The official narrative of the crisis

We’re in a financial crisis and there’s still no official explanation of what went wrong.

This crisis is like all other financial crises – it was caused by too much borrowing by people who can’t pay their bills. This narrative, however, is politically inconvenient, which is – more or less – always the case.

So the search is on for another alternative.

In modern times, the preferred narrative is generally that fiscal and monetary policy should have been more irresponsible post-crisis. Financial irresponsibility causes economic growth – that’s basically the theory.

To represent this view, enter Tyler Cowen:

Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times. We needed a big dose of inflation, promptly, right after the downturn. Repeat and rinse as necessary [i.e. if reality doesn't react properly to the theory, stick to the theory until reality catches up]. But voters hate inflation [WFT??] and, collectively, we proved to be cowards. Too bad.

Neither Tyler nor the oracles that he cites explain how to create inflation during a period in which: 1) interest rates are basically zero; 2) a huge amount of the “wealth” of our society was revealed to be a sham; and 3) our country is full of a lot of people who have no skills outside of constructing borderline-cardboard houses in planned communities 70+ miles from the nearest city.

Arnold Kling also wants inflation – he thinks it’s easy. All the Fed needs to do is “buy stuff.” But what’s left to buy? Corporate bonds are at record highs, treasuries yields are negative, mortgage yields are at historic lows, and commodity prices are setting records. Can we really solve crises brought on by too much debt by printing money to make it cheap to issue debt? There’s not much left to buy. Does he really want the Fed to start nationalizing firms by buying equity? Should the Fed start buying consumer goods? Should it start buying personal loans from banks? Should it start buying foreign currencies in a way that would (somehow) not start a currency crisis?

Matthew Yglesias (is there a better representative of official thinking?) seems to agree with Cowen and Kling. Yglesias thinks inflation will cause households that are “flush with cash” to spend money.

My household is just such a household. I think an anecdote about how loose monetary and fiscal policy has affected my household will serve to demonstrate why this official wisdom is wrong.

We’ve spent a lot of money since the start of the crisis in the sense that we started the crisis with lots of cash and we now have only a small amount of cash (i.e. US dollars).

Most of the money we had at the beginning of the crisis is now in commodities (agricultural generally), Swiss Francs and gold. All of these assets have “inflated.”

I want to save. Cowen and Yglesias want me to spend. In the past, they could make me spend. This is not the past.

The idea that we need inflation to solve our problems may have been a good idea in the ’30s, when people had no choice but to hold dollars or gold and FDR could steal their gold. This isn’t the ’30s anymore. For under $10, you can now convert your dollars into just about anything. The Cowens and Yglesiases of the world can create all the inflation they want, they just can’t control what assets inflate. In other words, they can’t give it to responsible citizens in the ass anymore – at least not in this particular way. I’m sure this is very troubling . . .

Every other Yglesias post is about how unfair it is that the rich are getting richer. He seems to be oblivious to the fact that his economic ideas are making the rich richer. Incidentally, he’s also demanding higher inflation while writing a book called, “The Rent is Too Damn High.”

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23 Responses to The official narrative of the crisis

  1. chucho says:

    The only way out is radical banking and monetary reform. The elites like Yegli know this, and that’s why it’ll never happen.

    The Fed basically announced as much today anyway. “We know things are f-ed, but we’re determined to keep it that way.”

  2. aretae says:

    If you’ve been reading Sumner for a couple years…he has very good explanations for how.

    • Foseti says:

      What’s the synopsis, because I don’t see it?

      It seems to me that if the Fed keeps buying bonds, they’ll flatten the yield curve so much that they’ll kill the borderline-insolvent large banks. They’d prefer an extended recession to failed large banks.

      • aretae says:

        He’s hard to summarize. Here, he asserts, without explaining: http://www.themoneyillusion.com/?p=10378

        Here’s Sumner’s introduction: http://www.themoneyillusion.com/?page_id=3443

        Here’s Sumner diagnosing the current recession as entirely a monetary phenomenon: http://www.themoneyillusion.com/?p=249

        And from a link in that last, here he is with the super-simple fix:
        http://www.themoneyillusion.com/?p=35

        Sumner is the most interesting Macro guy writing today.

      • aretae says:

        Also,

        After thinking overnight, I think your read on the goal is somewhat different than others’ read on the goal.

        “Yglesias thinks inflation will cause households that are “flush with cash” to spend money.”

        Read Sumner. Heck, ask him questions…he’s the kind of nice guy who will respond directly to you if you’re moderately polite.

      • Mencius Moldbug says:

        I only read the last link, Sumner’s proposed fix (fixing the price of GDP futures).

        I can’t even begin to convey how deranged these paper artists are. Or to put it differently: if I had to invent the sovereign analogue of Enron accounting, I couldn’t imagine doing better. It’s like Rube Goldberg meets Brezhnev meets VMS. It makes John Law look like Isaac Newton. Other than that, it’s brilliant. Fortunately the actual people in charge, though they don’t have any ideas, don’t have any ideas as insane as this.

      • Foseti says:

        That was – by far – the craziest of the posts. It was mind-bogglingly crazy.

        Perhaps the oddest part is how sure he is that it would instantly work. Who knew the holy Grail of economic growth was the Fed making a market in a strange derivative? That’s all it takes! As if lead were turned into gold!

      • aretae says:

        I’d be careful with Sumner. AFAIK, he knows more about the great depression than any person alive. Not because he lived through it, but because he’s an academic economist who’s studied the topic up down and sideways.

        His claim overall is pretty simple:
        You can track EVERY recession in (at least) 100 years of US History by watching Nominal GDP. ALL of the recessions start by NGDP crashing. Whenever NGDP was kept high, or allowed to revert high, the recession bounced. Whenever it wasn’t… the recession occurred. Claim is that we have 100 years of evidence saying that Real GDP follows Nominal GDP.

        Given his encyclopedic knowledge of US Recessions, cause and effect…I find hard-money advocates far more laughable than his proposals.

  3. [...] for existing government debt. As for just a little dose of inflation, let me offer this from Foseti: Arnold Kling also wants inflation – he thinks it’s easy. All the Fed needs to do is “buy [...]

  4. james wilson says:

    The financial crisis was not caused by too much borrowing. The financial crisis was cause by too much lending.

  5. Anonymous says:

    If by “official narrative” you mean narrative followed by officials in Sweden and Iceland where they have made a pretty good recovery, then you’re right. Otherwise, how can you call it “official” when no US or European government official will even utter the words inflation?

  6. Hesiod says:

    OR — we could tax the shit out of the money-hoarders who are destroying the economy. It is better to take the money from the money-hoarders and use it productively to generate economic activity than to let the money hoarders park their assets in completely useless shit like Gold.

    “Saving” money in this economic environment causes deflation, which is worse than inflation.

    This is why taxing the rich actually will spur economic growth and help the economy. The money is being hoarded and not being used. Or, it is being re-patriated. Nope. Sorry. You are not being “responsible” because you are hoarding money and screwing the economy.

  7. Hesiod says:

    This entire economic problem was caused by failing to rip the banks a new asshole. We should have treated them just like GM: Forced them into a controlled bankruptcy, have the Gvt assume at least 51% equity and control over them, fired the motherfuckers who destroyed our economy (that’s the least we should have done, as I was more partial to prosecuting the sons of bitches) and then cleaned up the toxic assets.

    This was the solution that people like Roubini and Krugman were pushing (the so-called Swedish model) that Tim Geithner — the Wall Street whore — convinced Obama not to follow.

  8. Hesiod says:

    I propose a 90% marginal tax rate on idle assets above $1 million. If you are hoarding cash — you don’t get to keep it. The Gvt will take it from you and use it to either pay off its debt, or rebuild the country. Either way, its being put to far better use than by the douchebags who are hoarding it.

    Of course, you could choose to actually invest or use the money fro productive purposes, thus avoiding the tax.

  9. Dan Warren says:

    Matt Yglesias an “official” thinker? You can go weeks reading him without coming across a single policy prescription that has been embraced by any public official, much less the neo-Hooverian officialdom now dominating Washington debate. So maybe you mean he represents some kind of erroneous “conventional wisdom” of the Keynesian type. Plenty of better, and better-known, candidates for that. One would almost think you don’t like poor Matt. And by the way, his book is about how rents are too high relative to OTHER things. He’s carefully explaining this challenging concept to the non-Swiss franc crowd at his blog.

  10. peterk11@comcaset.net says:

    Agree with Hesiod. Bend the money-hoardersover and tax the shit out of them. Next, the government can pay people to build borderline-cardboard housing communities. They will then take their money to buy things and help revive the economy.

    As Krugman says, huge increases in the monetary base have not been inflationary because of the liquidity trap. People have been crying wolf over inflations for 3 years now.

  11. Wonks Anonymous says:

    Tyler would regard the failure of the monetary authority to adjust supply in response to the demand for dollars as irresponsible.

    If you don’t know how to create inflation, hire a Zimbabwean central banker. It’s not that hard. Merely stating your target as monetary authority to create inflation will cause people to bid up prices in advance.

    What we might call the “Sumner strategy” has been implemented in Sweden (with even negative nominal rates) and Australia, where they’ve maintained a fairly consistent inflation rate of 4% and avoided recession. Within Europe, those countries with their own currencies have fared far better than those on the Euro. The UK is something of an exception, in that the central bank has provided the inflation (enough for the political opposition to make hay) but the “real” sectors of the economy haven’t provided real growth.

  12. Sam says:

    If you want to put your money in gold, well… have fun with that. The point of inflation is that it is the only way to redistribute wealth from the rich to the poor that doesn’t require Congressional involvement.

    This is a good thing because selling stuff to middle class people drives innovation – things like mass production, just in time distribution, etc – but selling stuff to rich people doesn’t (it’s hard to argue that the yacht industry has done very much for society).

  13. [...] Foseti – “Thought Experiment“, “The Official Narrative of the Crisis” [...]

  14. [...] Foseti on the official narrative of the crisis. [...]

  15. [...] This time he advocates doublespeak in order to keep the plebes in line. Foseti did an excellent job explaining the fallacy of this argument earlier, so I won’t rehash it, but I will add a different [...]

  16. [...] long time ago, I wrote a post that had a throw away line at the end criticizing Matthew Yglesias for simultaneously thinking that [...]

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