Monday, September 17, 2012

Weird Monetary Economics and the Republican Party

Ron Paul's views on the role of the Federal Reserve System are well-known. Paul has found little support for actually ending the Fed, but he managed to get a bill through the House during the summer which would have established additional "auditing" of the Fed. Fortunately, the bill went nowhere in the Senate.

The Fed is of course audited by the General Accounting Office. What Ron Paul has in mind is not auditing in the conventional sense, but an opening-up of FOMC deliberations, along with other elements of Fed decision-making. While transparency might seem like a good thing, there are elements of Fed secrecy that actually work to our advantage. A strong and independent Fed may be able to work more effectively in the public interest than a Fed that is constantly being "audited" by Congress.

The view that the Fed is in need of reform has been written into the Republican Party's election platform. The key passage is this one:
...the Republican Party will work to advance substantive legislation that brings transparency and accountability to the Federal Reserve, the Federal Open Market Committee, and the Fed’s dealings with foreign central banks. The first step to increasing transparency and accountability is through an annual audit of the
Federal Reserve’s activities. Such an audit would need to be carefully implemented so that the Federal Reserve remains insulated from political pressures
and so its decisions are based on sound economic principles and sound money rather than on political pressures for easy money and loose credit.

Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration,
established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar.

There are two ideas in there. The first is Ron Paul's Fed audit, and the second sounds like sympathy for a return to the gold standard. Once we enter into discussions of how precious metals should be an integral part of modern monetary systems, we have slipped into the territory of the lunatic fringe.

But this is just the Republican party's platform. Maybe the candidates aren't actually serious about it. Romney was asked about Fed audits at a town hall meeting, and expressed what the Wall St. Journal characterized as "lukewarm support," coupling sympathy for an audit with comments on the importance of Fed independence (much like in the party platform).

Similarly, public comments by Romney on the Fed's recent policy announcement were somewhat muted. Romney's campaign issued this statement:
The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked. After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars. As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay, and a true economic recovery.
Romney seems to understand that directly criticizing the Fed is a bad idea if you are running for President, so he uses this as an opportunity for Obama-bashing. There is some Fed-bashing in the statement though. "Artificial and ineffective measures?" That may be true, but Romney should not be saying that, or approving of other people saying it. "We should be creating wealth, not printing dollars?" Is this saying that financial and monetary factors never make a difference, or what?

Paul Ryan, in his attack-dog role, goes further. He says, commenting on the Fed's new policy:
One of the most insidious things a government can do to its people is to debase its currency.
Now we're venturing into Ron Paul territory. Start talking about "debasement," and you're not many steps down the road to Murray Rothbard, apparently a key influence on Ron Paul. Rothbard is a somewhat confused libertarian. Markets are good, except when it comes to the provision of "money." According to Rothbard, not only should we return to the gold standard, but anything that looks like a transactions medium should be backed 100% by gold. Most economists, including Paul Krugman, can understand why this is a bad idea.

Bad monetary ideas have always been with us. But, like other bad ideas, the financial crisis and the recent recession appear to have flushed those ideas into the open again. Ben Bernanke may think he has been doing the right thing, but he might do well to take a lesson from Alan Greenspan. While Bernanke knows far more economics, Greenspan was a master at staying out of sight. Good central banking proceeds in a way that nobody notices. The more unusual things you do, the more you get noticed.

28 comments:

  1. You complimented Krugman (sort of) and criticized the Republican party in one post. This will get linked by Mark Thoma in about 10 seconds.

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  2. Krugman gets this. Read this:

    http://newmonetarism.blogspot.com/2011/10/red-letter-day-krugman-gets-banking.html

    It also compliments Krugman (sort of).

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  3. The ironic thing about this post is that Greenspan supported a gold standard.

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    Replies
    1. http://en.wikipedia.org/wiki/Alan_Greenspan#Objectivism

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    2. Many of us believed stupid things when we were young ...

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  4. It gets even worse. Romney's fundraising email is basically trying to give the impression that he knows nothing about how the Fed works:

    "Barack Obama is at it again -- spending your tax dollars to bail out his failed economic plan. It's more of the same from an out-of-touch president with no plan to fix our economy and put Americans back to work.

    This past week, the Federal Reserve announced it would print $40 billion every month to prop up this administration's jobless recovery -- that's money we can't afford for jobs we will never see."

    http://www.theatlantic.com/business/archive/2012/09/mitt-romneys-bizarre-attack-on-the-fed/262465/

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  5. It's not an encouraging sign that today's mainstream monetary economists cannot bring forward much against the gold standard except that we didn't have it for the past 40 years, so it got completely out of the limits of their power of imagination.
    The decades after abandoning the last sort-of gold standard in form of Bretton-Woods saw unprecedented credit growth, debt growth and expansion of the financial sector. 2008 put an end to this and also marked a turning point in this development. Printing even more against the readjustment means long-lasting financial repression of the lower income classes.
    These facts are very aware to successful economists who are investors, analysts, traders... in the real world; unfortunately they have not filtered down to a large part of the academic economists.

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    Replies
    1. What is not an encouraging sign is that your post is what passes for economic understanding among a nontrivial fraction of the population. We as a profession should be embarrassed not by our disdain for the absurdity of a modern gold standard, but by the sad educational state that gives rise to imbecilic positions like yours.

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    2. *Yawn* "You talk about things I don't understand, so you must be dumb. Arf!"
      The academic level and argumentation of your reply struck me deep inside...

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    3. PS: I want to be one of these great academic economists who understand the current macroeconomic processes so well...
      http://www.youtube.com/watch?v=RVN1zWLP-Wc&feature=related
      http://www.youtube.com/watch?v=nuysYXlJ43I&feature=related
      ...and I for sure want these great academic economists managing my money...
      http://en.wikipedia.org/wiki/Long-Term_Capital_Management
      http://en.wikipedia.org/wiki/Myron_S._Scholes#Investment_activity

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    4. Boring.

      -The Anonymous who mocked the Anonymous

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  6. Dude, there is no level of argumentation, academic or otherwise, that can help you. It is a waste of time. So much has been written on what is wrong with the gold standard by Milton Friedman, John Maynard Keynes, more recently by Christina Romer and others, that if you don't get it by now you never will! I am writing this reply just to procrastinate.

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    Replies
    1. Proponents of the gold standard think that it's a simple mechanism that controls inflation and insulates monetary arrangements from the whims of central bankers. The problem is that you trade the whims of central bankers for fluctuations in prices caused by changes in the gold-extraction technology and the demand for gold in other uses. Further, the gold standard is not a commitment - you can always drop it, as of course happened in the past when the rule became unsustainable. Here's a post:

      http://newmonetarism.blogspot.com/2010/12/commodities-and-money.html

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    2. I should add too, that an important feature that any monetary system should have is elasticity of the stock of media of exchange. It's efficient if the money stock (however defined) fluctuates with economic activity. The gold standard does not have that property.

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    3. Dude,
      have you ever read anything in your poor little life? I don't think so, otherwise you might have noticed that Keynes' famous quote on the gold standard referred to the fact that by that time, all big nations had abandonned it during WWI to finance themselves with the printing press.
      You could have noticed too that the monetary system Keynes proposed after WWII was backed by gold - the "Bancor"'s value was supposed to be defined in gold, with the nation states fixing the values of their currencies with respect to the Bancor.
      Keynes' plan wasn't fully implemented in the actual Bretton-Woods system which introduced the Triffin dilemma. However, even Bretton-Woods was backed by gold. It was abandonned when...there needed another war to be financed. And what could have been the long-term consequences of that...?
      http://www.zerohedge.com/news/did-great-financial-crisis-start-end-gold-standard

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  7. Dude, if by anything you mean the garbage posted on zerohedge then I confess you are correct. I spend my time getting my information straight from the source, for example this video of Keynes celebrating the end of the gold standard
    http://www.youtube.com/watch?v=U1S9F3agsUA

    By the way, surely you understand that simply expressing the value of bankor in units of gold does not constitute a return to the gold standard, as Keynes repeatedly tried to explain. Fixing that value would, but this is not what Keynes suggested. Supply of the bankor would be controled by a central bank.

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    Replies
    1. Dude, if one-minute Youtube clips are your main source of information, I'm not surprised at all. You know, of course, that the bastard gold standard of that time was the gold bullion standard, which basically had the same flaws as Bretton-Woods, so Keynes had good reasons to be glad about its abandonment. By the way, it's "BanCor" and this central bank you're suspecting was supposed to be called "International Clearing Union". Gee, you sure had a close look at these things...

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    2. PS: I'm correcting myself in the sense that there are some economists with a "mainstream" education who are not ignorant of historic macroeconomic and financial trends - you're just not one of them. But fortunately, NBER welcomes them. An example: http://nber.org/papers/w18290

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  8. Dude,you are correct, I misspelled something that doesn't exist. Life has no meaning any more.

    Now, I would have given you partial credit for mentioning by name something that also doesn't exist, except that it is off topic! On topic, you didn't say zilch! Did Keynes advocate a fixed value in gold for the Bancor, which would have implied the need for the ICU to tie its supply of Bancors to gold reserves, yes or no? The answer is no, as the value of the Bancor would be subject to revision.

    By the way, Taylor's paper that you site has nothing to do with this; pretty pathetic attempt. Since you like history, this paper does:
    http://www.jstor.org/stable/1885759?seq=12

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    Replies
    1. Well, not long ago, banks didn't exist in macroeconomic models, but macroeconomists still knew how to spell them. Anyway...
      I never claimed that Keynes pleaded for a fully gold-backed system. I rejected your claim that he rejected any gold-backing in general.
      So, what does the Taylor paper say? "Extreme leverage: size of the banking sector is unprecedented. [...] It is the fact that, looking back over the long sweep of history, the financial sector in the world’s advanced economies is now larger than it ever has been. The increase in size has been dramatic since the 1980s;[...]" Oops, pretty much what I wrote in my first comment.
      Oh, and what have we got here? http://www.theatlantic.com/magazine/archive/2012/10/the-next-panic/309081/ A MIT professor worried about the country that has been doing quantitative easing for the past 10 years already, that has created money and debt out of thin air, not backed by any real assets. But you and Helicopter-Ben will prove him wrong, I'm sure...
      There is no unbacked credit creation without retaliation, sooner or later.

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  12. The elimination of fractional reserve banking is a CHICAGO idea -- endorsed by MILTON FRIEDMAN.

    ReplyDelete
  13. Actually, Friedman wanted to go all the way to a 100% reserve requirement. It's in A Program for Monetary Stability. Friedman had some good ideas, but that was a bad one.

    ReplyDelete
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