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White Schools Bernanke on Basic Economics
William White - former head BIS economist, currently chair of the
OECD's Economic and Development Review Committee - is again schooling
Ben Bernanke on economic fundamentals.
In an article published in the December-January OECD Observer, White wrote:
The
proliferation of financial markets and the relative decline of
intermediated credit in recent years have turned the focus to
underlying systemic questions. Indeed, we now know that surface
indicators of good financial health can be seriously misleading. If
market participants are hit by the same shocks, are similarly
vulnerable and react similarly as well, the implications for the
financial system as a whole and the real economy it underpins can be
devastating.So, financial stability is necessary. However,
similar to the earlier failure of price stability to deliver
macroeconomic stability, financial stability is also not sufficient to
achieve that objective. While “booms” similar to the one we had lived
through since the 1990s are ultimately driven by an excess of credit,
the imbalances to which they give rise go well beyond unjustified asset
price increases and a potentially weakened financial sector. One
particular contributor to the severity of the “bust” is debt. In fact,
in Japan through the 1990s and beyond, it was not the weakened banking
sector that forestalled recovery, but the efforts of the Japanese
corporate sector to reduce debt after the excesses of the 1980s. A
similar challenge may now be in store for the US, UK and a number of
other countries, as consumers and businesses reflect on the state of
their balance sheets.But even this broader set of balance sheet
effects fails to account fully for the imbalances generated by
excessive credit growth. Perhaps most important is a misallocation of
real resources, which then weighs heavily on the economy during the
subsequent downturn. In a number of economies, not least the US, the
combination of consumption and housing investment rose to unprecedented
levels as a proportion of GDP. In China, there was a corresponding
upsurge in capital investment. These two developments combined suggest
that Asia is now all geared up to produce export goods that the
traditional purchasers can no longer afford to buy. And to add to the
difficulties ahead, it seems clear that, during the boom, there was a
buildup of excess global capacity in a whole range of industries–cars
and trucks, banking, wholesale distribution, construction and steel,
among many others.It will take a significant amount of time for
the underlying resources (labour and capital) to be either written off
or shifted into more profitable and sustainable endeavours. During that
time, aggregate production potential will be diminished and structural
unemployment will rise. Credit-driven “boom and bust” cycles touch all
parts of the economy.
If it is not obvious that White is saying that Bernanke (and most other
central bankers) are using inaccurate economic theories, and that we
need to learn about the danger of bubbles from Austrian economics,
listen to what
White recently said at a talk at India's central bank:
- Everyone knows that excessive credit was at the heart of the "big mess" we're in
- The Fed has set up a straw man against the argument that central banks should act to moderate bubbles while they are being blown. Specifically, Bernanke says that you can't lean against asset prices, because it's not clear how to measure asset price bubbles or which asset prices to target
- But the proper question is whether we lean against the credit bubble itself
and its underlying symptoms. Specifically, if credit is the underlying
problem, it manifests itself in various imbalances in asset prices,
crazy spending patterns like we've seen in the U.S., or crazy investing
patterns as we've seen in China. That's easy to spot
- Economists have no insight into the effect of the unprecedented monetary easing measures recently undertaken
- The
Fed says that it is always possible to clean up a bubble after it
bursts, because it worked in the past (in 1987, 1991, 1997- 1998, and
2001-2003). But underneath it all, there is a "growing headwind of
debt". This works for a while, but then it won't work forever.
- Economists
have to learn that things work differently than we've been taught. The
ideas that the economy is self-stabilizing and follows rational
expectations are wrong
- Economists and central banks need to incorporate Austrian economic theory on supply side economics
White slammed the Fed in 2008 for blowing bubbles and then "using gimmicks and palliatives" which "will only make things worse":
In
a pointed attack on the US Federal Reserve, it said central banks would
not find it easy to "clean up" once property bubbles have burst...
Nor
does it exonerate the watchdogs. "How could such a huge shadow banking
system emerge without provoking clear statements of official concern?"
"The
fundamental cause of today's emerging problems was excessive and
imprudentcredit growth over a long period. Policy interest rates in
the advanced industrial countries have been unusually low," he said.
The
Fed and fellow central banks instinctively cut rates lower with each
cycle to avoidfacing the pain. The effect has been to put off the day
of reckoning...
"Should governments feel it necessary to take
direct actions to alleviate debt burdens, it is crucial that they
understand one thing beforehand. If asset prices are unrealistically
high, they must fall. If savings rates are unrealistically low, they
must rise. If debts cannot be serviced, they must be written off.
"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.
For background, see this, this, this, this , this, this and this.
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U2 and U6 higher, market celebrates with 122 point rise. Really ?. The free market would never celbrate such bad news. The new Bernanke ponzi scheme rises every day on low volumes. Thru gave you a 5% correction, now it's every one into the pool...
I didn't know George was born in Vienna! Good piece.
Equities are about to make a higher high. Ben rocks! Nothing to see here...move along.
dumpster schools leo on jobs market
san
francisco lays of 15,000
lost angels school district lays off 5500
shaw markets lays off 900
and others..debt to reach 20 trillion by 2020 lol
leo hires one person,, gets a grant from government lol
It's going to take a market crash to wake people up. The Elliott Wave theorists believe we're just about there; I for one actually hope so.
"Apres moi, le deluge."
I will add this. the banking industry has effective veto over who will be named chair of the federal reserve. excessive banking profits can only happen when the economic model is faulty (can only happen with excessive leverage of faulty products) therefore the banks ensure the person in charge of the fed believes certain economic models. The banks aren't going to let a "good" economist become the head of the FED. In fact they will annoint the bad economist as the best thing since sliced bread to ensure he keeps his job (bernanke, greenspan).
You think it was some kind of accident they managed to get Bernake in there. The greenspan clone. never lean against asset bubbles, don't regulate, the market is self correcting. They installed a guy they knew (via his faulty economic beliefs) would keep the party going.
Do you think the fact that the controller of the currency is a former lobbist is just coincidence. They pick the belief system they want to promote which just happens to max their bonuses and socializes their losses. Why to you think the whole efficient market chicago school was adopted in the first place. (LOL)
"If asset prices are unrealistically high, they must fall. If savings rates rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off."
Such common sense. Doesn't this disqualify Mr. White from the ranks of modern "economists"?
Is there something else than inaccurate economic theories?
Fun house mirrors.