This page has been archived and commenting is disabled.
Steve Keen Exclaims "The Fed Has Not Learnt Anything From The Crisis"
Submitted by Steve Keen via Forbes.com,
The Financial Crisis of 2007 was the nearest thing to a “Near Death Experience” that the Federal Reserve could have had. One ordinarily expects someone who has such an experience—exuberance behind the wheel that causes an almost fatal crash, a binge drinking escapade that ends up in the intensive care ward—to learn from it, and change their behaviour in some profound way that makes a repeat event impossible.
Not so the Federal Reserve. Though the event itself gets some mention in Yellen’s speech yesterday (“Normalizing Monetary Policy: Prospects and Perspectives”, San Francisco March 27, 2015), the analysis in that speech shows that the Fed has learnt nothing of substance from the crisis. If anything, the thinking has gone backwards. The Fed is the speed driver who will floor the accelerator before the next bend, just as he did before the crash; it is the binge drinker who will empty the bottle of whiskey at next year’s New Year’s Eve, just as she did before she woke up in intensive care on New Year’s Day.
So why hasn’t The Fed learnt? Largely because of a lack of intellectual courage. As it prepares to manage the post-crisis economy, The Fed has made no acknowledgement of the fact that it didn’t see the crisis itself coming. Of course, the cause of a financial crisis is far less obvious than the cause of a crash or a hangover: there are no skidmarks, no empty bottle to link effect to cause. But the fact that The Fed was caught completely unawares by the crisis should have led to some recognition that maybe, just maybe, its model of the economy was at fault.
Far from it. Instead, if anything is more visible in Yellen’s technical speech than it was in Bernanke’s before the crisis, it’s the inappropriate model that blinded The Fed—and the economics profession in general—to the dangers before 2007. In fact, that model is so visible that its key word—“equilibrium”—turns up in a word cloud of Yellen’s speech—see Figure 1. “Equilibrium” is the 17th most frequent word in the document, and the only significant words that appear more frequently are “Inflation” and “Monetary”.
In contrast, “Crisis” gets a mere 6 mentions, and household debt gets only one.
Figure 1: Word cloud (courtesy of tagul.com) of Yellen’s speech “Normalizing Monetary Policy”
What’s evident, when one compares Yellen’s speech to one to a similar audience by Bernanke in July 2007—the month before the crisis began—is that The Fed is just as much in the grip of conventional economic thinking as it was before the crisis. The only difference is that Bernanke’s speech focused on the “inflation expectations” aspect of The Fed’s model—which would be rather hard for Yellen to focus on, given that inflation is running at zero (versus 4% when Bernanke spoke). So Yellen has fallen back on the core concept—that a market economy reaches “equilibrium”—rather than part of the fantasy mechanism by which The Fed believes equilibrium is achieved.
Figure 2: Bernanke’s July 2007 speech “Inflation Expectations and Inflation Forecasting”
Equilibrium. What nonsense! But the belief that the economy reaches equilibrium—that it can be modelled as if it is in equilibrium—is a core delusion of mainstream economics. There was some excuse for looking at the world prior to the crisis and seeing equilibrium—though the more sensible people saw “Bubble”. But after it? How can one look back on that carnage and see equilibrium?
The epiphany that the real world is not in equilibrium is what enabled Irving Fisher to escape from the shackles of conventional thinking after the Great Depression. Prior to the crisis, he achieved fame amongst mainstream economists for extending the conventional “supply and demand” theory to cover finance markets. As part of that theory, he had to assume that the market for loans was in equilibrium at all times—and as a conventional economist, he had no problem in making the necessary assumptions:
(A) The market must be cleared – and cleared with respect to every interval of time. (B) The debts must be paid. (Fisher, The Theory of Interest, 1930)
After his economic theory had led him to personal ruin (Fisher lost over $100 million in current dollar terms during the Crash of 1929) Fisher realised that this false belief in equilibrium was the key delusion that led him astray. His new approach, which he called the “Debt Deflation Theory of Great Depressions”, was predicated on the principle that the economy must be modelled in disequilibrium:
the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium. (Fisher, “The Debt-Deflation Theory of Great Depressions”, 1933)
This led him to focus on two disequilibrium factors as key to explaining a crisis like the Great Depression—and like the one we have just been through—were “over-indebtedness to start with and deflation following soon after”.
So where do we stand today on Fisher’s disequilibrium markers of debt and deflation? In a phrase, on the precipice. As Figure 3 shows, private debt has only been reduced by 25% of GDP, whereas the decline in debt from its peak in 1932 to the end of WWII was almost 100% of GDP (this graph combined Federal Reserve data since 1945 with Census data from 1916 to 1970, and rescales the Census data to match The Fed’s data in 1945). And though we haven’t had deflation as severe as in the Great Depression—when prices fell by more 10% a year—we are back in deflation territory once more.
Figure 3: Private debt and inflation
In this environment, Yellen is hoping that the economy is going to return to “equilibrium”—where this can also be interpreted as “behaving like the economy did from 1993 until all hell broke loose in 2007”. Fat chance.
»
- 20260 reads
- Printer-friendly version
- Send to friend
- advertisements -
Don't worry, we've got this...
Thank you president obama... hope and change we can Believe in!
The charts show that there is no meaningful conclusion that can be drawn about the present time from the 1930's. This article is crap.
Don't get me wrong, I'm not dissing Steve Keen, one of the few real econs out there (and there really are remarkably few existing), but it isn't --- as most of us know here --- really about their learning curve or spine, it is about the fact that the Fed is simply the front office of the banksters which own them.
Just as they manipulated interest rates to support the RE bubble in the past decade, so too they will support credit derivatives and whatever else benefits and profits the banksters.
Nothing really suspicious about it, just in the same manner Noam Chomsky and his daughter Avi Chomsky are two of the top unofficial CIA propagandists out there, seemingly sounding a bit radical, but always supporting the US government (as in central bankers) in all their progams: the Federal Reserve Bank, the Warren Commission Report (the JFK assassination), the 9/11 Commission Report, etc.
It's not easy for academics to address the criminality issue, although the recent LIBOR and FX scandals are making it easier for them to do so. The world is not going to improve if we don't have alternative models to replace the existing Keynesian/Neoclassical crap though. The criminality issue can be handled by the noose and firing squad.
We have the "Austrian" model, if that helps. As for criminality, surely we need a criminal system that recognises a crime has taken place. These banksters, like all psychopaths, do not believe that what they do/have done is anywhere near against the law - because they make the law - so they should know!
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobs-review.com
The FED hasn't "learned" because they are propping Wall Street and the banks at the expense of the populace ON PURPOSE.
Those word clouds are FOG.
Come on Keen, the FED knows exactly what it is doing.
They are plundering the system. It is a planned and controlled demolition at this point. There is no chance of reform or rate policy returning to normal.
"The Fed has made no acknowledgement of the fact that it didn’t see the crisis itself coming."
Who is this idiot? Yellen warned Greenspan about a housing bubble, but Greenspan was blinded by his Objectivist delusions. Anyone who followed the run-up to Yellen's nomination can remember that she bumped Larry Summers aside precisely because Summers didn't--or wouldn't--see the housing bubble.
Forbes is run by idiots and has morons as writers.
And in the book, Capital Offense, by Michael Hersh, he mentions where Prof. Robert Shiller (Yale, "Irrational Exuberance" etc.) who had been an advisor to the FRBNY for 14 years, suggested to his new boss there, Timothy Geithner, at their first meeting that the housing prices could conceivably fall which would pose a disaster and he was immediately replaced with none other than Catharine Mann, from the Peterson Institute (founded by David Rockefeller and Peter G. Peterson), whose main expertise was in pumping out papers promoting the offshoring of all American jobs!
The myth that Mr Yellen saw the housing bubble coming was thoriughly ans sytemabtically de-bunked by Peter Schiff. It was just that - a myth, constructed to get her through the confirmation hearings.
Thanks Sgt Doom
Our problem is we cant remember beyond yesterday and we let slide so many atrocities.
The banksters must pay, and we have to remember their names.
First they came for the Socialists, and I did not speak out—
Because I was not a Socialist.
Then they came for the Trade Unionists, and I did not speak out—
Because I was not a Trade Unionist.
Then they came for the Jews, and I did not speak out—
Because I was not a Jew.
Then they came for me—and there was no one left to speak for me.
Because it is not the feds job. If you wanted lessons you had to let lehman brothers go before the bankruptcy court.
There was no need for bailouts too big or not.
One set of laws for the rich another for everyone else.
Now no one has any faith in the system no matter what the fed does or does not do.
We all no longer have the same rule book.
So lets just go back to you pretend to pay me and I will pretend to work.
"The one who is unwilling to work shall not eat." - 2 Thessalonians 3:10
I hate these fucking topic taglines...
"FED HASN'T LEARNED ANYTHING"
Immediately you're forced to debate a false narrative...
The FED isn't trying to LEARN anything... The FED are jews trying to steal your money for the past 100 years...
Yes, they are keep telling lies to shift blame to someone else
Why would anyone think the Fed is trying to learn anything? They control the money supply, they are rich, they have the power...what do they need to learn? Maybe we need to learn who these people are and give them the boot!
Yellen promised us a fat-tail distribution....
nothing yet!
Steve Keen not only predicted the crash at a time when everyone ignored him as a fringe looney, but he has been correctly demonstrating that none of the interventions to date have helped. He's in the same camp as Muhammad Rafeeq and Daryl Bradford Smith for a solution i.e. the only permanent fix is a debt Jubilee approach. Steve also shows many of the stupid and almost religious beliefs of the neoclassical schools to be wrong in their assumptions and mathematical models. He still believes in a central bank approach at this time, however without the criminality. Utopian maybe, but at least it's a worthwhile ideal.
"Don't waste what is holy on people who are unholy. Don't throw your pearls to pigs! They will trample the pearls, then turn and attack you." - Matthew 7:6
If I am faced with one more the-FED-hasn't learned-anything essay, I'm going to start bleeding internally.
and i tell you ... i'm all for a jubalee, but i have seen some versions that are nothing more than further bailout elite juballees-
if it ain't a steve keen style jubalee, i'm not interested.
as I've commented before some of the smartest people just don't get it, or don't want to get it.
long ago I just thinking, what could the people in power do to get more power, and destroy america, well just do what they've done the last 4 yrs..
it's a plan, not a misjudgment.
when this is realized, you can hedge accordingly.
Yellen isn't hoping for anything except to rip as much off from the citizens of the United States of America as possible. Get that through your head.
Psychopaths never learn from their mistakes because they never take responsibility for them.
Both the FED and the bankers took no responsibility for 2008, so they will have learned nothing.
Our USA says:
I got drunk
I fell down
I wanna get up
Gimme a drink!
Actually, he has it wrong. The FED learned that the gov can be coerced into bailing out their affiliated TBTF financial players when their positions (CDS, etc.) go south. So, the bigger the bad positions that get built, the bigger the eventual profits. Bubble on, dude. The TBTFs will profit on the way up AND down.
The FED learned that if they state something often enough the masses will believe it even if what they are promulgating is completely untrue. In brief, the USA is operating on a fantasy of Quantum Behavioural Economics where they purport to have stable quanta to measure by in order to establish so-called 'equilibrium'. In point of fact, America's Economic Quanta are broken and not even the nerds in Quantum Physics/Mechanical Engineering can repair those quanta. Equilibrium Economics has no basis in reality and has no real experimental data that supports the theory in light of the Ponzi schemes and financialization schemes that have been unearthed over the last seven years. Frankly, business has been trending out-of-existence over the last 28 successive business quarters. Take a page from behaviourism and deduce that the best predictor of future behaviour is past behaviour and you will ascertain the degree of efficacy that Yellen is espousing. Moreover, it is unfortunate that Yellen is not an independent thinker apart from Greenspan but what can one expect with a FED that lives in LaLa-Land.
END The FED, pull a Fidel Castro and feed the neocons to the lions, USSA
YES! I guess it would be sufficient to fully audit the FED and the american people would make sure it closes down
Board of Governors of the World Bank and IMF have foreclosed on the Fed:
https://s3.amazonaws.com/khudes/Twitter3.24.15.pdf
Yo Stevie boy...it's hard to learn anythig when you are paid not learn. It's obvious is it not?
"It is difficult to get a man to understand something when his salary depends on his not understanding it" - Upton Sinclair
And if one thinks about it.... it all started in earnest with SandyWeill, RobertRubin, Larry Summers, and Bill Clinton working to repeal Glass Steagal.
You mean Phil Gramm (or at least that shrew with her hand up his dumb ass).
But the fed IS helping the 99%. It is called "trickle down." Let's see, what revered leader implemented such ideology. Without it we would be collapsed, or not.
If there was ever an institution which doesn't learn from past history, it is the Federal Reserve. Three bubbles blown, in less than half a century no doubt, and they still think they can micro-manage the business cycle to, yes, some sort of equilibrium. It is dubious, at least, if not downright irrational and irresponsible. IF anyone is hoping they will learn their lesson this time, good luck with that. I am rooting for you, but I wouldn't place a wager on that occurring.
If dumb Dems (50 % of voters) give Billary a pass on things they know about (deleted emails), how little do they care about the Fed/Great Recession which they have no clue about? Looks like Malloy will get the Dem nod because they are shopping a pic of him playing guitar dressed like Bruce Springsteen. They dont have to nominate a token woman because they produced a token negro.
The
Board of Governors of the World Bank and IMF have foreclosed on the Fed:
https://s3.amazonaws.com/khudes/Twitter3.24.15.pdf
The money masters with their Fed puppets learned that 99.99999% of taxpaying Americans will accept whatever it taken from them by fear and force. All the money stolen to purchase govn't at highest levels finally paid off big time. More to come!
I remember viewing one of his lectures a while back.
He performed a Simulation Modeled after the Western Economies:
First, the Wage Earners Tanked;
Second, the Industrialist Tanked;
Shortly afterwards, the Bankers took up all the Assets...
Steve Keen is a great economist, but he needs to incorporate a little "Cui bono?" into his approach.
Nobody learns from history. In France, Hollande wants to extend the vote to non-nationals. He needs to study history from about 629 AD forward.
Of course he thinks he's discovered a voting block that will keep him in power.