Monday Business Edition
Following the economic story is a trifle confusing because there are at least 2 threads to it. One of those threads is the failure of our financial institutions and their systematic culture of fraud.
But another thread is the failure of academic economists and Washington policy makers to correctly diagnose and take action on our National economic problems.
Let me start by saying that what we are seeing in the United States macro economy is a textbook example of the complete and utter failure of Monetary Policy from Milton Friedman to Alan Greenspan. What ails us is overcapacity and a lack of aggregate demand. Businesses are making everything that anyone will pay for and could easily make much, much more at little marginal cost.
They are sitting on piles of cash which they are currently using to buy sort term treasuries at 0% interest (a safe way of parking it not investing it), stock repurchases, mergers and acquisitions, expanding overseas operations, and other non productive pursuits; non productive in this case meaning- Not Increasing U.S. Aggregate Demand.
Now the textbook response to a situation like this is for the Government to step in as a purchaser of last resort- Dig Holes. Fill them up. At least you’re putting money in people’s pockets and because of the Multiplier Effect Aggregate Demand will rise and your National economy will pick up. Tested and proven.
Indeed, this is exactly the argument David Broder uses for advocating War with Iran!
Umm… aggressive warfare for economic gain is pretty specifically a war crime Dave.
But it does validate the idea of Government fiscal policy as a tool for jump starting the economy.
Instead of that we are pursuing a policy of pushing on a string. The object of Bernake’s $600 Billion repurchase is to create negative interest rates in the hopes that losing money by keeping it parked in T-Bills will spur investment.
A thin hope at best and as Krugman points out, by foregoing the chance to create increased expectations of inflation in general we are reducing that incentive.
Doing It Again
By PAUL KRUGMAN, The New York Times
Published: November 7, 2010
Eight years ago Ben Bernanke, already a governor at the Federal Reserve although not yet chairman, spoke at a conference honoring Milton Friedman. He closed his talk by addressing Friedman’s famous claim that the Fed was responsible for the Great Depression, because it failed to do what was necessary to save the economy.
“You’re right,” said Mr. Bernanke, “we did it. We’re very sorry. But thanks to you, we won’t do it again.”
…
For the big concern about quantitative easing isn’t that it will do too much; it is that it will accomplish too little. Reasonable estimates suggest that the Fed’s new policy is unlikely to reduce interest rates enough to make more than a modest dent in unemployment. The only way the Fed might accomplish more is by changing expectations – specifically, by leading people to believe that we will have somewhat above-normal inflation over the next few years, which would reduce the incentive to sit on cash.
The idea that higher inflation might help isn’t outlandish; it has been raised by many economists, some regional Fed presidents and the International Monetary Fund. But in the same remarks in which he defended his new policy, Mr. Bernanke – clearly trying to appease the inflationistas – vowed not to change the Fed’s price target: “I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy.”
And there goes the best hope that the Fed’s plan might actually work.
Think of it this way: Mr. Bernanke is getting the Obama treatment, and making the Obama response. He’s facing intense, knee-jerk opposition to his efforts to rescue the economy. In an effort to mute that criticism, he’s scaling back his plans in such a way as to guarantee that they’ll fail.
Business News below-
On this day in 1872, fire rips through Boston. 
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