Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis. As one of the economists who helped create today's newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging. Why should non-economist readers care about these technicalities?
Dr. Samuelson’s explanation of the implications for monetary policy after the jump.
Because the policy tools that served so well for Alan Greenspan's Federal Reserve and for the Bank of England now have to be changed. It used to be enough for a central bank to "lean against the wind." That means lower interest rates when unemployment is too high and when deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year. Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low. This is surprising, but true. The safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.
I can recall my macroeconomic professors complaining about the shorthand of “the interest rate”, but this seemed like a quibble in the real world of policy making until we hit the Bush41 recession. Of course, President George H. W. Bush was trying to end the S&L crisis and raise tax rates at the same time, which likely made the FED’s job more difficult during his Administration. I don’t pity the task the FED is tasked with now either. Dr. Samuelson rightfully advocates a little more regulation of lending practices. But couldn’t more regulation of financial markets have a similar impact to the S&L reforms during Bush41’s era? Dr. Samuelson has a little more advice for our policymakers:
Watch developments closely. If America's Christmas retail sales fail badly - as they could when high energy prices and high mortgage costs pinch consumers' pocket books - then be prepared to accelerate credit infusions by central banks on the three main continents ... What the world does not need now is tolerance for any persistent weakness in global Main Street growth. It is better when physicians worry too much about a patient's health than when they worry too little.
I hope Chairman Ben will follow Dr. Samuelson’s advice.
Dr Samuelson said: "..be prepared to accelerate credit infusions by central banks on the three main continents ... What the world does not need now is tolerance for any persistent weakness in global Main Street growth...
ReplyDeleteWhy would a sane person advocate blind undifferentiated economic growth the way Samuelson does??
Aren't the economic abstractions being taken to the extreme. Haven't they become completely unable to cope with our reality?
Is it credible to say that what the world needs is a simple ramp up of the availability of money and credit and more consumer spending?
At a time of pending ecological collapse caused by the very same!
What do people around the globe need at present? Why not the following?
- less corruption;
- more housing more appropriately built;
- more governance;
- more organic food;
- less greenhouse emissions;
- more local production;
- fewer working hours;
- more equity;
- less poverty;
- more local enterprise;
- less of industrial monopolies
etc.
Less and more and DIFFERENT things.
A paradigm shift.
Wow, sounds like Robert Kuttner. Kuttner also invokes the Great Depression and the glib assurances, both then and now. Moreover, Samuelson names two of Kuttner's three parallels: the loss of transparency and the exorbitant debt. Third on Kuttner's list is conflict of interests, or, if you prefer, misaligned incentives.
ReplyDeleteKuttner argues for "rational regulation" as well. He singles out the neglected enforcement of the 1994 Home Equity and Ownership Protection Act and the 1999 repeal of the Glass-Steagall Act.
That may be as far as I can take the comparison, but the overlap struck me. And as Samuelson underscores:
"Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis."
"Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low."
... nobody knows what is coming.
Looks like I've put too simplistic interpretation on Samuelson's article.
ReplyDelete"..exploratory planning is worthwhile insurance."
Sounds like a hopeful change in direction.
The link to the article is:
http://www.iht.com/articles/2007/11/19/opinion/edsamuel.php
"Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis. As one of the economists who helped create today's newfangled securities, I must plead guilty..
ReplyDeleteI get the impression that Samuelson is being deliberately misleading here and attempting to cover his back as much as it is practically possible.
When the extent of this problem is finally known Samuelson probably won't - as an inventor of these incredible financial monsters - want to be seen in public again.
No mention has been made of the general situation with hedge funds. Not helped by their lack of auditing, lack of obligation to reveal their books. Then there are the credit insurers. The credit-worthy renters of dispossessed sub-prime houses, the naked short-sellers, the post-dated share options, the rise in oil prices to pacify OPEC's panic with the fallen US dollar, the enormous global contagion.
All you zombies show your faces
(I know you're out there)
All you people in the street
(Let's see you)
All you sittin' in high places
It's all gonna fall on you
One word:
ReplyDelete"ACCOUNTABILITY."
Looks like oue esteemed economic leaders are finally admitting what many of us have known all along. They don't know anything more than the average guy in the street, and I don't mean Wall Street. And these are the people that are allowed to determine over all economic policy. Come to think of it, if the free market is so effective in determining what should and shouldn't be vis a vis the economy, why do we need economic gurus to set policies?
ReplyDeleteAnother tangential point. Assume for the moment that the economy tanks just behind the big financial institutions and we are all up the creek financially. I know one group of people who will be sitting pretty with more than sufficient assets to start buyinig up everything at bargain prices. Guess who. The same guys who are leading those financial institutions, whether successfully or not. Their compensation seems to suffer no ill effect as demonstrated by the very unique severance packages described in the press for the recently past chiefs at Merril Lynch and Citibank. And how is it that the guy who one might have hoped had some eye on what was going on in those rampant markets, the chief at the exchange, is going to get $75,000,000 just to change hats, neither of which is likely to be white?
I seriously believe that part of the problem is that many of these models used to determine valuations and measures of risk are incredibly complex. Why is this a problem? Because if you don't fully understand the models you don't see the weaknesses present in them. Now the people who do the actual front end trading have an idea of what is underneath the black box but they don't really understand the box. Add to that incentives to not fully understand the box and you get problems.
ReplyDelete