British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
You know, an Italian won the British Open golf championship yesterday (the first Italian to ever win a golf major) because of the uncertainty surrounding Brexit negotiations. The causality is impeccable. I am sure about that, although it might take me a while to work it out. But if a British golfer cannot win their Open Championship (Rose tied for second, two shots back) then it must be because of Brexit. Everything else that goes wrong is, so why not the golf? It is the same when three former US policy makers, central bankers, Wall Street-types, claim that the US no longer “have to tools to counter the next financial crisis”. They know full well that that statement is a blatant lie. But they say it. To remain relevant as their stars dim? To do service to their conservative mates? All of the above and more. But the media grab the headline and the American public and the public in general is dealt another piece of neoliberal misinformation that helps entrench the hold on power by the elites. But things are changing, and these entrenched elites and the vested interests they serve don’t like it a bit.
To begin, the sell-out progressives in the social democratic movements around the world, have began to articulate a new narrative. I should add that articulate would imply it was articulate, which is to give what is going on too much credence.
More of a guttural rant out of fear of losing relevance.
You heard it from the Blairite progressive traitors when Jeremy Corbyn was overwhelmingly elected British Labour Party leader.
We heard it during the French national election when Jean-Luc Mélenchon broke from the Socialist Party to run under the banner of La France Insoumise.
And the decibels have been rising in recent weeks since the New York Primary victory of Alexandria Ocasio-Cortez.
A recent example is the story in the Time Magazine last week (July 20, 2018) – Democratic Centrists See a ‘Silent Majority’ Ready to Rebuild – which reports that the Chairman of the so-called “New Democrat Coalition fretted that his party could still blow its chance by veering too far to the Left in reaction to President Donald Trump”.
Really too far to the Left! Yes, that is what the spokesperson for these ferrets said. Sorry ferrets.
The spokesperson, by the way, was one “former Goldman Sachs banker-turned-Congressman” (Jim Himes), and the story came out of the “Opportunity 2020 conference” which has focused on the “fears that Democrats might embrace too strongly an agenda pushed by those like Sen. Bernie Sanders, the independent from Vermont who sought the Democratic nomination in 2016, hurting them among the more conservative districts and states they need to win to retake power in Washington”.
Power not leadership, note!
We read that “between strategy sessions” at this Conference, “Third Way President Jonathan Cowan told TIME” that:
The party is not going to go in the direction of Sanders-style socialism, because it’s not winning on the issues and it doesn’t win politically except in a very, very limited number of places.
And so the story went. Sanders and Co. are dangerous and their headlines “inspire idealists to open their wallets for low-dollar donations” as opposed to large-dollar donations from Wall Street. Idealists participating in the political process would “spell disaster” according to Third Way.
Another Democratic Party support group – so-called “Heartland Engagement” – is reported as claiming the “Silent Majority who just wants normalcy, just wants to see that people are going to go out to Washington and fight for them in a civil way and get something done.”
Not the “far, far, far Left”.
Which left me trying to calibrate how far is “far, far, far”, presumably pretty far.
But from what? The likes of Third Way and Heartland Engagement, which on any reasonable reckoning is pretty far to the right of centre, which means, using all the powers of logic I learned in Logic 101 within my Philosophy studies, means that “far, far, far Left” might not be very “Left” at all, given the “centre” has moved so far to the Right.
But you get the picture.
All these progressive traitors are running scared because the idealists are getting the headlines and derailing their cosy plans to regain power after stuffing up monumentally by supporting Hillary Clinton’s tilt at the White House.
The Time Magazine also presents some curious arithmetic.
On the one hand, we read that leftists haven’t done very well anyway (they cite a case where a “far-Left” candidate lost a 2017 primary for Governor in Virginia
Note that the Virginia governor candidate (so-called “far-Left” candidate) was attacked by NARAL pro-choice America because he had voted to prohibit federal funding for abortions under the Affordable Health Care for America Act. That is “far-Left” in the US.
A whacky world indeed.
Evidently, his “far-Left” credentials go back to his support from legislation that would have required the cash the banks paid back to government to be used to create new employment in construction and that he was critical of Larry Summers saying “Lawrence Summers as someone who wouldn’t know anyone making less than six figures, unless that person was driving him around” (Source).
That sort of orientation is “far-Left” these days.
Okay, so he didn’t do too well in his attempt at becoming the Virginian governor.
But on the other hand, Time claims that “where progressives have prevailed in primaries, they’re largely inconsequential.” For example, the victory by “Alexandria Ocasio-Cortez over the number-four Democrat in the House, Joe Crowley … will do nothing to help Democrats reach the 218 votes needed to claim the majority.”
Time quotes a Democrat mayor in Columbia as saying “The game of politics is a game of addition, not subtraction. It’s the game of multiplication, not division”.
So, first, progressive candidates win primaries against non-progressive Democrat candidates. Result: the number of progressive candidates at the next election increases – addition.
Second, this starts to purge the Democrats of these non-progressive voices – multiplication.
Some other Democrat representative at the “Opportunity 2020 conference” told TIME magazine that “We’ve got to focus on how we get back into power … The question is going to be who goes beyond Left and Right. We are so far beyond the old labels that it’s not even funny.”
So why are they so concerned to label these upstarts who are messing with their cosy little elite within the Democratic movement – “far-Left” and claiming they are “far, far, far Left”.
If the old labels are dead, why are they still using them as frames?
Answer: fill in the missing blanks with obvious.
And what about this Third Way organisation who hosted the “Opportunity 2020 conference”. Who are they?
The Washington-based (DC) organisation claims its purpose it to advance “center-left” ideas in the American political context through “high-impact advocacy campaigns” which they hope will change “how Democrats view the shape of their next electoral majority” (Source).
Apparently, Third Way released its latest report at the Conference which was the result of “a year-long assessment launched after the 2016 election”.
Media coverage of the Conference related that (Source):
Included in its report were a dozen big-picture policy recommendations – such as adopting a robust apprenticeship program and expanded unemployment insurance to help workers find new jobs – and encouragement to bypass talk of income inequality for an emphasis on creating opportunity.
The participants at the Conference were urged to drop any reference to “moderate” in favour of promoting themselves as “opportunity Democrats”
So these “opportunity Democrats” don’t want to use frames such as income fairness because that might reinforce voters attention on the dramatic increase in income inequality in the US.
Which is no surprise really.
I read an article in The Nation (December 11, 2013) – Third Way: ‘Majority of Our Financial Support’ From Wall Street, Business Executives – that discussed how this centre-left organisation were attacking Senator Elizabeth Warren about her policies to rein in Wall Street excesses and how the group were funded by Wall Street executives.
There you have it.
Why would Third Way want the Democrats to turn their focus away from income inequality?
Why would they want the Party to turn their focus away from banking regulation?
Answers: fill in the missing blanks with obvious.
Anyway, I am finding this tension among the social democratic movements to be very interesting at present. The Third Way-types are being challenged finally by a more coherent progressive narrative that is faithful to the traditional mission of the social democratic parties.
That mission was abandoned by the Third Way-type careerists all around the world.
There is a fightback starting. Finally. And it is causing strife. Good.
And then we move on to a report I saw last week from the American network CNBC (July 18, 2018) – America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson.
Last Tuesday, Bernanke, the former central banker, and two former US Treasury Secretaries (Henry Paulson and Timothy Geithner) attended a “roundtable” and claimed that the GFC was the result of policy makers allowing the:
… financial system outgrow the protections we put in place in the Great Depressions and … made the system very fragile and vulnerable to panic …
Loose banking regulations and excessive risk-taking helped plunge the U.S. into its worst economic crisis since the Great Depression of the 1930s.
Their mission it seems was to warn again the abandonment of the Dodd-Frank Act that Obama introduced to deal with the banking crisis.
There is on-going outrage about this relatively weak piece of legislation from various banking and ‘freedom’ lobbies, many of whom claim the Act pushes up costs for banks and therefore destroys jobs.
The argument amounts to saying that the jobs are disappearing because corruption, criminal behaviour and other types of misconduct.
Sure, that is the point.
The more apposite criticism of the Act is that it was tepid and doesn’t rein in the Banksters sufficiently.
Anyway, apparently at this ’roundtable’, Henry Paulson, who became Secretary of the US Treasury on July 10, 2006 coming from his position as CEO at Goldman Sachs and was a runner up for the Time Magazine ‘Person of the Year 2008’ award (would you believe), told the gathering that:
If we don’t act, that is the most certain fiscal or economic crisis we will have … It will slowly strangle us.
Reflect back a little.
Flashback to March 28, 2007 as the financial crisis was starting to manifest, Paulsen was told the Financial Services and General Government sub-committee of the U.S. House Appropriations Committee that “There are some encouraging signs that we’re at or near the bottom … It looks to me like the housing issue is going to be contained” (Source).
Impaired judgement index given the reality hit 11 at that stage.
But then a month later (April 21, 2007), Paulson gave a speech at the so-called The Committee of 100 (a New York business group) that “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained” (Source).
Move on to May 7, 2008, Paulsen gives an interview with the Wall Street Journal – Paulson Sees Credit Crisis Waning – and claimed that the “the worst is likely to be behind us”.
And so it went (I could cite several more cases of denial) until he was forced by reality to abandon the US has “a safe banking sustem, a sound banking system” (July 20, 2008), and instead, start to justify handing Wall Street billions of US dollars in public hand outs to prop up the failing investment banks.
Well he is back in the frame as the CNBC report suggests.
He was referring to concerns by “economists, echoing numerous market players and public officials … over U.S. debt” which is “double its 2007 level”.
The questions the journalists should have asked are:
What crisis – fiscal or economic – will the US public debt engender?
How does a 77 per cent public debt to GDP ratio, “strangle” any US citizen (“us”)?
What could he be referring to?
The US government will always be able to honour all of its liabilities that are denominated in the currency it issues.
If you consider that statement to be fact, then no crisis is imminent.
Further, some might argue that as the debt ratio rises (and the debt volume increases in absolute terms) the interest payments on that debt might increase (both in volume terms but also if yields are rising), which squeezes the capacity of the US government to spend on other things.
Indeed, there was a Tweet from the British Department of Treasury yesterday that came on my screen that is along these lines (about British fiscal affairs):
There are two angles to this point.
1. The idea that one type of expenditure has to squeeze out another type of public expenditure is only true if the government has some fiscal rule that necessitates that.
Otherwise, given that the currency-issuing government is never revenue constrained such a compulsory substitution is clearly false.
2. But, government spending of any type (so I am including interest payments here) add to net financial assets in the non-government sector and may add to the total spending stream.
If the economy is already operating at full capacity (and that is a rare state for advanced economies over the last three to four decades), then rising interest payments will mean the government has to reduce spending elsewhere – either from its own fiscal program or by increasing taxes to squeeze the non-government spending capacity to purchase goods and services.
Alternatively, it can opt to squeeze yields down to low levels via central bank action (buying up bonds) and control the government outlays in that way.
Whichever option(s) is (are) chosen would come down to political choices but they would be taken at a time of buoyancy rather than recession or stagnation (high unemployment).
In general, there is no threshold point beyond which public debt (absolutely or scaled against GDP) becomes a problem for a currency issuing government.
The real question Paulson should have been asking is: Why does the US government issue debt at all, given it is an unnecessary adjunct to its spending programs?
The answer is that the Wall Street tycoons love the debt – it is corporate welfare for them.
At the same roundtable, Timothy Geithner:
… expressed concern that the emergency powers they were able to draw on in 2008 are “somewhat weaker” today.
Apparently, the reforms that have been legislated since the GFC have ended the Government’s (Federal Reserve, Treasury and Federal Deposit Insurance Corporation):
… ability to make emergency loans to support troubled banks.
Remember, Timothy Geithner succeeded Paulson as the Secretary of the Treasury in January 2009 coming from a position as President of the Federal Reserve Bank of New York and a background as an assistant to Robert Rubin and Larry Summers in the Clinton Administration. Pedigree!
He oversaw the $US165 million handed out to AIG financial executives as bonus payments after the federal government had given the company more than $US170 billion in bailout funds. AIG had given even larger bonuses in late 2008 to its executives.
He was also implicated in the bailout of banks that were insured by AIG, including the urging of the Federal Reserve Bank of New York (while he was president) to suppress public information about the bailouts.
He was strongly supported by Democrats however despite his constant claims that the fiscal deficit in the US had to be cut despite the lingering entrenched unemployment.
But, of course, the facts are different.
The US government doesn’t face a reduced financial capacity to deal with emergencies if it has been running fiscal deficits in the past.
Just as past fiscal surpluses do not provide it with more capacity in the future.
As I explained above, past fiscal deficits might influence the political capacity to run deficits in the future in the sense that they have already created full employment and so there is a tighter limit on the sensible range of overall expenditure growth.
But that is the real resource limit that Modern Monetary Theory (MMT) focuses on. There is nothing financial in that statement.
And, if the US was to (and will) encounter a new economic downturn, marked by declining growth rates in non-government spending, then the US government can always intervene to sustain employment either through spending increases of taxation cuts or a combination of the two.
The fiscal mix used in meeting the non-government sector spending shortfall (defined as relative to the expenditure growth required to sustain output growth at full capacity) will depend on political factors mainly.
Does the government want more public sector activity (command over real resources) or more private domestic activity? The answer to that question would influence the mix in the fiscal stimulus between spending increases and tax cuts.
But it can never be said that there is an intrinsic lack of capacity to meet such a situation.
As I wrote in this blog post – There is no financial crisis so deep that cannot be dealt with by public spending – still! (October 11, 2010).
And finally, former central bank chairperson Ben Bernanke was apparently worrying at the ’roundtable’ about:
… the nation’s ballooning deficit … [and] … criticizing the timing of the Trump administration’s tax cuts and fiscal stimulus package amid nearly full employment.
The journalist also reported that this trio claimed that:
Far higher debt and deficit levels than those of a decade ago also mean there is less insulation in the event a potential stimulus package is needed. Obama in 2009 implemented the controversial American Recovery and Reinvestment Act to offset the drop in private sector spending, at a price tag of more than $800 billion.
What’s more, the Fed has less room to lower interest rates in the event that more stimulus is needed – the bank’s benchmark rate target is now just 1.75 to 2 percent compared to 5.25 percent in summer of 2007.
Falsehood: “higher debt and deficit levels … mean there is less insulation in the event a potential stimulus package is needed”.
How did they come up with that conclusion?
What is the limit? When private bond markets stop buying the debt at low yields? When the central bank runs out of credit typing strokes to buy public debt that the private bond markets decline?
But the central bank cannot ‘run out of credit typing strokes’.
Falsehood: And it doesn’t matter a hoot that interest rates are closer to the zero bound now than they were before the GFC. Why? Because it was largely fiscal policy that turned the GFC into a recovery.
Monetary policy (interest rate changes) is relatively ineffective as a counter-stabilisation tool. That was demonstrated very clearly during the GFC as central banks claimed they were trying to elevate inflation rates and haven’t succeeded despite massive asset increases on their balance sheets arising from QE.
Remember the famous Bernanke exchanges during the GFC.
Scott Pelley asked Bernanke on the US 60 Minutes program (December 3, 2010) about QE and the growing fear that it would unleash an inflationary spiral.
The transcript included this Q&A (Source):
Pelley: Many people believe that could be highly inflationary. That it’s a dangerous thing to try.
Bernanke: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re gonna do.
Okay, no printing presses.
QE lowers interest rates only.
Lower interest rates may or may not stimulate spending depending on a host of other things including the state of confidence, unemployment dynamics etc.
We also might recall an earlier interview between Scott Pelley and Ben Bernanke on the US 60 Minutes program (March 12, 2009) – Ben Bernanke’s Greatest Challenge.
The interview was largely a litany of mainstream statements but at one point Bernanke provided a very clear statement about how governments that issue their own currency actually spend.
At around the 8 minute mark of the segment, Bernanke starts talking about how the Federal Reserve Bank (the US central bank) conducts its ‘operations’ (in this case, how it conducts government spending).
Interviewer Pelley asks Bernanke (Source):
Is that tax money that the Fed is spending?
Bernanke replied, reflecting a good understanding of what we call central bank operations (the way the Federal Reserve interacts with the member banks):
It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.
That is, the US government spends by creating money out of ‘thin air’. They can always do that.
Which negates all these scaremongering statements about running out of capacity now to address a new economic downturn.
We have now lived through nearly a decade of major shifts in government policy.
We have experienced large fiscal deficits to stimulate growth, which were accompanied by constant claims from the conservatives and mainstream economists that governments would run out of money, that bond markets would drive yields through the roof, that inflation would accelerate in hyperinflation.
All we saw was rising deficits and stronger growth. Where austerity was imposed we saw the opposite.
We have experienced massive expansions of central bank balance sheets (QE) in the UK, Japan, Europe, the US, which were all accompanied by the sort of claims that hyperinflation would result and currencies would be trashed.
We have observed none of those things happening.
And has our behaviour changed dramatically? Not in any unpredictable (broadly) ways.
When unemployment started rising we increased our saving ratios – as you would expect.
When the fiscal stimulii started to work – we loosened our spending again – but modestly.
Investment has been slow to pick up because it is asymmetric due to the irreversibility of capital formation. All as expected.
Borrowing didn’t go through the roof at zero interest rates. Why not? Because credit worthy borrowers were cautious in the milieu of high unemployment and previous credit binges.
And, of course, the Japanese have been going through this process for a quarter of a century. They have seen credit rating agencies embarrassed as they downgrade Japanese government debt to junk status only for the public to observe nothing of consequence follows.
They have seen on-going deficits, low to zero interest rates, low inflation (bordering at times on disinflation), high gross public debt levels.
I haven’t seen major behavioural shifts in the economic behaviour of Japanese residents.
So why are these three economists spreading these falsehoods?
They want to leverage opinion against Trump presumably. At least Bernanke knows there are no intrinsic financial limits to government spending in the US.
And that is even when we consider the debt limit hoopla that the politicians tease each other with from time to time.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.