Why Financial regulation will never happen given the makeup of the US Congress (from Robert Kaiser's comments in the video): "...it was the belief that it ... [regulation]... was the wrong way to go held by people who didn't understand the situation."
Mr. Kaiser does not mention the role of money in politics and Upton Sinclair's comment (here) that "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
In case we have forgotten about the Subprime Mortgage Crisis, Frontline replayed their documentary "Is Wall Street Untouchable?" tonight -- see the video above. It has now been almost five years since the start of the financial crisis in 2007 and the statue of limitations on civil fraud cases is about to run out. It appears right now that there will be no major Wall Street prosecutions, either criminal or civil. Can anyone see a link between the lack of prosecutions and the obscene level of income inequality in the US?
In spite of the smack down from Rick Santelli (CNBC's "freaked out white man") Ezra Klein, a financial columnist for the Washington Post, recently wrote an excellent piece (here) on the Late 2000 Financial Crisis (also known as the Subprime Mortgage Crisis). Klein's article argues that there is never the political will to either (1) impose strong enough regulation to prevent financial crises or, (2) once the crisis has started, provide enough stimulus to bring the economy back to full employment.
One particular quote from the article caught my attention:
It is never possible for the political system to do enough to stop them [financial crises] at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale [once the crisis has started].
One of my favorite financial commercials with music by Ray LaMontagne. Some more of the lyrics:
Trouble... Trouble, trouble, trouble, trouble Trouble been doggin' my soul since the day I was born Worry... Worry, worry, worry, worry Worry just will not seem to leave my mind alone We'll I've been... saved by a woman I've been... saved by a woman I've been... saved by a woman She won't let me go She won't let me go now She won't let me go She won't let me go now
Trouble... Oh, trouble, trouble, trouble, trouble Feels like every time I get back on my feet she come around and knock me down again Worry... Oh, worry, worry, worry, worry Sometimes I swear it feels like this worry is my only friend
John Taylor is an economist at the right-wing Hoover Institution. His specialty is monetary policy. He is best known for proposing the Taylor Rule, a simple rigid formula for how the central bank should change its nominal interest rate based on departures from targeted inflation rates and differences from potential GDP.
The purpose of the Taylor rule is to systematically reduce uncertainty and increase the credibility of future central bank actions to foster price stability and full employment. In the video above, Taylor extends his uncertainty-credibility analysis beyond the central bank to all areas of government policy, to include fiscal policy, health care policy, regulatory policy, etc.
The extended generalization hinges on whether uncertainty-credibility are at the root of our current financial crisis. Taylor thinks that business would be hiring if the government was "credible" (instituted austerity programs) and business had "certainty" (business can be certain that they can do whatever they want without regulatory interference).
The Keynesian response to the "business confidence" argument (stated here and critiqued here) is that actual demand is more important to investment. What's the point of investing if there is no demand? In the current financial crisis where investment has been chocked off with the evaporation of liquidity, we're in a situation where consumption (C) and employment (L) are at low levels consistent with the downturn in GDP. We might hope that exports (a positive balance of payments, BOP) might help, but that's unlikely because the world system is also in recession.
Eliminate "Investment" and "BOP" from the graph above and you are left with government expenditure (deficit spending) as the only way to increase consumption and employment. You can lower the interest rate as much as you want and it won't stimulate investment because (1) current capacity is not being fully utilized and (2) the interest rate cannot go below zero.
John Taylor's arguments about uncertainty-credibility make sense in a business-as-usual environment when inflation and GDP are near their targeted values. To make these arguments during the Great Recession, when inflation and GDP are well below targeted values doesn't even make sense using Taylor's own formula (see below).
THEORY: The Taylor Rule is roughly i = i* + a(P - P*) + b(GDP-GDP*) where i is the interest rate, P is the price level, GDP is gross domestic product, and the starred values are desired, equilibrium or attractor levels. If P* and GDP* are a lot greater than P and GDP, respectively, the interest rate becomes negative, the dreaded zero-bound when the Taylor Rule no longer applies.
Analyzing the Taylor Rule would, by itself, be an interesting topic for a future post. For me, the key issues here are how to specify the dynamic attractors for inflation and GDP and how well changes in nominal interest rates would lead to price stability and full employment. The fact is that central banks do not use the Taylor rule so its application is purely counterfactual.
In July 1944, John Maynard Keynes addressed the Bretton Woods Conference (pictured above) arguing in favor of government spending during recessions and depressions. The Christian Science Monitor has recently reported that Keynesian economics failed, in of all places, England where Keynes was born. Whether or not Keynesian economics is a failure, there is a bigger question of whether there are automatic stabilizers that keep the economy on course and, if not, should there be? Keynes' argument was that the automatic stabilizers did not work in the way envisioned by neoliberal economists. This is a particularly important question to answer in the aftermath of the Financial Crisis of 2007-2010.
This list of potential mechanisms for automatically stabilizing the economy is fairly short: (1) unemployment benefits, (2) manipulation of the Fed Funds Interest rate, (3) Keynesian deficit spending and (4) market discipline. The US Senate failed to extend unemployment benefits even though unemployment is still high. The Fed is at the zero-bound (interest rates cannot go lower without money essentially being free). In a reprise of Herbert Hoover in 1932, the "bond-vigalantes" are calling for a return to austerity to end deficit spending and bolster "confidence". And, a bubble in the housing market is what got us in to this mess in the first place (the opposite of a bubble is a deflationary collapse).
Paul Krugman recently took on the issue of unemployment benefits. Yes, unemployment benefits create mild disincentives for people to look for and accept lower pay or poorer quality jobs. The lack of job creation, however, trumps the incentive effects. The jobs aren't there and without unemployment benefits, consumption isn't there to create a recovery.
Deficit hawks on the right are arguing that it's time to "cut, cut, cut, irrespective of the economic consequences" according to Carolyn B. Maloney, D-NY. Interestingly enough, the argument for austerity is the same argument made to countries on the periphery of the world system going through debt crises. Republicans (e.g., Kevin Brady, R-TX) are even arguing that "the United States may experience a debt crisis similar to Greece." In other words, the government should step back and let the market that created the crisis solve the crisis through the discipline of unemployment and enforced hardship for the working class--even though with low interest rates and a high demand for government bonds, now would be a good time for the government to increase borrowing.
I use my blogs to make informal comments on policy topics related to my research interests in the World-System, computer simulation of the US Health Care System, the US Economy, the US Stock Market, and the US Financial System. I am retired from the University of Wisconsin -- Madison. I have taught Statistics and Computer Science and also served on the UW's HIPAA Task Force and the Bioterrorism Task Force. I have also been a member of my local planning commission, a jazz guitarist and a golfer, so some of that may find its way into the blogs.
