One on Ben Bernanke and one on market economies vs. market societies.
The Bernanke story, which a lot of people are linking to, was mostly good. A couple things bothered me about it. First, I think Lowenstein took the old "fair journalism means treating everybody's view as equally respectable" attitude, which I think made people like Ron Paul and Michele Bachmann sound more reasonable than they really are. Moreover, the article lead with a discussion of those sorts of people, with the views of those who respect Bernanke coming further down.
Another thing that bugged me about it was this assertion (which apparently Bernanke takes seriously) that a higher inflation target would be hard to stop if inflation started taking off. Now, I know there's apparently been discussion at the Fed about how hard it might be to stabilize a higher inflation target. That seems plausible, but this idea that inflation would be hard to stop if it really took off just seems wrong (Simon Wren-Lewis seems to agree). I can't think of any episode where the Fed was genuinely concerned about runaway inflation and had trouble doing something about it. The solution is easy - contract the money supply. Benjamin Strong did it in the 1920s, and Volcker did it in the 1980s. There isn't some great mystery about it. And the reason why they had the inflation run-up before that was because Strong wanted inflation to finance the war and because Burns didn't want to run up unemployment (see the quote from Burns on the second page of this paper). It wasn't because Strong or Burns couldn't control inflation. They knew exactly how to control it - they didn't want to. Same goes for the Weimar hyperinflation if you want to point to that case. It was a deliberate decision to hyperinflate - but nobody was in the dark on how to stop it.
The other thing that bothered me about the article was this line: "Banks and bondholders get cheated, because their loans are repaid with inflated coin. Similarly, people with fixed savings, such as retirees, get punished for their thrift. President Grover Cleveland, a warrior against inflation (in his day, brought about by cheap silver), rightly likened a debasement of the currency to theft." This is an irresponsible set of sentences. Nobody has property rights associated with a stable value of money. Everyone makes transactions with the understanding that the value of money changes - CERTAINLY banks and bondholders do. This is absolutely, unequivocally not "theft". Lowenstein shouldn't be validating these views. And if he's going to talk in terms of "theft" he should have talked about the people who got hurt because of the distortions caused by inadequate monetary policy. At least the changes resulting from inflation would bear some resemblance to what would have been expected to occur in the absence of the depression. It's the debtors and the average families that have been caught off guard.
The Bernanke story, which a lot of people are linking to, was mostly good. A couple things bothered me about it. First, I think Lowenstein took the old "fair journalism means treating everybody's view as equally respectable" attitude, which I think made people like Ron Paul and Michele Bachmann sound more reasonable than they really are. Moreover, the article lead with a discussion of those sorts of people, with the views of those who respect Bernanke coming further down.
Another thing that bugged me about it was this assertion (which apparently Bernanke takes seriously) that a higher inflation target would be hard to stop if inflation started taking off. Now, I know there's apparently been discussion at the Fed about how hard it might be to stabilize a higher inflation target. That seems plausible, but this idea that inflation would be hard to stop if it really took off just seems wrong (Simon Wren-Lewis seems to agree). I can't think of any episode where the Fed was genuinely concerned about runaway inflation and had trouble doing something about it. The solution is easy - contract the money supply. Benjamin Strong did it in the 1920s, and Volcker did it in the 1980s. There isn't some great mystery about it. And the reason why they had the inflation run-up before that was because Strong wanted inflation to finance the war and because Burns didn't want to run up unemployment (see the quote from Burns on the second page of this paper). It wasn't because Strong or Burns couldn't control inflation. They knew exactly how to control it - they didn't want to. Same goes for the Weimar hyperinflation if you want to point to that case. It was a deliberate decision to hyperinflate - but nobody was in the dark on how to stop it.
The other thing that bothered me about the article was this line: "Banks and bondholders get cheated, because their loans are repaid with inflated coin. Similarly, people with fixed savings, such as retirees, get punished for their thrift. President Grover Cleveland, a warrior against inflation (in his day, brought about by cheap silver), rightly likened a debasement of the currency to theft." This is an irresponsible set of sentences. Nobody has property rights associated with a stable value of money. Everyone makes transactions with the understanding that the value of money changes - CERTAINLY banks and bondholders do. This is absolutely, unequivocally not "theft". Lowenstein shouldn't be validating these views. And if he's going to talk in terms of "theft" he should have talked about the people who got hurt because of the distortions caused by inadequate monetary policy. At least the changes resulting from inflation would bear some resemblance to what would have been expected to occur in the absence of the depression. It's the debtors and the average families that have been caught off guard.
So those are some critical points, but overall the article was a good read.
The other article I mentioned - about how we're becoming a market society and what implications that has - was very good as well. I started off not liking it because I do think market allocation has improved a lot of the things he scoffs at, but the discussion at the end about thinking through what we allocate according to the market and what we allocate according to non-market norms was spot on. I was wary at first, but by the end I did not get the impression that he had an encompassing suspicion of the market or anything like that.
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"And if he's going to talk in terms of "theft" he should have talked about the people who got hurt because of the distortions caused by inadequate monetary policy. At least the changes resulting from inflation would bear some resemblance to what would have been expected to occur in the absence of the depression. It's the debtors and the average families that have been caught off guard."
ReplyDeleteAre you really equivocating non-inflation with theft Daniel? I get what you are saying (something like "everyone expects inflation to be used to battle a downturn") but do you really think that the average Joe working at Walmart sees a downturn and assumes that printing money will be resorted to? That he should brace himself for potentially higher prices?
That seems like quite a strange and very stretched argument.
And if you are gonna mention distortions, how about the distortions caused by monetary policy in general?
What I'm saying is that in a fiat money system, any outcome is the result of a choice by the monetary authority.
DeleteThe average Joe is facing considerable uncertainty about his job because of these decisions. If we're going to use words like "theft" to describe a perfectly valid monetary system, perhaps we should apply it to the theft of people's employment.
Does it make sense? No, I don't think so. I'd rather just not use words like "theft". But if we're going to use it to talk about banks and bondholders we ought to use it consistently.
DK,
ReplyDeleteUnrelated, but what are your thoughts on this post by Steve Keen regarding the (neoclassical) oversight on private debt?
I don't understand how economists can look at that empirical link and conclude that Keen is anything other than right.
DeleteMacro is not my special field of interest, but one of my classmates is tailoring his dissertation to build on the type of work that Steve Keen is doing. Accounting for and controlling the leverage cycle, etc. Very interesting stuff.
Delete