I have enormous respect for Ralph Nader. I think he has accomplished as much for social progress in the US as any white guy in the last 50 years. My one personal interaction with him left me with a feeling of awe at his level of dedication. (And, no, he is not responsible for that Florida business in 2000, but that’s another argument.)
Alas, he has gone off the deep end in his criticism of the Fed’s zero-bounded interest rate policy. He thinks it represents a scam to prop up the evil banks at the expense of virtuous savers, who deserve to earn more on their money. Even worse is the comment thread, which exposes the lunacy of much of the US left, or at least the portion of it driven by the urge to post comments.
For the record, if your perspective on economics comes from the left, you should be a big fan of low interest rates under most circumstances. (1) Given whatever fiscal policy is doing, lower interest rates mean more macroeconomic stimulus, with less unemployment and more potential for worker bargaining power. As long as there’s labor market slack, this argument should be compelling. (2) Low interest rates increases the shadow of the future. That means more incentive for conserving natural resources while lowering the bar for investment in new products and processes. (3) Interest is a return on holding money, and it’s hard for me to see how anyone on the left could argue that a greater share of society’s resources should go toward remunerating existing wealth. (4) It’s true that more of the burden for financing retirement falls on individuals who are now expected to bulk up their savings. This is the consequence of the demise of defined-benefit pensions and the failure to expand Social Security to keep up with economic growth. The reality is that most people can’t save enough to make for the lack of social insurance, especially with wages stagnant over multiple decades. A few percentage points in interest rates will not solve this problem: we need publicly funded pensions adequate for a decent retirement.
Meanwhile, the left should support the Fed in its low interest policy and put whatever pressure it can muster on it to resist the demand for tight money—which comes mostly from the right and the rich, except for Ralph Nader.
16 comments:
A more plausible criticism of low interest rates is that they discourage banks from making loans because the margins (at or near the ZLB) are so small. Anyway, that's the bank's complaint about such low interest rates.
Why take the banks at their word? If they're in a competitive market, their competitors will make the loans and make profits. They will go out of business no matter how discouraged.
It's really, really weird how the left has bizarre views on monetary policy.
"Support" for the Fed not raising interest is pretty weak tea. The Fed should get back in the QE business by announcing that it will keep buying whatever longer term assets it needs to until the price level (or even better, the NGDP) is back up to it's pre-crisis trend. And of course governments should act on the "shadow of the future" (nice phrase) by actually investing in activities with present costs and future benefits.
@ rayward: I'd like to see the argument that low cost of funds to banks necessarily means low margins.
It seems more likely that the low margins (if the phenomenon exists) arises from firms expectations that the feeble expansion going on will be interrupted at any quarter by the Fed's fear of the inflation rate reaching 2% and hence from low demand for loans.
Banks desire for higher rates now (and the constant drumbeat in favor of it from their financial press) may arise not from low margins per se, but by uncertainty about margins. Making a long term loan now is risky if banks' cost of borrowing is expected to rise in the future. But that is just an aspect of the uncertainty created by the Fed's having in practice an inflation rate ceiling rather than an inflation (price level) or NGDP target.
Looking at the index's on credit conditions, there appears to be no issues with credit worthy borrowers & firms getting loans. See FRED Chicgo FED National Financial Conditions Subindex. U would think it would give Ralph Nader & all those left wingers pause to make the same argument as Paul Ryan, Louis Gohmert, WSJ editorial page, & every right winger on Faux News & Talk Radio. There are good left criticisms if the Fed, for instance Dean Baker, but this is just stupid.
As Dean Baker & Bill McBride at "Calculated Risk" have both pointed out the slow growth in this decade is no mystery given the demographics of slow down in growth of labor force, slow productivity growth, & with dollar strengthening, a widening trade deficit. Raising interest rates will slow the recovery of the housing market, which will slow GDP growth while further driving up the value of the dollar, thereby raising negative net exports. Ralph' S ideas would be disastrous for most working people.
The author appears to project his anecdotes from opinions of a single person, Ralph Nader, and an attached comment thread onto the left in general. My conversations with left oriented people, IOW my own anecdotal data, show that lefties support QE, but think that at zero percent interest rates the Fed is basically shooting blanks. They also think that Conservatives are mistaken that tight fiscal policy will reduce the debt/GDP ratio.
The people on the right I speak with or read decry QE and urge the Fed to raise rates. They constantly state that QE is just printing money. I tell them that 1) the Treasury prints money, not the Fed, 2) that the QE funds used to purchase mainly mortgage backed securities are still sitting mostly as Excess Reserves at Depositary Institutions and, 3) unless these funds are lent out, no printing of money occurs. They absorb this and repeat that the Fed is printing money.
So maybe the author is just basing his opinion about the "lunacy of much of the US left" on a biased sample, which he does, sort of, allow is a possibility. I think my description of the right's lunacy however, is more widely held than by just a portion driven to comment on blogs.
http://research.stlouisfed.org/fred2/graph/?g=oyz
"A more plausible criticism of low interest rates is that they discourage banks from making loans because the margins".
Rayward sounds a lot like John Taylor with this. But it seems Brad DeLong has thoroughly debunked this claim.
Is the comment thread to Nader a representative sample of the left "street"? I don't know. But I'm an academic, and the people I talk to are mostly academics or close to the academic world, so that's almost by definition an unrepresentative sample. The people who read and post at Common Dreams are probably more indicative.
Actually, I don't think most people who affiliate with the left have a monetary theory at all. I suspect they think the Fed is little more than a front for the bankster mafia, and whatever the Fed is for they have to be against. This also explains the attractiveness of the gold standard, full-reserve banking and any other scheme that seems like it would tie the hands of the Fed to large swaths of the left's base.
Just to be clear: I am not on an anti-left rampage. I just think there's a need for more internal education among the dissident multitudes.
"Is the comment thread to Nader a representative sample of the left "street"? I don't know."
Well, I know. The answer is, unequivocally, "no."
Are you claiming to know as little about survey research and statistical methodology as people who affiliate with the left know about monetary theory?
OK, S-man, what's your candidate sample? I would be delighted if it turned out that the Common Dreams crowd was a weird little knot, and that proper measures of the rank and file left showed they had a more sophisticated grasp.
(In case you're wondering, I do know a bit about sample frames, power analysis and all that.)
Peter: I agree that most people on the left do not have a monetary theory, but that applies equally to those on the right.
And from my reading, there is s propensity across the political spectrum to view the Fed as just doing the banks' bidding.
But I have literally never met a leftist who wants to return to the gold standard. That, on my experience at least, is an idea confined to the loony right, best exemplified by libertarians who claim to love Austrian Economics, though on further probing it seems most of the claimants have never read Mises.
Peter,
I would be more inclined to agree with the idea that most people on the left don't have a monetary theory, although that statement would be at least as true if you omit the modifier "on the left."
BTW the Common Dreams commenting crowd IS a weird little knot, as are the Alternet commenting crowd, the Nation commenting crowds, the CNN, Politico, Fox News and Wall Street Journal commenting crowds -- or, for that matter, the EconoSpeak commenting crowd.
I don't see how one can have a "representative sample" of such an amorphous grouping of people as "the left." Does that designation refer to Democrats? to Marxists? to Bernie Sanders supporters? to long-haired commune dwellers? It seems to me that "the left" and "the right" are identity designations with little or no objective content.
Attributing this or that given opinion to "the left" doesn't add any information, only noise, which distracts from whatever information is being presented.
My remark about your knowledge of sampling was, of course, meant to be sarcastic because I read your "I don't know" as flippant.
as someone who is to the left of Nader, and who, despite many hours of reading on line still doesn't understand the interest rate thing, let me say
taking the comments section of common dreams as representative of anything other then a small group of idiots is completely unfair (indeed, the avg quality of common dreams posts is so low that no intelligent informed person would bother to got their in the first place; the only positive thing you can say about common dreams is that it is one step above counterpunch)
second, if people don't understand something, should not the teachers (economists) get some of the blame ?
3rd, while Nader's letter may be phrased poorly, I don't think your dismissive tone is helpful: you should, instead, take the moment to explain what choices Dr Yellen and Dr Bernanke have and have had
in pqrticular, given that the fed has a legal mandate to equally ensure price stability and full employment, it is not out of line for Nader to ask why there appears to be so little concern and effort expended at the Fed on employment
my onw person suspicion is that, as B Delong remarked, economists of Yellen's stature don't spend a lot of time in Toledo OH
not seeing suffering on a daily basis, they can't empathize strongly with the sufferees; this si a normal human thing - you see remote things as less important; economists of yellens stature don't spend a lot of time waiting at the bus stop, or at the homeless shelter
i just noticed the last graf in your post
5 gets you 10, R Nader is rich (top 1% or so) and most of his friends are rich too
so when he and his friends sit around and moan how that 100k investment isn't paying off like it use to, irony is, they don't realize how atypical they are !!!
class trumps all
PS: people of that age all know a story of an aunt or uncle pat who invested in 30 year Tbills at 15% in the early 80s...
nadir should not be conflated with "the left". he's an iconoclast who sees an issue and goes after that issue with a bulldog approach, always ignoring the bigger picture.
nadir's tenacity and intelligence, had it been coupled with foresight and wisdom, would have been a true gift to mankind.
If you want to know what the monetary theory on the left is, all my Sanders-supporting friends seem to prefer MMT. Which is quite the opposite of gold-standard beliefs!
Although MMT does, as I understand it, require the elimination of the Fed as an independent central bank. So it may be just about as practical as the gold standard.
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