Why is the Global Crisis so persistent? Q&A with Ben Hunt (of Fund Strategy) on the themes of the Global Minotaur

Ben Hunt, of FUND STRATEGY, posed eight poignant questions to me concerning the continuing Global Crisis and touching upon various themes from my Global Minotaur. Here is a taste of the soon to be published interview:

1. What is your understanding of what has been driving the growth in the world economy (the “engine of growth” if you like) since the recovery after 09 – it is that the economy has been on “government life support” in that the fiscal stimulus of China, US etc has been driving growth?

Since the Crash of 2008, we have had a tale of two worlds: the North Atlantic Recession and the considerable growth in China, India, Latin America and, poignantly, Africa. Nevertheless, all the sources of growth mentioned in the previous sentence are reducible to one country: China. Without Chinese growth, not only would China be destabilized to a horrifying degree but, arguably, there would be no growth in South America (since its growth is predicated upon exports to China) or in Africa (for which Chinese direct investment is the major boon). While India’s growth is not reliant on China, it is also the case that it is too anaemic and inward looking to count as a source of world demand.

2. Related, what is new about say this year and this summer with an acceleration in the slowdown? Do you understand it as a combination of factors – i.e. stimulus has wore off, deepening recession in Europe, cooling meaures to fight inflation in China, deleveraging in the US? Or do you tend to see one factor as being decisive – i.e. the deepening of austerity in Europe, hitting demand from Europe which then affects China, US, etc?

The Crisis is global, and so are the reasons for its global acceleration.

Europe is, of course, the sick man of the planet, exporting its austerity-driven recessionary effects worldwide. And it is not just austerity that turns Europe into the globe’s nemesis. It is the combination of the Eurozone’s laughable architecture with the administered austerity-medicine (or, more aptly, poison) that is responsible.

However, beside Europe, we have a number of recessionary forces at work. In the United States, the falling out between Congress and the administration on fiscal policy has muddied the waters, has caused a spike in uncertainty (the debacle of debt ceilings being the tip of the iceberg), and has left Mr Bernanke of the Federal Reserve too much to do with the single lever (quantitative easing) in his reach. Alas, when aggregate demand is so deficient, and the labour force is shrinking as a result of the so-calle ‘discouraged worker effect’, however much the Fed boosts the supply of money, its success in boosting economic activity is heavily circumscribed. As Keynes once put it, it is like trying to push a hanging string from below, as opposed to pulling it from above.

Meanwhile, while China is far more responsible in its deployment of both monetary and fiscal policy, and has been boosting investment handsomely, the Chinese economy is not geared to create demand for other parts of the world through stimulus. All that fiscal stimulus does is to increase the investment ratio of GDP to an astounding 70%, pushing the consumption ratio of Chinese people to a ridiculous 25% –  a certain recipe for negative expectations of aggregate demand and growth. Coupled with relatively loose monetary policy, the result is a lethal combination of asset bubbles (in the real estate sector, in particular) and of falling consumption. To be fair with Beijing, they have no other choice. It is only the ‘profligate’ West that can generate the demand necessary to re-balance the global economy. China can simply not do it on its own. Tragically, the West has lost its penchant for a designing a globally sustainable economic macro-economy.

3. In terms of China in recent years, would you agree that it has not really been an “engine of growth” as such for the world economy (although confusingly, people talking about China contributing up to a quarter of world growth etc)? I.e. China may have driven the fortunes of commodity producers but with low consumption it is nowhere near acting in the same role that the US did as the consumer of last resort for the world economy? And going forward, presumably you are not expecting it to play this role for a long time?

See above!

4. On the issue of the breakdown in credit, and monetary stimulus, which you have talked about. In very simple summary terms, a lot of the aggregate demand of recent years was predicated on the continual extension of credit/debt to the consumer in the deficit/debtor nations – but that all came to an end in 2008. With unemployment, existing debt levels, and so on, consumers don’t have the same appetite to borrow, are deleveraging in the US, banks that lent in the various contexts, i.e. mortgages, to sovereigns, etc, are still reeling in many cases. My first question is about the monetary stimulus. Presumably your analysis is that the LTROs, waves of QE etc have simply plugged the holes in terms of bad loans, i.e. repaired balance sheets, but have not fed through to any productive lending and investment in the real economy? Second point. What I do not really understand (and could do with some enlightening!) is that, I can see that a breakdown in credit is hugely important in a country like Greece which is dominated by small firms dependent on credit in the first place. But what about say more “corporate economies” like the UK, where the impression left by the government is that restoring credit to SMEs is of central importance?  Here I find the credit issue confusing because I don’t know the relative importance of say SME investment in the economy versus corporate investment (the latter not reliant on credit and of course having huge cash piles that they could invest and are not). Perhaps the issue of corporations not investing is the central one which then affects SME suppliers and the rest of the economy, rather than lending to SMEs per se?

To begin with, the rumour of a fiscal stimulus in the United States is a gross exaggeration. If you take into account the precipitous drop in State and Municipal expenditure, you will find that there was no such thing as a stimulus. What there was was a significant amount of quantitative easing by the Fed, in conjunction with the preposterous Geithner-Summers plan whose purpose was simply to pull the wool over Congress, enabling legislators to pretend that they ‘thought’ that a market for defunct and unloved (toxic) derivatives was being created (when, in reality, the taxpayer was footing the bill of bad private sector bets).

As for QE, there was never any possibility that the Fed could create sufficient aggregate demand through purchasing from banks paper titles of dubious value. In fact, the Fed had real difficulty even boosting the money supply (as banks refused to lend even when ludicrous overdraft facilities, at almost zero interest, were offered them by the Fed).

So, to cut a long story short, there was precious little fiscal stimulus in the United States, none in Europe, and the monetary operations on both sides of the Atlantic failed to deal with the banks’ insolvency, while keeping them liquid – doing precisely what we used to admonish the Japanese monetary authorities of doing back in the 1990s. The two QEs in the United States and the two LTROs in Europe only allowed for the ‘proper’ zombification of banks, a process that deepened the Crisis’ potential for causing long term recessionary damage on all of us.

5. Onto the themes of your book a bit more…I have a question first of all. Generally I buy your overall analysis – which by the way I think is excellent and raises some profound questions. Capitalism needs a GSRM, a way of reinvesting trade surpluses, and profits, to coordinate production and consumption at the international level and to ensure that trade imbalances don’t take on crisis proportions over time. Now as I understand it, the flaw with the Global Minotaur GSRM was that the surpluses/profits were not reinvested productively in the US – they went via Wall Street and were recycled into speculation and consumption rather than productive investment which would have rebuilt US industry, bolstered US production and therefore rebalanced trade more? You then got a problem – a slowdown in productive investment and growth while at the same time, a financialisation process (bubbles, debt, etc) which then got out of balance with the real economy. Debt rises too fast to incomes; the financial sector grows too big in relation to the real economy, and so on. Seen at another level, the “exorbitant privilege” backfires, in the sense that the US gets further and further into debt, with the dollar as reserve currency, on the different levels but its economy weakens at the same time, creating a dangerous divergence which is now the “low growth, high debt trap” that we see today. So first question, have I understood that this is the way you see it?

Yes, I think you did!

6. If so, my second question is, why was the new credit created, plus others’ profits, not reinvested back into industry and production in the US? What explains the twin process of financialisation and deindustrialisation? I wonder if the simple answer is that profits grew to be bigger in finance than industry since the early 1980s (partly perhaps due to deregulation of finance, i.e. deregulation of interest rates) – which I think you discuss briefly in your book? Corporations began to reinvest more capital in finance (i.e. GE Capital), did more share buy backs (perhaps the influence of shareholder value), while bank lending grew more to finance and real estate than industry. Do you understand this to be the key factor – or do you think there are other factors at work? For example, corporate investment in the real economy has been on a secular decline (since the early 70s?) Some would say, i.e. Robert Brenner – this is about the failure to restore the rate of profit to post-war levels. Others, i.e. Michael Hudson – that finance has taken a greater proportion of workers’ incomes and has diverted purchasing away from goods and services, hitting aggregate demand and therefore undermining the rationale for corporate investment. Would be very interested in any thoughts on this.

All this is correct. But it begs a question: Why did finance have to grow so much at the expense of industry? My answer is quite simple: Because capital accumulation never fails to follow the path of least resistance. Given the size of the capital flows into the United States, and the anxiety that they may one day recede, it was imperative that the conditions for maintaining the capital influx (into the United States) are maintained. Once prerequisite for that was the median real wage of American workers stays low and US inflation is lower than that in Europe and Japan. Subcontracting to Asia, adopting the Wal-Mart model (for squeezing both American labour, American small scale producers and foreign suppliers) became essential for maintaining the Global Minotaur’s rude health and dynamism. Thus, de-industrialisation in the United States, and the effective conversion of part of America into a form of Third World society were crucial features of the global recycling mechanism that grew up in the 1970s and crashed and burned in 2008 – what I refer to as the Global Minotaur.

7. Another question that leads on from this, regarding the role of corporations. You have talked about the general problem of business confidence and related, dearth of aggregate demand that has arisen in the last few years. Businesses are not investing, are hoarding cash and so on. But if investment has been on a secular decline in the US and UK at least (and indeed, cash hoarding really began a upward curve a decade ago), are we seeing a combination of a supply-side issue (i.e. long-term failure to invest) which is then exacerbated by a hit to demand coming from the last years with the drying up of credit to households, small businesses, etc? Is that the way you would understand it?

Very much so. But this is not surprising. Every capital ‘c’ Crisis entails the co-existence of two ‘mountains’: a mountain of debts and banking losses on the one hand, and a mountain of idle savings too scared to channel ‘themselves’ into productive investment. The state we find ourselves in after 2008 is a typical case of this situation.

8. Finally, as you mention in your book we have seen a lot of talk about global imbalances of late, from academics, institutions such as the IMF, G20 etc. Do you see this discussion as deficient in key ways? Do you see any evidence that policymakers will grasp the importance of addressing them seriously, i.e. by having a new GSRM, and any evidence in the world of your two scenarios happening (the West having an epiphany and realising a new Bretton Woods style agreement is needed), or BRICs coordinating new productive investment etc?

I wish I could share good news with you. But I cannot. The G2O rose to their historical challenge once, after Lehmans’ caved in in 2008. Since then, the powers-that-be have demonstrated spectacularly a singular ability to fail in their task of coordinating on a global strategy for arresting the Crisis. With Europe at the forefront of organised idiocy, the global economy is experiencing the Great Recession We Did Not Have To Have. Even if we had a degree of appreciation by authorities of the need to plan for surplus recycling (a necessary condition, though not necessarily sufficient, for exiting the Crisis), our analysis would only become usefully complete if it involved an appreciation of the natural tendencies of the labour and money markets to fail. None of that is in the air. No epiphany seems in sight. No latter day FDR seems to be emerging. I truly hope that I am wrong or just blind enough to not see the rays of light in the distance. But I very much fear that they are just not there.

46 Comments

  • Regulation killed the US economy. Lust like it did in Europe. How can a regulated business in Greece/UK/US hope to compete with an unregulated business in China for example. And whose quality of life is improving? The “sweat shop” worker in China or your worker in Greece/the US/UK.

    With regards to the recession. It is never going to end if QE continues in any form. There is no way businesses are going to invest when high inflation is on the horizon and the fed/central banks are continuing to skew the economy. Like a Squirrel before winter, no matter how many nuts you give him he is going to keep them just in case. Just like firms hoarding cash at the moment.

    • A great example of truth reversal Richard. It was deregulation that put the nail in the coffin of US industry first and finance a decade later. But such is your capacity to see things inside out that it is futile to even begin to explain.

    • Yanis – We have gone through this many many times. The truth about regulation and what is put out by the media is 2 completely different things. As a recent example you have Dodd Frank which will be a complete disaster by further inflating the bond bubble but is a prime example of the increasing regulation

      Glass Steagall is the only example that is given by the media that is apparent deregulation. Okay, it was big one.

      You only have to speak to someone in the investment industry to understand how much regulation there is no compared to 10 or 20 years ago. There is simply no comparison.

      http://www.youtube.com/user/SchiffReport/videos?query=regulation – This guy has been proved right, time and time again.

      To repeat, the myth of deregulation is just that, a myth.

      Yanis if you can give me some examples of deregulation, ie regulations that were repealed I am all ears, all the evidence I get is that regulations have gone through the roof but I am prepared to have my position changed.

      This is a good source citing the major regulatory changes in the finance industry since 1978, there is not a lot of deregulation going on and a lot of regulation, which incidentally has been bank rolled by the Fed.

      http://www.openthegovernment.org/sites/default/files/otg/dereg-timeline-2009-07.pdf

      The same Fed which I think you believe has the answer to the US recession?

      Again, if you have an example of the Fed making something better in the last 20 years I am all ears, really, I would love to be proved wrong, life would be a lot easier and I could sit back knowing that my financial future is in safe hands.

      But again, I have to go back to Fisher, he says the Fed has done more than enough http://www.bloomberg.com/video/fed-policy-costs-greater-than-benefits-fisher-says-z~p6WIS1T_~GmwsNDdM~XQ.html

      Forget about regulation in general, that has gone through the roof, that is in dispute? http://paul.senate.gov/?p=issues

    • “Regulation killed the US economy”

      Quite the contrary. It was the deregulation of the finance sector which destroyed the real economy in a lot of countries.

      “With regards to the recession. It is never going to end if QE continues in any form.”

      Correct. Plus, even worse: the several QEs inevitably lead to asset price bubbles, to more wealth concentration at the top1%, to disappropriation of the main street people’s pensions…

      It is idiotic to try to fix the problems which swere largely caused by to much money thanks to wrong monetary policy with even more money.

    • VSS – This is the history of “deregulation” in the finance industry. http://www.openthegovernment.org/sites/default/files/otg/dereg-timeline-2009-07.pdf Like I said it is a myth, there has been far more regulation implemented than repealed. And it does not even include the Patriot Act. Deregulation is propaganda tool to get us to give up our liberties to central banks. You see it in Europe on the news. Deregulation is blamed for the recessions and the ECB is touted as the answer. This is complete fiction, like you said, cheap money caused the problem and the bailouts stopped the rectification. I say again, there has been no meaningful deregulation except Glass Steagel but the free market attempted to punish those who made mistakes but the government stepped in and protected the banks with our money.

    • Regulation never killed anyone. In fact the degree of regulation is a function of how advanced a society is.

      What killed the US economy and other economies of the traditional center (Europe-US-Japan) was unbridled capitalism after the collapse of communism (as its antithetical system keeping it in check).

      It was unchecked capitalism plus the complete absence of political barriers(following the collapse of communism) that sent manufacturing scattered in all four corners of the earth and in almost complete avoidance of American soil. Because the name of the game in capitalism is profit maximizing which goes hand in hand the regulation avoidance.

    • Dean – Ill keep it brief.

      See this for evidence of how poor and backward and corrupt you get with regulation http://www.doingbusiness.org/rankings

      About profit – you can only make it if you have something people want, what is the problem? You want to stop people from buying iphones? (To use an example)

    • Richard,no offense but seriously….are you a troll?Where the hell did you see MARKET REGULATION in the US ?

    • Cross – Am I a troll? Are you a troll? Did you even bother to read, watch the link I gave? Please respond to evidence if I wanted opinion I would only watch the TV coverage of the news.

    • “With regards to the recession. It is never going to end if QE continues in any form. There is no way businesses are going to invest when high inflation is on the horizon and the fed/central banks are continuing to skew the economy.”

      I posted this yesterday but i guess its no harm posting it again:

      Dollar Index on 9/19/2011: 77.14
      Gold price on 9/19/2011: $1803 per ounce
      Dollars “printed” in past year according to US Treasury: $65 TRILLION
      Dollar Index today: 79.05
      Gold price today: $1770 per ounce
      Dollar is up.
      Gold is down.

    • Cross – Thank you for stating some facts that can be responded to.

      Dollar Index – I would expect it to be stable, the dollars are distributed worldwide, http://www.reuters.com/article/2012/09/06/us-usa-fed-foreigners-idUSBRE88517W20120906
      Gold – 33USD less than in 2011, okay, 1,100 dollars more than 2008, what is your point? There is no doubt the trend is up to put it mildly http://goldprice.org/gold-price-history.html

      I realise you have probably got a lot of “education” tied up in years of mainstream media nonsense but there has to come a time when you say to yourself “what I have been told by the TV is spun out of all recognition” the evidence is all around you if you simply open up your eyes to see it.

      Feel free to give me some more facts, my mind is open, I would much prefer to believe what is in the news.

    • Indeed, Richard. Like a squirrel before winter the US economy is surely better off with no nuts at all rather than with hoarding nuts. No pun intended, but the underlying logic of this beautiful image appears to be totally nuts. And Yanis is right, the fact that such thoughts still prevail, here and elsewhere, is a big part of the problem.

    • CEA – You have got to be joking. I am stating reality, corporations have more money on their books then at any time is history. http://www.bloomberg.com/news/2012-03-13/apple-drives-record-1-24-trillion-of-company-cash-moody-s-says.html

      You deny that firms and banks are not hoarding cash???? If so, state your source please.

      Totally nuts you say. It comes to something when people prefer to believe the news than the cold hard figures, I think you need to see this, you have passed through step 1 http://www.youtube.com/watch?v=mjO3K0kAx-8 – please tell me what he has got wrong, please. Use fascism if you want instead, its the same thing, centralised control and that is exactly what we are being told in the media today. Apparently we need to hand over control to central authorities like the EU and ECB in order to “survive”

    • Richard: I don’t find the “doing business” list/ranking relevant at all. Let me demonstrate what I mean. Germany ranks #19 on the list. So, let’s pick 3 countries just above Germany and 5 just below. That will be: Georgia, Thailand, Malaysia (just above) and Japan, Latvia, FYROM, Mauritius, Estonia (just below). So, what’s the conclusion here? That Georgia, Malaysia, FYROM and Mauritius are into some sort of a path to glory and we don’t even know it? There is no correlation between this list and any significant metric like per capita GDP or any other metric associated with the markings of an advanced economy. This is just a ranking. So what? Are you trying telling me that New Zealand (#3) is an economy worth emulating because it’s so easy to set up a business there? This is a matter of policy. Obviously countries which have a ton of difficulty attracting business might make it easier to set up a business there? But how does this list to any success or prosperity? Just because you have a business it does not mean that it’s the right business or that the business is profitable. The only think it means is that it’s easier for you to sink or swim. And once you have your license it’s up to you to make it a mess. Say as an example that the top of the “doing business” list is Siberia. So? o.k. very easy to set up a business in Siberia? But why would you ever want to set up a business in Siberia? To write better open source code inspited by the vastness of nature or what? Or advancements in medicine? Just because a country offers an easier landing facility does not mean that you should land there. The only thing it means is that such country wants to attract your business or is desperate for your business. Switch to dating now. If a lady was desperate to go out with you or made it easy to go out with her, does this mean that this is the right relationship for you? Only if you are equally desperate maybe a soft yes.

    • @Richard Its crazy that you are the one who chews whatever mainstream theory-myth there exists and then you accuse others for the same.Money printing being by definition inflationary is a mainstream theory-myth.QE being inflationary because it floods the economy with new money is a mainstream theory-myth.US financial market being REGULATED and regulation being the cause of its What I just pasted can in no way be mainstream since it comes from a website dedicated to MMT ie heterodox economic theory and totally not mainstream.Please…. “Gold – 33USD less than in 2011, okay, 1,100 dollars more than 2008, what is your point? There is no doubt the trend is up to put it mildly” I thought money printing is inflationary hands down?Thats my point.Its not. So according to you the crisis is over and if the dollar was “healthy” investors would have abandoned gold and return to the dollar?Im impressed…

  • @ Richard: Great comment!

    @ Mr. Varoufakis: If regulation of the real economy would be the answer, Greece and her > 160 closed shops, her rigid labour markets and famous bureaucracy would be bailing out the rest of Europe, not vice versa. But in your world, Greece’ problems come from the outside, not from oligopolsitic markets, clientelism, tax evasion, red tape and the waste of public ressources. Your way of thinking is interesting since Greece would even have a budget surplus, wouldn’t have to deal with the Troika and could invest in growth stimulus if just a part of the outstanding evaded taxes would be collected, which is a matter of will, not of money. Greece could invest in even more growth stimulus if just a tiny part of Greeks’ private savings – which you proudly mention in your last video – would be taxed properly to solve her public fiscal problems. Interesting that you didn’t get the idea of transferring those massive Greek private savings to the state to be able to send the Troika away. It’s easier to complain permanently, to demand another hair cut and foreign fiscal stimulus instead, isn’t it? Your stories are obviously the perfect example of “truth reversal”.

    Yours sincerely, a reader

    • A_Reader – Right on, the countries with the most central control would be the most successful and leading the world! Excellent way of putting it.

      If there was any evidence required that centralised control through fascism/communism/socialism does not work this is it http://www.doingbusiness.org/rankings – Honestly, this should put the whole issue to be, can we move on now with rampant capitalism please (and I mean capitalism, not fascism, big difference)

    • Yes, this is more false logic from you. You cannot falsify a proposition by extending at ad absurdum. Did anyone say that the closed shop is a correct way to regulate (although it may be, on occasion)? Did anyone say that the Greek bureaucracy is the correct way to regulate? Clearly, it is not and was never intended to be anyway.

      I am afraid that you argue like a second-rate politician, with a third rate mind. Go and take a course in basic logic and come back when you have something inside your head worth hearing.

    • Guest – Why is it socialists ie people who believe in the “common good” and who want to give government more power, always the first ones to resort to insults when their arguments run out of steam?

      To your comment – If you are saying their is something faulty with the people Greece which leads them to having an “incorrect” regualtion can you please specify how? If you are not saying that then why do you believe Greek regulation is any different from regulations in “correct” countries and if you could please specify a country which you think has “correct regulation”

  • Proffesor i just read your article «Ποσοτική χαλάρωση».You say:

    “Γιατί να αγοράζει όμως μια Κεντρική Τράπεζα χάρτινους τίτλους, αντί να κόβει απλώς χρήμα; Το σκεπτικό της ποσοτικής χαλάρωσης είναι ότι, με αυτές τις αγορές, η Κεντρική Τράπεζα ουσιαστικά στέλνει ρευστότητα στους κατόχους τους (κυρίως στις τράπεζες αλλά και σε πολλές μεγάλες εταιρείες) ελπίζοντας ότι εκείνες, με την σειρά τους, θα την εμφυσήσουν στην οικονομία υπό την μορφή νέων δανείων (οι τράπεζες) και νέων επενδύσεων (οι επιχειρήσεις). Δυστυχώς, για να πετύχει αυτό το «τρικ» οι τράπεζες και οι επιχειρήσεις πρέπει να «περάσουν» την νέα ρευστότητα στην υπόλοιπη οικονομία. Μόνο τότε έχει κάποιο αντίκτυπο. Αλλιώς, αν οι τράπεζες και οι επιχειρήσεις τελούν υπό καθεστώς απόλυτης απαισιοδοξίας, είναι πιθανόν να μην υπάρχει κανένα αποτέλεσμα – ούτε καν αύξηση της ποσότητας χρήματος!”

    QE is no different than regular open market perations that serve the purpose of the monetary policy.This means that 1) the balance sheets of the banks dont expand or contract during qe, 2) The CB offers bank reserves in exchange for these assets.It actually offers excess reserves, from the view of minimum reserve requirements.

    The thing is reserves dont fund anything.Banks dont use reserves to make loans,they simply expand their book creating an asset (the debt) and a corresponding liability (the deposit) and thats it.Then they will try to look for reserves if they dont fullfill the minimum requirement.They are only capital constrained according to Basel. (subnote: Canada has no minimum requirements for reserves).
    So while i dont think you are wrong for claiming that QE wont help,i think you still dont make clear that its not reserves that the banks were missing in the 1st place in order to make loans.The banks are either not well capitalised so they are afraid to take risks,or there arent enough people that want to take loans,or both!

    • Cross – I don’t think anyone on the planet disagrees with points 1 & 2. The whole issue is that these “assets” are garbage and yet the taxpayer through inflation is paying face value. That is the issue.

      Which leads to “The banks are either not well capitalised” – Even though the Fed is monetising the debt there is still a mountain of garbage/assets on the banks balance sheets that has to be worked through.

      “afraid to take risks” – Yes because they know things are going to go pear shaped

      “there arent enough people that want to take loans,or both!”- Plenty of people are being refused loans, even if the loans are secured against assets, this is happening in the UK and Greece, USA I dont know.

    • ” The whole issue is that these “assets” are garbage and yet the taxpayer through inflation is paying face value. ” Sure the only thing is that the cb applies a haircut on the asset price ie u might have paid 100k for a greek bond and now its market price might be 20k…20k is the purchase price from the cb…so nobody is getting richer or whatever.As for inflation…there is not a stich of it….the explanation is simple.Apart from the fact that money printing is not by definition inflationary,during QE no new money enters the economy.The CB purchases assets in exchange for bank reserves.Reserves never enter circulation.

  • More or less regulation is not the issue. The issue is and always has been effective or ineffective regulation. Currently in the U.S., since the Greenspan era, the financial regulators have been in bed with those whom they would regulate. This stands to reason, since Mr Greenspan was ideologically opposed to financial market regulation, subscribing to the religious belief that markets will self-regulate as long as they are allowed to. Does Richard also subscribe to this religious belief?

    • You are right about “The issue is and always has been effective or ineffective regulation.” There are quite clear empirical findings under which conditions certain forms of regulation make sense. Very often, regulation is chosen by ignorant politicians even though an improvement of market transparency and a reduction of information asymmetries would be more efficient as that would allow markets to regulate themselves. That is not the case in the financial markets. But there is plenty of evidence of the efficiency of self-regulating markets in high competitive and transparent environments in which external effects are not a problem. If you ignore that, it is you who is subscribing to the religious belief of the superiority of government regulators, not Richard who is believing in the efficiency of markets. And if that is the case, Greece’s domestic markets (if that’s the right term, too often they have more in common with a hierarchy) and the way they are regulated should shock you like Leonardo da Vinci shocked the Vatican.

    • Hello A_reader if I can chime in – “That is not the case in the financial markets. ” – I disagree, the markets wanted to destroy the companies who made the mistakes (the ultimate form of regulation). The government stopped it, the same government people look to for regulations (the ultimate irony for those calling for more regulations?). It would have been far cheaper to compensate savers in those banks than give money to these black holes. If of course you think the gov should get involved at all.

    • Yes, discussions about regulation tend to be very vague and unsophisticated. It is not even about effective or ineffective regulation — as your improved analysis states. it is actually about “appropriate regulation” — that is, regulation by the state that serves the interests of an economic prosperity for its general population. In other words, this is a matter of politics and policy choices — where do the interests of political elites lie?

      Of course, it is possible to make the case that financial deregulation was “appropriate”, considering that the primary interest of policy-makers was not the general population, nor even the production sector, but a specific fraction of capital — the financial sector — that as long ago as the 1980s was embraced by neoliberal politicians and economists as a putative remedy for declining economic competitiveness in the global economy. I suppose the fact that these same politicians also benefited financially from this choice is quite coincidental :-p

    • Guest – “it is actually about “appropriate regulation” — that is, regulation by the state that serves the interests of an economic prosperity for its general population. In other words, this is a matter of politics and policy choices ” – Regulation is exactly NOT a matter of politics and policy choices. If they were, the regulations would change with each government. Regulation is done by customers constantly. Regulation by customers is the most effective regulation, by far the most powerful, the most cost effective, the most innovative, the most geared to what people actually want, the most transparent, creates the most competition, and is the most democratic. There is no logical reason for government to regulate anything except their own monopolies.

    • @ xenos: The appropriateness or effectiveness, whatever you call it, of regulation depends on a variety of market characteristics, in other words, it should not be a matter of politics. If it becomes a matter of politics instead, the highest possible “economic prosperity for its general population”, also called welfare, is usually not achieved. And here you focus too much on the financial markets which are indeed a problem but only one of many. If regulation is used by politicians to protect their clients from more competition, which is one form of clientelism and produces all those oligarchic structures and high prices, you destroy both welfare and growth. Since that is the case in Greece for more than 160 professions, this is major problem in Greece and requires further deregulation of those professions, not even more regulation. The same applies to the labour markets which are too rigid. So you should differ between markets and look separately to decide if more or less or a different form of regulation is required if you talk about “appropriate regulation” at the same time. “Neo liberals” don’t differentiate, they don’t prefer any form of regulation, but those who condemn every form of deregulation are not better, they just follow a different religion.

    • “There is no logical reason for government to regulate anything except their own monopolies.”

      Quality minimum standards for trains, cars etc., information minimum standards for food, anti-dumping laws, … there are some logical reasons for those forms of regulation and some others.

    • Sorry, both Richard and a_Reader are completely wrong. All of the decisions about how to manage our economies are political decisions, and correctly so. I don’t know where you learned about economics, but I would advise you to ask for your money back (since you didn’t learn very much). Of course, if you have not studied economics, then perhaps you should ask the advice of those who actually do know something.

      Those who advocate that markets always know best are neoclassical ideologues who have been proven wrong again and again. You are simply repeating those mistakes, albeit in a slightly different form. The art of economics is to know — almost intuitively — when market forces can be used with little or no intervention, when they need a heavy hand from the state to deliver optimal outcomes, and when they are so dysfunctional that they cannot be used at all. i do not think that either of you has the slightest idea of what I am talking about, of course.

      And no, I am not focusing on financial markets either: my comments were directed at the management of all markets.

    • @ xenos: 🙂

      “All of the decisions about how to manage our economies are political decisions, and correctly so.”

      Hm, that’s probably what Greek politicians and Berlusconi thought during the last 30 years and we see the outcome today. It is too often a political and not a rational decision.

      If you knew something about neoclassical economics and other schools of thought, you’d know that your latest comment contains some nonsense. Modern research about effective regulation and the conditions under which markets work efficiently have absolutely nothing in common with neoclassical economics, such research is based on entirely different assumptions… as well as my comment btw. Or do you find information asymmetries in neoclassical economics? It is you who lacks some basic economic knowledge, isn’t it? 😉

    • @A_reader

      Indeed, you think you know so much, when it is clear you know little. If you think that I am claiming that the Greek economy was properly regulated over the last decades, then you are completely off your head. It is also clear that you are a Greek, who knows only Greece — since when you mention political choices you assume that I mean the idiocies and clientelistic practices that have informed Greek politics. The Greek economy is not regulated: it is strangled by bureaucracy, corruption and nepotism.

      I am familiar with the literature on regulation — some of which may be relevant to Greece. However, I have noticed that many Greek economists study US and European literature and think that they can import such ideas directly into Greece. They too are off their heads. As I mentioned above, this sort of economy policy making is more like an art than a science, and relies on sound judgement; nevertheless, these are political and policy choices, and cannot be made solely by technocrats. The fact that Greeks have not been able to get their politicians to act in the interests of Greek society as a whole is a major problem, but does not mean that Greece has to abandon democratic choices.

    • Guest – Lets deal with the facts. The countries with the least regulation are the richest, those with the most and the poorest. That is a fact.
      Google “ease of business world”
      and “gdp country wiki”

      Good regulation, bad regulation, any regulation that is done with the use of force is bad, you agree with that right? So the only truly democratic regulation is done by the people.

      The people can on regulate effectively if the government does not get in the way with their regulations. The power should be in the hands of the people. Regulation is only required for government monopolies because the people do not have a say. Everything else the people control as long as government does not take our freedom to control away.

    • “but does not mean that Greece has to abandon democratic choices.”

      No, of course not, that is a misunderstanding. Regulation should be decided by democratically elected politicians, but I think they shouldn’t base their decisions on vested interests but on sound economic criteria so that society profits the most. And that is not happening often enough, not in Greece and not in other countries either. Sound economic criteria means that they should try to achieve the highest possible welfare and growth for society and not consider distributional effects. Wealth distribution should depend on taxing and efficient welfare systems, but unfortunatelly, often market regulation is used for that purpose at the expense of overall growth. Regulation can of course also be a political issue, e.g. if you subsidize green energy. But also in this case, even if you take such a truly political decision, it should be based on sound economic considerations, for example it shouldn’t lead to a permanent subsidy of a technology which isn’t profitable even after reaching a high level of economies of scale and kick-starting demand. That kind of regulation leads both to a waste of public money and unfair markt conditions. EU CAP subsidies are such a malpractice. Richard is right that the best regulation is “truly democratic regulation … done by the people” in an environment of fair competition. But I think you often need certain forms of regulation to create such an environment, for example because customers lack knowledge and are unable to get required information.

    • A_Reader – “Regulation should be decided by democratically elected politicians,” – Why? Should the power not rest with the people? If not, why not?

      “but I think they shouldn’t base their decisions on vested interests but on sound economic criteria so that society profits the most.” – you’re living in a fantasy land (and I mean that in the most respectful way possible), the decisions of government do not work this way. I am not sure what evidence you need so you can understand that your government does not care about you? Let me start it off, if you live in Europe they take 50% at a minimum of all the money you earn against your will, and you think they want to do what is best for you?

      ” for example because customers lack knowledge and are unable to get required information.” – sorry, let me give an example of why consumers are ABLE to get information if they care about something.

      Imagine there are no seat belts in cars. Volvo for example comes along and advertises the fact that its cars are 100 times safer than cars without, it then shows crash tests on the TV adverts to show how much better its product is then the competition. Businesses have to educate their customers in order to gain a competitive advantage, perceived or otherwise.

      If people want something, for example to eat food that is not poisonous, then the competitors in the food industry are for sure going to be telling people how much safer its food is than the competition, especially if those competitors are hurting people. Not to mention word of mouth. To say people will not be educated by competitor businesses and by their peers about things they care about does not match the evidence I see and hear.

      If something matters to people, for example safety, then they will be educated either by companies offering safe products or their peers. Now some people might not care about safety and I respect their opinion as long as they respect mine.

    • @Richard: what you have just written is abject nonsense, since clearly you do not understand the purpose and mechanisms of regulation.

      First, there is no simple relationship between regulation and economic prosperity, not even with per capita GDP. This is a fact.

      Secondly, regulation should not have anything to do with “ease of doing business”, regardless of whether one accepts the dubious methodology of such reports. Bad regulation, unnecessary political interference in the economy for nefarious reasons, is a problem — not only for doing business but also for living and working in a country. Bad regulation is not the same as strong regulation; please try to understand the difference.

      Besides, as the first poster pointed out, this crude distinction between “strong regulation” and “weak regulation” is completely amateurish and misleading. As I mentioned in my first post on this topic, it is about *appropriate* regulation [of individual sectors and subsectors of an economy], taken as policy decisions for the benefit of the entire society. Not for the benefit of a tiny minority, as has happened in the USA and UK; nor for the benefit of larger minorities, as has been done in Greece. Regulation has broken down across the globe, primarily because the political process in developed countries has been hijacked by the super-rich, and has always been corrupt in poorer countries anyway.

      So, if you want to know where regulation is best practised, I suppose it is in northern Europe (excluding the UK): primarily Scandinavia, Germany and arguably one or two more. Those countries have high taxation and a high degree of involvement by the state, even though they have strong private sector economies. The USA survives not on its economic management, but by virtue of its dominance in the global economy. If it were a country the size of Finland, the USA would have been before Greece in going to the IMF.

    • Guest – “what you have just written is abject nonsense, since clearly you do not understand the purpose and mechanisms of regulation. ” – Thanks! Seriously though, I think regulations are supposed to protect me, am I correct?

      “First, there is no simple relationship between regulation and economic prosperity, not even with per capita GDP. ” – I don’t think anyone is saying it is simple are they? It is complex, but fundamentally the “fact” is the correlation between deregulation and prosperity it indisputable.

      “This is a fact. ” – Okay, I stated my sources can you please state yours.

      “Secondly, regulation should not have anything to do with “ease of doing business”, ” – You must be joking? That’s the only thing it has to do with. What are you regulating if you are not regulating business???

      “Bad regulation, unnecessary political interference in the economy for nefarious reasons, is a problem” – And who makes those judgments (unnecessary/nefarious) for you? Me? Someone who does not know you? And who makes that judgement for me? You? Someone that does not know me?

      “Bad regulation is not the same as strong regulation; please try to understand the difference.” – See previous point

      “as the first poster pointed out, this crude distinction between “strong regulation” and “weak regulation” is completely amateurish and misleading.” – Yeah, because the difference between strong and weak is far inferior to the difference between bad and good.

      “it is about *appropriate* regulation [of individual sectors and subsectors of an economy], ” – again, who makes that judgement for you? and do you acknowledge someone else may have a different opinion to you? and do you acknowledge that you and someone else’s opinion should both be respected?

      “taken as policy decisions for the benefit of the entire society. ” – how can stopping people from buying/building/providing/doing what they want possibly benefit the “entire” society?

      “Not for the benefit of a tiny minority, as has happened in the USA and UK; nor for the benefit of larger minorities, as has been done in Greece. ” – I agree with you 100%. Have you not been keeping track of what is happening/what happened. The “regulators/government” kept this tiny minority in business, the people (the true regulators, the public) would have them on the street by now. Did you miss the bit where the biggest banks in the UK went onto the taxpayers balance sheet?

      “primarily Scandinavia, ” – this has been talked about on this blog before at length, Sweden specifically have been deregulating their economy for years because of their financial problems in the 80s/90s.

      “The USA survives not on its economic management, but by virtue of its dominance in the global economy. If it were a country the size of Finland, the USA would have been before Greece in going to the IMF.” – I agree, the regulation in the USA is destroying the economy as you can see by their trade deficit. The USA came to dominance in the global economic in the 19th century because it was a free country with little if any government regulation. – For an example of where the USA is now re regulation in health care http://youtu.be/Dlm-9hUScLE If you have evidence of government regulation in the 19th century for example, please feel free to give me some sources.

    • @Richard: you did not give any sources that can be taken seriously. I am not even prepared to look for sources to prove basic issues of economic regulation which I have been familiar with as an economist since 1986 and as a citizen since 1976 when I started reading and worrying about the emerging neoliberal propaganda that came out of the USA.

      So, some specific replies. No, regulation is not there to “protect you”. Wherever did this ridiculous notion come from? (I already know the answer so dont bother replying)

      Proper regulation does not have as its objective the idea of making business difficult. This is a childish notion; even if bad regulation (such as Greece’s) ends up being hostile to business, that is not actually its objective. Adequate regulation can have many objectives — including the prevention of monopoly abuse, oligopolistic cartels, manipulation of markets by fraudulent practices, inter alia. Regulation is also there to protect the political system from abuse by powerful economic interests (the USA has failed miserably in that since the 1950s), the society from exploitation by foreign multinationals, &c. And finally, yes, some regulation is there to stabilise the worker-employer relationship and maximise production and productivity while maintaining adequate social protection and remuneration for workers and a stable predictable environment for business. The list goes on and on. You might try reading some standard books on the topic,.

      So, finally the relation between economic prosperity and regulation. You are merely citing neoliberal propaganda at me, so don’t expect me to do anything other than laugh. Some of the US regulation of markets used to be quite tough, but has been weakened in recent decades. The same in the UK. And of course the deregulation of financial markets and the disaster that followed is the primary cause even of why we are talking here. This sector alone is the strongest proof possible in economics of the absolute need for regulation of most economic activities — and especially those involving very large amounts of money.

      The fact that national markets were closed in the mercantilist period, and started to be opened up for trade in the second half of the 19th century has nothing to do with contemporary debates on regulation. If you are trying to make the case that deregulation of markets in that period led to economic prosperity, then forget it. The success of the British Empire, for example, was predicated on military power and the abuse of entire continents’ resources, allied to new production techniques known now as the Industrial Revolution. Regulation is a meaningless word when physical force, legal formalities and sheer power of life or death push people into servitude for the profits of the rich. Of course, we are well on the way to going back there…

    • Guest – “you did not give any sources that can be taken seriously.” – Is Yanis paying you to make argumentitive comments? I gave the World Bank, OECD, IMF. Who do you think is mor serious?

      “Adequate regulation can have many objectives — including the prevention of monopoly abuse, oligopolistic cartels, manipulation of markets by fraudulent practices, inter alia. Regulation is also there to protect the political system from abuse by powerful economic interests (the USA has failed miserably in that since the 1950s), the society from exploitation by foreign multinationals” – Sorry, of the examples you gave, which one is not there to “protect” me/citizen? Maybe I am missing something but if a regulation is not there to supposedly “protect” the citizens then what other reason is there for a regulation? I personally can not think of a single one, maybe you can enlighten me?

      “And of course the deregulation of financial markets and the disaster that followed is the primary cause even of why we are talking here. This sector alone is the strongest proof possible in economics of the absolute need for regulation of most economic activities — and especially those involving very large amounts of money. ” – Sorry, I am sure I have said it to you before, the people/citizens would have put the big banks out of business, the regulators have kept them in business. Do you disagree that this is what happened? Do you agree with the state supporting private oilgolplies?

      “allied to new production techniques known now as the Industrial Revolution” – Ill give one more example and then Ill have to quit, Im clearly not making any inroads. The USA and the UK both had the industrial revolution. The USA started from nothing in 1800 and within a hundred years had overtaken the UK despite the existence of the British Empire. USA had little regualtion, the UK had more regulations. Read Carnegie’s autobiography for first hand examples of business life in the two countries.

    • @Richard: if you are incapable of distinguishing between systemic protection for a society and that which is aimed at individuals, then there is no hope for you.

      As far as your version of history is concerned, there is also no hope for you. The lack of regulation in the history of the USA is related to its size, population distribution, federal structure and natural resources. (Not to mention the fact that it was a country founded by Europeans who took it by force from its native inhabitants, and the power of the gun was the only form of regulation that they understood.) With the twentieth century, the USA started regulating until the neoliberals took over and decided to shift the balance of power in favour of big business.

      As far as evidence is concerned, I really have no idea what you are talking about. You are giving your own opinions, which have no value. I am not interested if you link to the OECD or World Bank — and their analyses are frequently nothing other than pro-establishment because the rich countries of the world finance and control them. It is about time you learned how to think.

    • Guest – You really do take the biscuit. “if you are incapable of distinguishing between systemic protection for a society and that which is aimed at individuals, then there is no hope for you. ” – Educate me, give me an example of the two.

      “The lack of regulation in the history of the USA is related to its size, population distribution, federal structure and natural resources.” – Im glad you can see the lack of regulation in the USA

      ” As far as evidence is concerned, I really have no idea what you are talking about. You are giving your own opinions, which have no value.” – I gave the opinions of Carnegie, not my opinion.

      “I am not interested if you link to the OECD or World Bank — and their analyses are frequently nothing other than pro-establishment because the rich countries of the world finance and control them. It is about time you learned how to think.” – Your not interested in the World Bank and OECD? They are on your side of the argument! They want centralized government and global regulations.

  • As this part of the wonderful blog dealt a goo deal with (deals, ha ha, sorry for the pun) – deregulation and regulation – here is a link to a good interview with Joseph Stiglitz.

    From ARD, german TV, but in english – about social injustice and democracy, and in good parts about – the disastrous effects of deregulation. Stiglitz won the nobel prize in 2001, there should be more like him^^.
    http://www.tagesschau.de/multimedia/video/video1194644.html is the link, the interview is from October, 9 (if it slips into the archive you’d find it there).

    • klemperer85 – The myth of deregulation is really getting old. Please state some sources with regards to what financial regulations were repealed since 2000. Ill give you Glass Steagel from 1999 if your stuck but anything else?

      Also Stickler is on the same end of the argument as the people he believes are the cause of the problems. He believes government has the solution and so do the major banks. Of course there another line of thinking and that is that centralised power is always going to be a target for corruption either from within or from outside. Some would say it is better to have power decentralised as much as possible to get is closer to the hands of the people.

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