Tuesday, September 20, 2011
A Little Basic Economics Would Go a Long Way for Paul Kasriel and Joe Nocera
Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust. Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.
It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both). He simply assumes it comes from the supply side. With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient? An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.
I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.
The economic problems and the jobs problem are joined at the hip. The former is dependent on the latter for its resolution. The jobs problem has been buildiing for three decades with the continuous exportation of the manufacturing process, euphamistically and antiseptically referred to as "outsourcing." With the loss of manufacturing jobs came a fight for the scraps left over in the U.S. jobs market. The miracle of the service industries supplied some replacement jobs at the cost of worker income. Now we are left with far fewer and lower paying jobs. So there in is the sad dilemma of our economy. No demand means no need for supply and that means the economy sucks. It really isn't any more complex than that. Economics isn't rocket science unless you want to avoid the actual answers to the real problems.
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ReplyDeleteI feel it my civic duty to correct this post. You would benefit from reading the actual article. He does not assume that it is a supply problem and the banks aren't lending bc they're evil, he is merely stating that there is a significant lack of credit being created in the economy and that is a huge problem, whatever the reason, supply or demand driven. The point is that if commercial credit isn't being generated, the Fed needs to step in and create credit, which is what happens through the QE mechanism. Next time you're assuming that an economist like kasriel doesn't understand supply and demand, you should probably take a look in the mirror and also the actual article that you're lambasting.
ReplyDeleteDorman
ReplyDeleteMy guess is that the deleted comments are the most amusing. We can all use a good laugh. Why not create a deleted comments file available to all who need an intellectual R&R.
Richard,
ReplyDeleteI admit to avoiding mirrors whenever possible, but mostly that's because I like to imagine I'm still 30.
Other than that, I don't think there's any need to change my take on Kasriel (and Nocera). Yes, of course, private sector lending is way down. But the magic of open market operations works only if the cause is insufficient supply. The effect of QE is simply to lower interest rates in whatever segment of the market the Fed enters. The zero lower bound problem (aka liquidity trap) arises if demand is so depressed, however, that easy money doesn't get credit flowing. There is less mortgage credit, for instance, because households are trying to pay down their debts, and because, with (according to Case-Schiller) a still overvalued market and widespread unemployment, lenders are understandably wary of default risk.
Bottom line: the Fed can do its part (more QE to bring down long rates etc.), but pumping up demand will generate credit creation, not the other way around.
Incidentally, I have not referred to the banks as evil, and bank morality plays no role in my analysis. You may want to consider why you assumed otherwise -- another mirror moment?
You're still missing the point. He is not saying that the Fed has the ability to create commercial credit, he is saying that the economy requires credit for growth and one form of credit is Federal Reserve Credit, which can be created out of thin air essentially. If commercial credit is 0, and the economy needs 7% credit growth to achieve a nom gdp target, than the Fed has the responsibility to fill that gap with Federal Reserve Credit. Read Milton Friedman's piece on Saving Japan to get the idea. Or maybe Friedman doesn't get S&D either?
ReplyDeleteI haven't read MF on Japan, and that isn't the topic here. Can you find a single slide in the Kasriel presentation in which he addresses whether credit trends are due to supply-side or demand-side factors? Doesn't he simply assume that more credit creation (by the Fed) is the solution?
ReplyDeleteTo take a specific example, are you willing to defend slide 27, in which "bank credit" is treated as an exogenous variable for explaining changes in depression-era GDP alongside "federal outlays"? (And why federal outlays and not the combined govt deficit as a share of GDP? And no operation of lags?) Can you detect an effort to determine what may have caused movements in bank credit outstanding -- whether it was due to supply or demand?
Seriously, isn't this econ 101 level stuff?
Do you believe that Federal Reserve Credit is credit?
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