Mr. Bernanke the Great Depression "expert"

[yoganmahew]

nakedcapitalism.com/2009/01/ … ssion.html

In the US, one of the reasons that Fed chair Ben Bernanke is given so much deference (aside from the fact that we treat people in positions of power with kid gloves) is that he is regarded as an expert on the Great Depression, and has also studied Japan’s Lost Decade.

Steve Keen, author of Debunking Economics and professor at the University of Western Sydney, has taken a look at some of Bernanke’s writings on the Great Depression and finds them wanting, Serious wanting. I’ve read some of Bernanke’s work on Jaoan, and quite a few of his speeches, and was bothered by some of the assumptions and omissions. Keen tears into Bernanke with a gusto that I find refreshing.

A link to this blog from a US legal advisory website the Practising Law Institute’s In Brief ( “DEFLATION IN THE REAL WORLD“) reminded me of Bernanke’s book Essays on the Great Depression, which I’ve been aware of for some time but have yet to read. I’ll make amends on that front early this year; fortunately, an extract from Chapter One is available as a preview on the Princeton site (I couldn’t locate the promised eBook anywhere!; in what follows, when I quote Bernanke it is from the original journal paper published in 1995, rather than this chapter).

To put it mildly, Bernanke’s analysis is not promising.

The most glaring problem on first glance is that, despite Bernanke’s claim in Chapter One “THE MACROECONOMICS OF THE GREAT DEPRESSION: A Comparative Approach” that he will survey “our current understanding of the Great Depression”, there is only a brief, twisted reference to Irving Fisher’s Debt Deflation Theory of Great Depressions, and no discussion at all of Hyman Minsky’s contemporary Financial Instability Hypothesis.

While he does discuss Fisher’s theory, he provides only a parody of it–in which he nonetheless notes that Fisher’s policy advice was influential:

“Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed.

He then readily dismisses Fisher’s theory, for reasons that are very instructive:

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. ” (Bernanke 1995, p. 17)

This is a perfect example of the old (and very apt!) joke that an economist is someone who, having heard that something works in practice, then ripostes “Ah! But does it work in theory?”.

It is also–I’m sorry, there’s just no other word for it–mind-numbingly stupid. A debt-deflation transfers income from debtors to creditors? From, um, people who default on their mortgages to the people who own the mortgage-backed securities, or the banks?

Well then, put your hands up, all those creditors who now feel substantially better off courtesy of our contemporary debt-deflation…

What??? No-one? But surely you can see that in theory…

And the Keen piece:
debtdeflation.com/blogs/2009 … epression/
And so on, a great read from someone who has an inkling of what he’s talking about (at least to these untutored eyes).

If these criticisms are valid, we could well be looking at stoking the fire (increasing the length of the depression) rather than letting it burn itself out. Maybe if we pile enough tar soaked wood on top it will suffocate it?

[PROFESSORI]

What we must never forget is who Bernanke works for - THE BANKS.

Who is the new Treasury Secretary?Timothy Geitner,ex President of the Federal Reserve Bank of New York,former Secretary Hank Paulson - director of Goldman Sachs,together with Bernanke they have complete control over the American economy.

Bernanke’s aim is to ultimately flood the world with new dollar bills,and in the process let the banks that created this mess off the hook and ultimately inflate away government and consumer debt,that’s why he was appointed and that is what he will do - you don’‘t need a Phd from Harvard to work it out,just a certificate from the online university of the Bleedin’ Obvious.

[yoganmahew]

Do read the piece Prof, then tell me why debt deflation, no matter how much money you throw at it, is, well, deflationary?

[room305]

@PROFESSORI

Bernanke’s aim is to ultimately flood the world with new dollar bills,and in the process let the banks that created this mess off the hook and ultimately inflate away government and consumer debt,that’s why he was appointed and that is what he will do - you don’‘t need a Phd from Harvard to work it out,just a certificate from the online university of the Bleedin’ Obvious.

Options for Bernanke:

1. Hyper-inflation = Bernanke out of the job, tearing up of the dollar, bye-bye Federal Reserve that was a nice thing we had going there for a while, Bernanke goes down in history as the man who destroyed the dollar and killed off the Fed

2. Deflation = Bernanke in a job, dollar remains the reserve currency, Federal Reserve remains in place, if Bernanke can hang on long enough for a recovery he’ll probably be credited as the genius who beat deflation

I know which option I’d pick if I was Bernanke. Simple do my best to make it look like I was doing all I can and recovery is just around the corner, so credibility in the Fed remains reasonably intact.

What makes you think Bernanke wants to step through door number 1?

[PROFESSORI]

@yoganmahew

Do read the piece Prof, then tell me why debt deflation, no matter how much money you throw at it, is, well, deflationary?

YM
I’m not saying debt deflation is deflationary,what I am saying is to counteract the efects of this debt deflation Bernanke et al are going to chop down what is left of the rainforests and turn them into paper money to inflate away the debt.If the printing presses are run at sufficient speed,the debt is inflated away,so the effects of debt deflation do not take hold.

You and others think this stimulus will not work and deflation will win,I and others think the banks will just keep printing until prices stop falling.Only time will prove who is right.

[PROFESSORI]

@room305

@PROFESSORI

Bernanke’s aim is to ultimately flood the world with new dollar bills,and in the process let the banks that created this mess off the hook and ultimately inflate away government and consumer debt,that’s why he was appointed and that is what he will do - you don’‘t need a Phd from Harvard to work it out,just a certificate from the online university of the Bleedin’ Obvious.

Options for Bernanke:

1. Hyper-inflation = Bernanke out of the job, tearing up of the dollar, bye-bye Federal Reserve that was a nice thing we had going there for a while, Bernanke goes down in history as the man who destroyed the dollar and killed off the Fed

2. Deflation = Bernanke in a job, dollar remains the reserve currency, Federal Reserve remains in place, if Bernanke can hang on long enough for a recovery he’ll probably be credited as the genius who beat deflation

I know which option I’d pick if I was Bernanke. Simple do my best to make it look like I was doing all I can and recovery is just around the corner, so credibility in the Fed remains reasonably intact.

What makes you think Bernanke wants to step through door number 1?

Who says the Fed will be shut down if the US experiences hyperinflation?Who is going to do it?The senate/house of representatives haven’t got a clue what is going on in the economy,you only had to see them debating the bailout bill to realise this,the ones that really matter and probably do know what is going on are easily bought off,if you read my previous post you will see that Timothy Geitner,the previous President of the Federal Reserve Bank of New York is now the new treasury secretary,so instead of shutting down the Fed,the Fed is actually increasing its powers and influence: the Fed is seen by the US government as its saviour!

If they can’t see that the Fed caused this crisis now after what has just happened there really is no hope they ever will,why would they wake up one morning some time in the future(after your dollar collapse scenario) and suddenly realise the time had come to do the right thing?.In all likelihood,following the inevitable collapse, the Fed would demand(and get) - as they are now - new even more extensive emergency powers.

[room305]

@PROFESSORI

Who says the Fed will be shut down if the US experiences hyperinflation?Who is going to do it?The senate/house of representatives haven’t got a clue what is going on in the economy,you only had to see them debating the bailout bill to realise this,the ones that really matter and probably do know what is going on are easily bought off,if you read my previous post you will see that Timothy Geitner,the previous President of the Federal Reserve Bank of New York is now the new treasury secretary,so instead of shutting down the Fed,the Fed is actually increasing its powers and influence: the Fed is seen by the US government as its saviour!

When constituents require a wheel barrow of money to buy a loaf of bread then representatives will know about it. Of course the Fed will treat the crisis as a power grab - just like any regulatory office the world over - if only we had more power, more staff, better wages we could avoid x. The Fed are no different in this respect and since they’re getting what they want, why change tactics and start printing extra bills? Especially when they have absolutely no authority to do so.

@PROFESSORI

If they can’t see that the Fed caused this crisis now after what has just happened there really is no hope they ever will,why would they wake up one morning some time in the future(after your dollar collapse scenario) and suddenly realise the time had come to do the right thing?.In all likelihood,following the inevitable collapse, the Fed would demand(and get) - as they are now - new even more extensive emergency powers.

If the Fed request the power and authority to print physical dollars and this results in the complete collapse of the dollar, then that’s end game for the Fed no doubt about it. They won’t have a hope of petitioning to congress to launch a new currency and start over.

Also remember, they represent the banks and hyperinflation is end game for the banks as well.

[yoganmahew]

Actually, room305, I thought printing money was the one power that the Fed does have, that is, printing real money. They don’t have the power to issue debt in the form of securites. I’ve said before we’ll see a billion dollar bill out of this, as it is a weapon the Fed can use without recourse to Congress.

Will it change things? Well, the Japanese didn’t really do Quantative Easing, but does that really matter? They borrowed hugely and spent freely. Were they just recycling the same money, though, with less momentum each time?

Now, if a big enough stimulus cheque is mailed to every consumer in the US, that might make a difference, as long as they bought US goods… perhaps car tokens would be a better idea!

The Financial Ninja covers a lot of ground on the effects of MULT below 1:
benbittrolff.blogspot.com/2009/0 … -plan.html

[lord_vader]

there are now direct flights between new York and Harare

[yoganmahew]

Another very, very long piece from Mr. Keen on why Mr. Bernanke’s helicopters aren’t working.
nakedcapitalism.com/2009/02/ … redit.html
Yves says:

The post debunks several notions near and dear to the Fed, most economists, and pretty much all financial commentators. First, that the Fed’s current and expected money expansion moves are on a scale sufficient to create inflation. They aren’t because, second, we are working with the wrong paradigm. The assumption is that we operate within a “fiat money” or “fractional reserve banking system”. Keen argues these are incidental elements to what is more properly described as a “credit money system”.

This post is LONG and very much worth your attention, so you might want to get a cup of coffee first.

[Nate]

@yoganmahew

Another very, very long piece from Mr. Keen on why Mr. Bernanke’s helicopters aren’t working.
nakedcapitalism.com/2009/02/ … redit.html
Yves says:

The post debunks several notions near and dear to the Fed, most economists, and pretty much all financial commentators. First, that the Fed’s current and expected money expansion moves are on a scale sufficient to create inflation. They aren’t because, second, we are working with the wrong paradigm. The assumption is that we operate within a “fiat money” or “fractional reserve banking system”. Keen argues these are incidental elements to what is more properly described as a “credit money system”.

This post is LONG and very much worth your attention, so you might want to get a cup of coffee first.

A good read, thanks.

I think this chart gives an idea of just how much the FED must print before reversing Deflation…

Nate

[JimmyTheFish]

I reckon that the people who least want inflation are the Chinese. They can have a minimum wage of basically a bowl of rice 3 times a day. They will need to invent jobs to occupy the peasantry and the last thing they need is inflation (they will have to buy rice wheat to keep the show on the road).

Me thinks that they will soak up all the dollars that are made by the Fed and use them to buy America and to prevent the yuan from increasing in value. How long this can last for is anyone’s guess but the Chinese have one major advantage over the Yanks in one word patience.