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How Quantitative Easing really works: Occupy Wall Street Edition (2)

October 10, 2012 Leave a comment

As a contribution to Occupy Wall Street’s efforts against debt, I am continuing my reading of William White’s “Ultra Easy Monetary Policy and the Law of Unintended Consequences” (PDF). I have covered sections A and B. In this last section I am looking at to section C of White’s paper and his conclusion.

Back to the Future

It is interesting how White sets all of his predictions about the consequences of the present monetary policies in the future tense as if he is speaking of events that have not, as yet, occurred. For instance, White argues,

“Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom/bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities.”

It is as though White never got the memo about the catastrophic financial meltdown that happened in 2008. If his focus is on the “medium run” consequences of easy money that has been practiced since the 1980s, isn’t this crisis the “medium run” result of those policies? Why does White insist on redirecting our attention to an event in the future, when this crisis clearly is the event produced by his analysis.

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How Quantitative Easing really works: Occupy Wall Street Edition

September 23, 2012 Leave a comment

Since Occupy Wall Street appears to be undertaking a concerted push toward addressing the growing debt servitude of the mass of working families to Wall Street banksters, I thought it might be interesting to understand how the Federal Reserve is now doubling down on a policy of manufacturing an even greater debt burden for working families under the guise of stimulating the economy.

Comments and suggestions for improvement to this post are welcomed.

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Why didn’t capitalism collapse in 1929? (Final)

September 27, 2009 Leave a comment

Continued from here

If we try to reconstruct the underlying events leading to the Great depression according to Marx’s theory, we arrive at this narrative:

At the beginning of the Great Depression the owners of businesses would have been  experiencing some definite fall in the profitability of their operations. They would have then began implementing the previously mentioned four options to deal with it: (1) Slowing the rate of new investment in plants and machinery; (2) closing existing plants, etc.; (3) reducing wages of their work force; and (4) aggressively seeking new markets for their products.

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Why didn’t capitalism collapse in 1929? (Part two)

September 23, 2009 4 comments

Continued from here

The oddest statement to be found in Grossman’s reconstruction of Karl Marx’s Theory of Capitalist Breakdown is the one he makes at the very end of his essay:

The historical tendency of capital is not the creation of a central bank which dominates the whole economy through a general cartel, but industrial concentration and growing accumulation of capital leading to the final breakdown due to over-accumulation.

What is so odd about this statement is that it pretty much sums up exactly what happened following the collapse of the economy during the Great Depression!

Grossman made this argument – again, oddly enough – not in response to  a mainstream economist contemporary, or some defender of capitalism, but in response to another Marxist who claimed Marx had been wrong in his prediction of capitalism’s demise.

Wikipedia: Hilferding and his wife, 1928.

Wikipedia: Hilferding and his wife, 1928.

The guy’s name was Rudolf Hilferding, and he made a big splash predicting that capitalism would eventually be taken over and regulated by the biggest banks of each nation.

Before we get to Mr. Hilferding, however, we need to address this very odd statement by Mr. Grossman.

Grossman indeed made the above statement, and, it is pretty obvious life corrected him on this point. But, in his defense, we should point out that Grossman was only talking about the raw economic logic of capitalism.

Grossman spends a considerable amount of time in his essay showing how Marx stripped every non-essential feature of a capitalist economy from his theoretical model in order to reduce it to its most minimal elements. Gone were such things as prices, money, imbalances between industries, and between supply and demand.

He goes further: Marx assumes there is no foreign trade, no banks, no credit, no other nations, no classes except workers and the owners of businesses, and, at the start of his model, competition between businesses are assumed to be at equilibrium.

In doing this, Marx essentially is discounting every other known economic factor which has been cited by one economist or another as the causes of economic disturbances in a capitalist economy – gone are Krugman’s greedy Wall Street banks, hyper-salivating mobs of irrational investors, and, impotent and corrupted regulators, as well as income inequality, discrimination, huge bonuses, colonies, oil price shocks, and acne.

In other words, Marx strips capitalism of every recognizable feature, reduces it to its most abstract processes, and asks himself: Can this thing survive? Can an economic system rooted in scarcity and the need for work survive as it undermines both of those conditions?

Marx’s conclusion is fairly straightforward: Given its focus on the profitability of its undertakings, capital is compelled toward the “unconstrained development in geometrical progression of the productivity of human labour.” Human labor takes on an almost supernatural quality: Books which once took months to transcribe can be copied in their entirety from a digital archive in fractions of a second; agriculture, for centuries the labor-intensive vocation of the greater part of humanity, is reduced to the labor of the smallest fraction of the labor force; the sheer consumptive power of economic activity is such that it threatens to destabilize the climate itself.

But, the process is not merely technical, because capital itself is rooted in the very work which is being abolished by the geometrical progression of productivity. Hence, even as it abolishes work, it is abolishing its own conditions of existence. The more productive work becomes, the greater the quantity of goods thrown on the market; the greater the quantity of goods thrown on the market, the greater the mass of profits; the greater the mass of profits, the greater the need to convert those profits into more raw materials, more machines, and more employees, and bigger markets.

When ever capital runs up against the limits to its expansion crises erupt, followed immediately by efforts to exceed the constraints: improved machinery, new markets, new sources of raw materials, competition between businesses, nations, etc., seeking always to make room for the increased application of employees to an expanded scale of production. All of these methods of rationalizing economic activity, however, are only temporary, and merely set the stage for the next round, where the interruption of expansion takes on an even greater magnitude.

Ultimately, there is no possibility of further expansion, and the economic contraction which characterizes previous episodes of dislocation becomes a permanent feature of society. From this point forward hours of work must be reduced and they are, in the form of a massive implosion of employment.

Wherein Grossman gets served by the Masters of the Universe

In none of this bare outline of Marx’s theory (provided we have offered an accurate view) is there a notion of any central bank emerging from the rubble of society to take control of the economy and operating it along the lines proposed by Hilferding.

Ben Bernanke and Jean-Claude Trichet, head of the ECB

Ben Bernanke and Jean-Claude Trichet, head of the ECB

According to Hilferding, capitalism was moving not toward some massive implosion driven by the reduction of work, but toward some form of equilibrium maintained by the biggest banks who would rationalize the more chaotic features of the economy, and set the stage for some later political revolution of the working class, which would then take over this instrument for its own ends:

Finance capital puts control over social production increasingly into the hands of a small number of large capitalist associations, separates the management of production from ownership, and socializes production to the extent that this is possible under capitalism … The tendency of finance capital is to establish social control of production, but it is an antagonistic form of socialization, since the control of social production remains vested in an oligarchy. The struggle to dispossess this oligarchy constitutes the ultimate phase of the class struggle between bourgeoisie and proletariat.

There was, in Hilferding’s view, no inherent reason for capitalism to implode as Marx believed; it simply suffered from the fragmentation of industry, which prevented the smooth coordination of all of the elements of the economy. But, the very development of capital itself – particularly the growing role of the banks in the economy – would facilitate this coordination under some form of banking cartel.

Indeed, as Hilferding pointed out, “Even today, taking possession of six large Berlin banks would mean taking possession of the most important spheres of large-scale industry …”

We can infer from the fact that Ben Bernanke still gets invited to all the best parties in Washington and New York that, in fact, something very much like Hilferding’s scenario emerged from the economic chaos which erupted on Thursday, October 24, 1929.

Marx may have stripped away every non-essential feature of capital to show why it would collapse, but, in doing so, he also stripped away some pretty important attributes of capitalist society that we try to capture with the term political-economy. Plainly, capital is not just an economic formation, it is also a political formation – full of self-interested people, who have lobbyists, and bagmen, and the kinds of living standards inconsistent with some cranky old dead guy in Germany who predicted they would soon have to get real jobs, if there are any jobs left.

The Federal Reserve Bank was born just about the time Hilferding was writing his most famous work, from which the above statements are taken. By the time of the Great Depression, it had already captured much of the economic policy role in Washington. The events which unfolded before the ink was dry on Grossman’s book would seem to defy Marx’s prediction of capitalism’s inevitable demise.

To be continued

Don’t count on a replay of the Great Depression…

September 9, 2009 Leave a comment

We are trying to figure out what of the criticism we leveled at Paul Krugman is relevant, and what is not.

Krugman’s article raised two important points:

  1. Schumpeter was not some flat earther who believed in a stable, steady state theory of capitalist markets. He believed, based on what I have read of his works – a tiny. perhaps, unrepresentative fraction – both that markets were prone to sudden and even violent dislocations, and had a definite trajectory toward ultimate collapse. The former, at least, driven by technological change. Perhaps the latter as well. He also seemed to believe these two tendencies were not exceptional cases, needing to be explained or accounted for separately from a description of how capitalism worked, but had to be accounted for in the description of the capitalist market itself. The fact that even the most rudimentary examination of his work reveals how different his ideas were from how he is presented by Krugman is telling.
  2. The same conclusion applies to how Krugman treats Lord John Maynard Keynes. I have not been a fan of his, and only came to understand his work based on tutoring by Tom Walker. I had absorbed much of what I knew of his theories from reading the post-war American interpretation. That interpretation, which, apparently, Krugman has swallowed whole cloth, calls for government intervention to stabilize the economy through fiscal and monetary policy tools. It completely neglects Keynes’ comments that shorter working time is the long term solution to the problems arising from the depression. However, it is one thing for me to fall victim to this misunderstanding, it is quite another for Krugman – who fancies himself as a follower of Keynes – to spout the same one-sided interpretation.

*****

schumpeterSchumpeter’s main criticism of the steps taken by the Federal Reserve and the Roosevelt administration during the Great Depression was simple: the Great Depression, however, difficult, was a necessary adjustment to the changes which had taken place in the economy over several decades – changes which had virtually transformed the economic landscape, and increased the productive power of labor beyond anything imagined up until that time.

To cope with those changes, a number of measure had been taken, some of which were necessary – relief for the unemployed – some of which only served to intensify the crisis – protectionism, the replacement of gold by fiat money, and the imposition on Germany of the costs of World War I – some of which were called for, but vulnerable to charges they undermined economic activity – the Glass-Steagall Act (which ultimately was undone by the Clinton administration) comes to mind.

And then there were those measures specifically designed to prevent the economy from adjusting to the new economic reality of less work: the Keynes inspired government intervention, using its fiscal and monetary powers to promote an inflationary expansion of the working time.

Tom Walker has pointed out recently that, based on the available evidence, at least one author of the history of working time, Benjamin K. Hunnicutt, believed the Roosevelt administration undertook the latter set of policies specifically to avoid reducing the work week as proposed by the Black-Connery 30 hours legislation:

It is true that Ben Hunnicutt doesn’t see the New Deal programs as a conspiracy. What he does say, though, is that the only real coherence to the programs was the intent to defeat the Black Bill. Or, to soften that somewhat he attributes the view to a few of his sources (Keyserling and Connery) without directly disputing it. Whether or not one calls an intentional program a conspiracy depends, technically speaking, on its legality and secrecy.

“In a letter to Arthur Schlesinger dated April 9, 1958, Leon Keyserling stressed that Roosevelt came to Washington without a “systematic economic program.” The “highly experimental, improvised and inconsistent” programs of the first New Deal defy categorization. They were the products of “schools of reformers” that had been promoting diverse programs that Roosevelt, higgledy-piggledy, picked up.

“According to Keyserling, the PWA, CWA, NIRA, and the rest were not parts of any systematic plan or overall purpose. The only coherence given these events came from outside the administration. It was the “desire to get rid of the Black bill” that prompted the administration to draw up such things as the NRA, “to put in something to satisfy labor.” This same point was made by other notables in Roosevelt’s administration, among them Raymond Moley.

“Throughout the depression, 30-hour legislation goaded Roosevelt to action. The Black-Connery bill, introduced in each depression Congress until passed in highly modified form as the Fair Labor Standards Act [FLSA] in 1938, with all the work-sharing teeth pulled, continued to function as a sort of reverse polestar, enabling Roosevelt to chart his course by the simple expedient of sailing in the opposite direction.

Roosevelt’s instinctive reaction against 30 hours matured to positive approaches to industrial stabilization and reemployment. They were built on work creation, not work spreading, founded on industrial growth and increased spending as the wellsprings of progress. In the process, he and his administration discarded the century-old notion that work reduction had the potential for social and individual advancement.

“From the point of view of someone like Representative William Connery, who pushed for 30 hours from 1932 to 1937, the New Deal had a coherence, a reason for happening when and as it did, that was lost on others not so positioned. From Connery’s perspective, the New Deal was what it was because of its opposition to 30 hours. — Hunnicutt, Work Without End, pp.248-49″

The relevance of Schumpeter’s observation to the present crisis is compelling. If he is correct, what we are witnessing is not simply a replay of the Great Depression, but of the Great Depression PLUS all the accumulated changes to global economy which have taken place since that time.

But to this balance of adjustment which must be accounted for in this crisis, we should add all the imbalances that have built up over that time, and, which resulted from seven decades of government intervention to forestall the adjustment to all the economic changes over that entire period.

Says Schumpeter:

For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. Particularly our story provides a presumption against remedial measures which work through money and credit. For the trouble in fundamentally not with money and credit, and policies of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future.

*****

john-maynard-keynesBy contrast Keynes believed there was a role for just the kind of monetary and fiscal intervention that Schumpeter wanted to avoid.

The problem, from Krugman’s perspective, is that he saw this as a strictly limited intervention, with clear limited aim, and further limited in duration.

The blog, Econospeak, has reproduced his ideas on this in full, of which we excerpt the relevant portion:

4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.

In Keynes’ view, in other words, following World War II there would be a period of rationing while the economy recovered; a period where economic policy would be to encourage some additional investment to bring the economy up to its potential; and a period where, in his words, It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.”

Keynes estimated that it would take some 10 to fifteen years after the war ended to get to the point where working time would have to be reduced in order to discourage saving and prevent unnecessary and wasteful over-investment – what we would call a bubble today.

The war ended in 1945, which would have put the ideal time to begin reducing hours of work at around 1960 at the latest.

If we double Keynes’ off the cuff estimate, just to be conservative – to thirty years, rather than fifteen – we are in the middle of the stagflation of the 1970s, which brought about the collapse of the Keynesian Revolution in economics.

*****

It is impossible to say with precision how this insanity will unfolds over the next period, but we believe any comparison to the Great Depression completely underestimates the degree of adjustment that must impose itself on the global economy to account for unfinished adjustments of the Great Depression, the accumulated changes since then, and the perversities introduced into what Schumpeter called the economic organism in the seven decades since World War II, which have resulted in one after another bubble.

This triple threat is now aimed at the survival of millions of working families in this country, and billions more beyond.

The management of this crisis is now in the hands of the very men and women who failed so miserably to avoid it. It really is not clear that it can be managed even in the best of circumstances, but it is obvious that the first step in that process is to remove those who made it inevitable by prolonging the very policies that made it inevitable – this is now a political catastrophe.