaction under such circumstances can have huge political as well as concrete costs.
A great deal has been written about the causes of the global financial crisis. Its magnitude is evidence that there are plenty of individuals, governmental regulators, and political officials to whom blame can be assigned. Fortunately, it appears that a global economic meltdown has been averted – but many of the underlying problems inflicting mankind – crime, disease, greed, immorality, intolerance and violence (taking a multitude of forms) remain.
Most people will give more thought to their sustaining minor injuries after falling down a flight of stairs, than they will about the problems of the abuse of governmental power, extreme poverty, seemingly mindless violence and other human induced problems that one can read about and ignore.
Nonetheless, a great many people will find satisfaction in learning that two former Vivendi executives will be standing trial in Paris for stock manipulation dating back 8 years, that McKinsey partner Raj Rajaratnam was arrested and charged (granted not convicted) for securities fraud, and that the regulatory and prosecutorial authorities are proceeding with their investigation of the Galleon inside trading matter, even though those who may have lost their life savings or jobs as a result are seldom made whole.
It is too ambitious to seek to solve the world’s problems. Many foundations are engaged in commendable efforts, which people would not be willing to fund their governments to accomplish. There are some things politicians can change and presently there is considerable interest in creating mechanisms that will prevent the financial crisis that occurred last year. I will focus on the commercial and regulatory situation in the U.S. since it is a topic with which I have some degree of familiarity.
Making the Fight Against Financial Crime More Proactive
Monetary policy looks to be at a protracted standstill – or even arguably becoming less accommodative as purchases of long dated securities draws to a close – despite incoming information that points toward persistently high unemployment rates and an ongoing disinflationary environment. Is policy stability the consequence of changing economic conditions, a perceived ineffectiveness of nontraditional policy, or a willingness of policymakers to be constrained by conventional policy limitations in the absence of impending financial doom? My sense is that all three elements are in play.
It is pretty clear that economic conditions changed dramatically mid-year as inventory correction and policy stimulus brought the recession to a close, at least if measured by growing output. To be sure the sustainability of the gains are in question. I hold little hope that growth could be sustained in the absence of the policy efforts to date, and the Administration is likely starting to realize that it underplayed its hand this year, offering far to little stimulus to effect stabilization from the all important jobs perspective. Calculated Risk sees growing potential for a second stimulus package (in spirit if not in name), the support for which will gain as concerns about midterm elections grow. Still, from the perspective of monetary policymakers, positive growth after such a long recession could only be met with a sigh of relief and, perhaps inevitably, a willingness to pause and assess the implications and impact of policy to date.The problem with pausing, however, is that a combination of maximum sustainable growth and price stability are in fact the Fed’s objective, we seem to be falling short on both measures. Unemployment continues to climb, nonfarm payrolls continue to fall, and core-PCE inflation continues to decelerate. Moreover, Fed forecasts suggest that these trends will continue for literally years. Leaving aside inflation fears that seem to be largely contained in a handful of what I think are crowded trades (gold and TIPS), what should the Fed be doing on the basis of actual, incoming data? Have they truly hit the limits of policy? This brings be to an ongoing debate between Paul Krugman and Scott Summner, with the recent participation of Joe Gagnon.
A starting point for further analysis is Krugman’s assertion that conventional policy has been brought to a standstill. Zero is zero:
I keep seeing economics articles and blog posts that insist that we’re NOT in a liquidity trap (and, of course, that yours truly is all wrong) because the situation doesn’t meet the author’s definition of such a trap. E.g., the interest rates at which businesses can borrow aren’t zero; or there are still things the Fed could do, like buying long-term bonds or corporate debt, or something.
Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional monetary policy — open-market purchases of short-term government debt — has lost effectiveness. Period. End of story.
Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact — namely, conventional monetary policy has lost effectiveness.
The loss of conventional monetary tools led Krugman, and many others, to conclude that stimulus efforts should focus on the fiscal side of the equation. In response, Scott Sumner has long argued that more aggressive monetary expansion was needed, to which Krugman replies that at zero rates, more money is ineffective at stimulating output:
A dozen years ago I would probably have agreed. But way back in 1998 I tried to think my way through Japan’s situation with a little intertemporal model, and surprised myself with the conclusion: under liquidity-trap conditions, it doesn’t matter at all what happens to M.
In that model, prices are assumed sticky in the short run, so P is predetermined. What, then, determines Y? Well, it’s a real thing — as opposed to a nominal thing. In the model it’s actually tied down by an Euler condition, by future consumption and the real interest rate (which is stuck thanks to the zero lower bound). Monetary policy has no traction at all against the right hand side of the equation.
Now, the equation still holds. But all that tells us is that any changes in the money supply are offset one for one by changes in velocity. Focusing on nominal spending makes you think that low nominal spending is the problem, a problem with a monetary solution; but actually it’s the symptom, and monetary policy doesn’t matter (unless it can affect expected future inflation, but that’s another story).
Aid Watch has a stubborn attachment to excellent but possibly hopeless causes… Madagascar, a country we first blogged about in June and then again in August, may be down to its last few days as regards AGOA, the US preference program that underpins about 50 percent of the country’s $500 million textile industry. Because of […]
Recent proposals to limit “too-big-to-fail” miss the main cause of the credit crisis. In fact, it is not sheer size that is the problem, it is the lack of information. Like the 911 commission is showing, failures to share intelligence across different agencies, as well as a lack of intelligence, overall, led to the shortcomings […]
As everyone knows by now, Neil Barofsky, special inspector general for TARP, has a new report out on the decision by the Federal Reserve Bank of New York last Fall to make various AIG counterparties (primarily some very big banks with names you know) whole on the the CDS protection they had bought from AIG […]
Back in October, I laughed off the latest China GDP data as utterly fabricated.As it turns out, I was not the only one. China expert Gordon G. Chang (author of The Coming Collapse of China) is more than skeptical — he has the data to question much of China’s growth miracle. Spoiler alert: Its been […]
First there was Medicare for all 300 million of us. But that was a non-starter because private insurers and Big Pharma wouldn’t hear of it, and Republicans and “centrists” thought it was too much like what they have up in Canada — which, by the way, cost Canadians only 10 percent of their GDP and […]
Reader Doug Smith was not happy with an article in the Christian Science Monitor yesterday, titled, “Does US need a second stimulus to create jobs? His remarks: Could you, Edward or someone consider reading this article and responding to it? My sense is that it perfectly captures ‘conventional wisdom’ and, in that sense, is a […]