Tag Archives: Rajan

Mind the Wealth Gap

Bubble MachineStandard & Poor’s, God bless ‘em, have figured out that America’s rising wealth gap is responsible for our boom and bust economy. Obviously, blaming anything on a “rising wealth gap” will have a certain political appeal, but – this is to mistake cause and effect.

What Raghuram Rajan and (separately) Larry Summers have said is that the advanced economies ran out of gas in the late twentieth century, leaving us not only in secular stagnation, but with unsustainable social commitments. Since Chairman Greenspan, Fed policy has been to “jump start” the economy with cheap funds, making available – on credit – a lifestyle we can no longer afford.

Those to whom the system brings windfalls … become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

So, we had an economic boom and the tech bubble in the 1990s, and then a bust. Next, federal policy joined cheap Fed funds to produce the housing bubble, and – now we are on the third bubble in recent memory.

The “rising wealth gap” is responsible for this? Quite the contrary. Our monetary policy is a trillion dollar bubble machine. Whoever is nearest the spigot is going to get rich fast even if – as Keynes observed – he’s not trying. There’s your rising wealth gap. It is an effect, not the cause, of our boom and bust economy.



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Goodbye, Ben Shalom

ben-bernankeRegular readers know that Jeremiah was for QE before he was against it.  This is actually the consensus view of professional economists – Raghuram Rajan, for instance, since we were just talking about him.  Chairman Bernanke will be remembered for QE #1, which averted a certain disaster.  Subsequent rounds of QE were more risky and less effective.  Before stepping down, Bernanke also began the process of tapering off QE.

It now seems obvious that central banks should have done what they did … restored liquidity to a world financial system that would otherwise have been insolvent

The strong dollar people hated QE from the beginning.  Their fears were confirmed by inflated returns in the stock market.  At the other end of the spectrum, Paul Krugman is still beating the drum for more.  You can’t please everyone.  Bernanke also had a hand in shoring up the euro.

It is often the mundane achievements that turn out to be the most durable.  Chairman Bernanke took huge steps in making the Fed more transparent, with regular statements, published minutes, and quantitative targets.

But no amount of transparency can offset the cultism which now surrounds the Fed.  On Monday, the stock market was idle, as the world waited for the new Chairman’s testimony.  Bernanke retires with a good record, on balance, but there is work to be done.

Chairman Yellen must disabuse Congress, and the world, of their superstitions about the Fed.  Monetary easing is a poor remedy for unemployment, not to mention inequality.  Jeremiah would like to see the new Chairman remind Congress of its own responsibilities, and maybe even question the “dual mandate.”

Update:  Well, that was just embarrassing.  Congress begged the new Chairman for help with unemployment, inflation, mortgage lending, inequality, and the weather.  The price of gold went straight up.

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The Placebo Effect

RajanHere is India’s central banker, Raghuram Rajan, warning that tapering by the Fed is causing problems for the world’s smaller economies.  This is the same Rajan who warned that QE was going to have adverse side effects.  Such a gloomy fellow!  He complains when the Fed prints $4 trillion, and he complains when they taper off.

Everyone, including the Fed, understands that this money did not fund the kind of investments that create jobs.  It merely inflated stock markets at home and abroad.  Abroad, the flood of “hot money” distorted currencies from the Swiss franc to the Turkish lira. Now the tide has turned, it has created a panic in emerging markets.

This turns out not to have been globally coordinated financial repression.  The big dogs – the Fed, ECB, and IMF – make policy, not the Bank of India.  When the big economies run into trouble, we just print more money.  When it’s the emerging markets, we tell them to suck it up.

Emerging market policymakers were faced with orthodox economic advice that suggested many years of austerity and unemployment as well as widespread bank closures … to cleanse the economy

The IMF is run by Europe and based in Washington – and the only serious challenge to the dollar is the euro.  Together, we have a lock on monetary policy.  It’s a good deal for America, while it lasts, but you have to wonder – which group took the cure, and which got the placebo?

See also:  Bank of England official criticises go-it-alone approach

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Common Sense Alert

RajanThis fellow, Raghuram Rajan, has just been appointed to run India’s central bank.  He is widely credited with having foreseen the global financial crisis.  You can read his latest thoughts on said crisis here, in a lecture he gave recently to the BIS.

The speech is well crafted, with references to its honoree, Sir Andrew Crockett, serving to motivate the topic.  Rajan presents his own analysis of the crisis, and contrasts it with the conventional one.   The prevailing policy, as he says, is this:

Surplus countries should trim surpluses, governments that can still borrow should run larger deficits, while thrifty households should be dissuaded from saving through rock bottom interest rates … budgetary recklessness is a virtue.

If you read the New York Times, you are familiar with Keynesian dogma.  Professor Rajan’s ideas are rather different, but they will be familiar to our readers.

Jeremiah’s favorite part is toward the end, an allusion to past crises in the developing world.  They were told simply to suck it up and implement reforms.  Now that the pain is in the West, suddenly central banks are willing to “innovate.”

Never in the field of economic policy has so much been spent, with so little evidence, by so few.

Why don’t we have common sense people like this, in America?  There are too many good quotes to reprint here.  You’ll have to read the speech.

See also:  Nigerian Vouchers

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