{"id":10499,"date":"2010-07-01T16:23:30","date_gmt":"2010-07-01T06:23:30","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=10499"},"modified":"2010-07-01T16:23:30","modified_gmt":"2010-07-01T06:23:30","slug":"the-bis-is-part-of-the-problem","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=10499","title":{"rendered":"The BIS is part of the problem"},"content":{"rendered":"

\t\t\t\tIt is now 2.15 am in Boston on a Thursday morning (16:15 Thursday afternoon in Australia East Coast). I always try to stay on Australian time when I make these short trips. It is hard while you are away but easier to adjust back when you get home. No real jet lag. Yesterday (Wednesday) I gave a Teach-In on the concept of fiscal sustainability to an interesting group of participants ranging from those with an active role in the financial markets to those with more general business interests. The participants came from all around as far as I can gather – many from New York which is a fair hike for a single day workshop. The discussion that followed my presentation was very interesting and while the concerns reflected the usual issues – solvency, exchange rates, intergenerational issues – the standard of debate was civilised. I don’t know how many Warren and I convinced to probe deeper but I hope we planted some seeds of doubt in the minds of the audience that the mainstream macroeconomics position is wrong and therefore untenable. After the Teach-In I read the BIS Annual Report 2009\/10<\/a> – which signalled to me that they are now firmly part of the problem that we face when dealing with the task outlining fiscally sustainable policy positions.
\n
\nOn June 28, 2010, the Bank of International Settlements released their Annual Report for 2009-10 – Full PDF available<\/a>. In the Overview of the Economic Chapters<\/a> their message is clear although seriously deficient in its understanding of the difference between sovereign debt and privately-held debt. It also fails categorically to understand what the fiscal options of a sovereign government are.<\/p>\n

Their basic claim is that:<\/p>\n

\nThe financial crisis has left policymakers with a daunting legacy, especially in industrial countries. In setting policies, they must adopt a medium- to long term perspective while they cope with the still fragile and uneven recovery. Households have only just begun to reduce their indebtedness and therefore continue to curb spending. Extraordinary support measures helped to contain contagion across markets, preventing the worst. But some measures have delayed the needed adjustments in the real economy and financial sector, where the reduction of leverage and balance sheet repair are far from complete. All this continues to weigh on confidence. The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts.<\/p>\n

Macroeconomic support has its limits. Recent market reactions demonstrate that the limits to fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal consolidation is required in several industrial countries. Such policies need to be accompanied by structural reforms to facilitate growth and ensure long-term fiscal sustainability. In monetary policy, despite the fragility of the macroeconomy and low core inflation in the major advanced economies, it is important to bear in mind that keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial and monetary stability.\n<\/p><\/blockquote>\n

So this opening gambit is replete with all the neo-liberal fallacies that are being used to undermine effective fiscal responses to the crisis. Here is another unelected body, which really is meant to be the central banker for the central banks, lecturing democratically elected governments about what they should be doing. <\/p>\n

I also find interventions like this interesting because the BIS has promoted the independent central bank line that the mainstream economists try to argue is the only way to discipline inflation and keep the markets happy. But then they think they can pass comment on fiscal policy. Further, how does this square against the recent ECB “fiscal” interventions. The whole construction that the neo-liberals put on the separation of monetary and fiscal policy is deeply flawed anyway, but you would at least expect them to be consistently flawed.<\/p>\n

Further, I agree that governments have not set in place the necessary policy changes to allow the private sector to consolidate precarious balance sheets and the banks around the world are still very shaky. The bank bailouts were a mistake. The government should have nationalised the ailing banks and dealt with the toxic assets as the owner not the benefactor.<\/p>\n

The BIS is also pushing the emerging line that the crisis was somehow something to do with structural rigidities in the real economy which need to be eliminated. This is code for deregulation of labour markets, winding back of welfare and pension entitlements and cut-backs in public services generally. Whatever we might think about these things they had nothing to do with the crisis and its severity. The argument the conservatives push is that if employment entitlements and protections were reduced significantly unempoyment would not have risen by as much as it has in various countries.<\/p>\n

This is a spurious argument in the extreme. It really rehearses the old arguments that excessive real wages and\/or other labour cost imposts (protections etc) cause mass unemployment. The argument always encounters the fallacy of composition when applied at the macroeconomic level. What might apply for an individual firm will not apply at the macroeconomic level because in the latter case demand and supply relationships become interdependent. What does that mean?<\/p>\n

It means that for a firm, saving on labour costs might induce it to hire more. It knows the lower wages (costs) will not impact much (if at all) on the demand for the goods and services it sells. But at the macroeconomic level, we have to realise that wages are both a cost (which affects supply) and an income (which affects demand).<\/p>\n

So a cut in wages will reduce unit costs (assuming it doesn’t impact on productivity adversely – which it probably will) but also reduce aggregate demand. The conservatives do not understand that macroeconomic level changes are, by definition, big<\/strong>. Please read my blog – What causes mass unemployment?<\/a> – for more discussion on this point.<\/p>\n

The BIS also join the throng that try to define fiscal space (and sustainability) in terms of what the bond markets think is possible. The operational reality is that what the bond markets think is not a constraining factor for sovereign governments. Why?<\/p>\n

This came up in the Boston Teach-In I conducted today. It was argued in the Q&A section by one person that the bond markets reactions can alter yields and make it hard for governments to finance themselves. My answer was obvious. Only if the government allows that to happen. All the power lies in the policy hands of the government.<\/p>\n

The arrangements that see governments issue debt $-for-$ into the private markets to match their net spending are purely voluntary and can be changed virtually any time the government wants. The institutional machinery erected by sovereign governments to facilitate the debt-issuance provide no funds to the government. It is really a reserve draining operation.<\/p>\n

If the outcomes from the bond auctions were preventing the government from doing what it thought was best for advancing public purpose then the government could assert their power and eliminate the bond markets from the picture. It could do this in a number of ways.<\/p>\n

For example, the central bank could control rates along the yield curve or better still the government could just stop issuing debt instruments altogether and deny the private markets the benefits of the guaranteed return when otherwise the funds would just sit there as reserves earning nothing (preferably). Please read my blog – Who is in charge?<\/a> – for more discussion on this point.<\/p>\n

The only limits that macroeconomic support has reached in the sovereign nations are political and ideological in nature. There are no financial limits. My focus today at the Boston Teach-In was to emphasise the real<\/strong> limits on fiscal policy.<\/p>\n

A sovereign government always has a choice:<\/p>\n