09 September 2014

Gold Daily and Silver Weekly Charts - Learning to Love the Fed's Bubbles Is Our Only Choice

Apparently today is my day to pick on poor Paul Krugman. I happened to read this today, and it was just too illustrative of a certain institutional economic mindset to go by unremarked. 

Paul is responding to questions for an interview in a recent issue of Princeton Magazine.

Are bubbles good or bad and do we need them to create strong economic growth and reach higher levels of employment?

Bubbles are bad if you have an economy near full employment, where they divert resources from their proper use and set the stage for financial instability. In a depressed economy, even ill-conceived spending can help create jobs, so bubbles aren’t necessarily bad. There are reasons to believe that we’re facing an era of persistent economic weakness, which means that we’ll only feel prosperous during bubble periods.

Please comment on how artificially low interest rates have impacted the current value of baby boomers’ retirement portfolios and should this be a consideration of the Federal Reserve?

Oh, boy. What do you mean 'artificially low'? Compared to what? The appropriate level of the interest rate, most economists would say, is the rate that gives us full employment without inflation; since we don’t have full employment, that says that rates are too high.

And no, the Fed’s job is to stabilize the economy, not to protect incomes of some groups at the expense of that mandate.

Paul Krugman, Princeton Magazine

It's one thing to infer that the economists of the professional status quo believe these sorts of things. And its quite another to see it in print. 

Paul apparently thinks that bubbles are not really a problem if you are not at 'full employment,'  because they might be stimulus.  Oh boy, what do you mean 'full employment?'  Does that mean everyone who wants a shit job without benefits at a below poverty level wage can have one is 'full employment?'

Or does 'full employment' mean a robust economic environment where people are obtaining jobs that pay living wages for families that keep up with inflation and provide affordable health benefits sufficient to keep them from falling into bankruptcy if anyone in their family sustains a serious illness?

Well, we haven't been at 'full employment' since the last bubble broke, and that was six years ago.  And depending on how you want to define it, we may not have been at 'full employment' in a very long time of stagnant median wages and a deteriorating middle class. 

So I would imagine that means that Paul was ok with the housing bubble, at least while it was growing.  In his defense the Fed publicly dismissed it as well.  And reading this interview helps one to understand why.

But that doesn't bother me so much, since this is the policy jargon used by economists to justify whatever policy initiative they are pumping for that day, for whatever reason.  And most do it.

What does surprise is that a Nobel prize-winning economist is ok with asset bubbles, which by definition in the real world involve a significant mispricing of risk, will almost always result in stress on the financial system, and inflict harmful losses on less sophisticated investors and non-insiders.   They tend to coarsen the political environment, and generate a cycle of moral hazard when tolerated.

Bubbles by their very nature are very often symptoms of lax regulation, and methods of transferring wealth from the many to the few.  And they are very often a fairly thin veneer for control frauds. 

Paul goes on to suggest that we are in a new normal where the bubbles that the Fed occasionally creates through its policy errors are the only times that 'we will feel prosperous.'   So enjoy.   This is preposterous humbug.  It is the worst sort of excuse making for the failure of leadership.

Does he notice that this latest 'recovery' from the aftermath of the latest financial bubble is resulting in the greatest disparity of wealth in US since before the Great Depression?  And that it is growing worse, not better?

His statement that the Fed's overwhelming mandate to provide 'stability,' for which you can read the health of the banks, is superior in consideration to protecting the income (wealth) of some groups like retirees, should give you a good idea of the Fed's actions in the future when this current asset bubble implodes, and the Banks come back to their trough again. Bail-in anyone?

Does this criticism seem harsh?  I hate to pick on the establishment Democrats, since their counterparts the neo-liberal austerians are often so much worse.  

But given that too large a part of the country has been enduring the equivalent of an economic 'Death March of Bataan' for the last seven years because the Wall Street wing of the Democratic party, which was given a mandate for reform, has perpetrated so many poorly thought out and corporate friendly economic policies, written by non-elected and barely accountable Banksters operating largely in secret, I don't think so.  And they can't keep blaming it all on the Republicans.  They are both failing, and badly.

This should give you a fairly good idea where the financiers and politicians are coming from these days.  Even the so-called 'liberals.'

Protect yourself. 

Have a pleasant evening.