Thursday, March 24, 2011

In Charge and Clueless

Reading Central Banks Worldwide: Past, Present And An Uncertain Future gives the impression that the people in charge of the global financial system are clueless — and more concerned with their credibility than addressing their ignorance. This is doubly important because not only are central bankers in charge of managing a nation's finances, but also they are major players in determining the direction that the world economy takes in a century of increasing globalization.

I had this exchange with Warren Mosler in this thread:

TH: Right now central banking is the greatest threat to liberal democracy and national sovereignty. This is where global integration under a command system is emanating from.
WM: i’d say the largest threat is from the failure to understand monetary operations
TH: Warren, I agree on that economically. However, I am concerned about the political threat that cb independence and interdependence among cb’s constitute. I am sure that these people are well-meaning, and I agree that the direction is toward increasing globalism, but I don’t trust the direction they are taking to get there. If they understood monetary ops, that would be a help. but there is still [Dani] Rodrik’s trilemma to deal with, and I think they know this and have an agenda to force increasing integration at the expense of either national sovereignty or liberal democracy, since the three can’t all exist together. This is clear in the case of the EU/EZ, for example.

Rodrik's trilemma results from what he calls an "impossibility theorem."

DR: I have an "impossibility theorem" for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

What we are witnessing in the EU, through the EZ, is that the ECB is leading Europe toward greater economic integration. It was clear from the outset that this could only be accomplished by greater political integration that involves surrendering at least some national sovereignty. For example, joining the EMU involves surrendering monetary sovereignty by adopting the euro in place of national currency. The plan was to herd Europe toward greater politically integration gradually, by imposing greater economic integration with less national sovereignty and less democratic choice and control.

Initially, the goal of greater political integration was opposed democratically. What is happening in effect is that the leaders are trying to impose economically a political arrangement that failed at the polls and remains unpopular.

This attempt can be seen as a test case for greater integration of the world economy along the same lines. Should we as a nation be trusting our fate to clueless bankers who are also "interested men" in Tom Paine's sense of the phase? If they understood how the monetary system works, we might have a chance. But in is clear that they don't, or are hiding it very effectively for some unknown reason.

We need to be thinking carefully about Rodrik's trilemma and debating choices instead of letting ourselves be herded by small groups of technocrats that are unelected and unaccountable since they are "politically independent." Moreover, some of them are not even citizens of this country. At any rate, virtually none of them really know what they are doing from an MMT perspective of monetary operations. Should the clueless be in charge?

DISCLAIMER: The views put forward here have nothing to do with NWO conspiracy theories such as that being put forward here.


googleheim said...


Matt Franko said...


I very much agree that the external sector effects are just as important as our domestic sector.

I have been reading Ramanan's posts wrt the external sector with objective interest also. It's a big problem. And Rodrick is on it here.

But I think this: If we were to have a US administration that politely took the podium and thanked China for sending us all of their real goods in exchange for us entering some keystrokes on a computer system, CHINA'S policies wrt the external sector would probably change significantly in short order .... it would HAVE to unless the whole thing over there is one big corrupt scam to grab USDs by the Chinese insiders.


Letsgetitdone said...

Tom, I think the trilemma is too optimistic. We know that global economic integration requires that nations give up some measure of monetary sovereignty. We also know that the world's people's have too many ideological, cultural, and political differences to combine in a world-wide integrated and democratic political union. So, it seems to me that global economic integration is incompatible with both democracy and national sovereignty, and that therefore too much global economic integration is to be avoided until there is a greater measure of cultural and political integration than there is today.

In fact, many of the problems we have today, I think, are caused by too rapid global economic integration, relative to integration in other speheres.

Tom Hickey said...

Matt, Joe, I intend to explore this much further. I think that Rodrik has put his finger on it. As I said to Ramanan somewhere, this is chiefly a control problem.

There is no way to avoid this problem with the world shrinking due to communications and transportation technology and countries becoming more interdependent due to trade relationships. There is no way to opt out of the trade game.

The question now is control — the people (democracy), the nation state (national governmental institutions) or international institutions run by central bankers. At the moment, the voice of the people isn't being heard, and government are brokering away control to international neoliberal institutions that don't have the interest of the people as a priority.

We as a people need to meet this transition with eyes open, or we are going to get herded. In fact, we already are being herded.

As Warren observes, this is not only an institutional problem, it is a knowledge problem. It seems that the folks in charge actually are clueless and could drive us over a cliff in their rush to globalize and smooth out the friction of transaction costs.

googleheim said...


googleheim said...

can someone tell me why the Euro still flies with the PIIGS ?

if American announces this sort of bailouts, then we get weaker USD.

if EU announces it .. nothing Euro stays course.

What is going on here ???

Is the currency market rigged or not ?

I can only come to following conclusion - the Maastrict Rule is not being followed.

They are bailing out their confederacy and we are not bailing out our confederate states.

If that is the case, then we have an example where MMT is being applied in the EU and it works but is being smoke screened behind some Austerity measures.

Here it is not being applied to help the states of the Union.

That's a kicker - MMT being hidden behind a false veil of Austrian Economic austerity !! the result - a strong Euro.

Tom Hickey said...

Matt Stoller has an interesting comment today at New Deal 2.0

The Federal Reserve’s Wheezy Independence Takes Another Hit

During the discussion of Dodd-Frank, Congress deliberated without knowing that the Federal Reserve had extended $9 trillion to various banks, foreign central banks, corporations, and hedge funds, often collateralized by junk...

...there is now an explicit two-tiered monetary system, where elites can borrow against junk collateral under difficult circumstances, while ordinary people face foreclosure and bankruptcy should they encounter liquidity or solvency problems.

Tom Hickey said...

g, MMT cannot be applied in the EZ because they don't have a fiscal authority, i.e., a federal government with a Treasury that corresponds to the ECB.

Your guess is as good as mine about the fx market. Makes no sense given the disaster in the periphery and German and French banks holding all that dodgy debt. I still think the euro could blow up for political reasons, even thought the powers-that-be are determined to make it work economically. I don't see "austerity" working, i.e., making workers pay for the financial fiasco. A voter revolt would mean either a break up of the euro or pretty massive intervention on the part of the ECB. It really depends on whether Spain can hold together. I have doubts, given the condition Spain is in. There's a lot of bad debt and malinvestment to clear. We'll see, but I think the assessment is overly optimistic now.

No Crisis Unless Spain Falls?

Marc Chandler: Investors are interested in the strength of the firewall around Spain. We have tried to operationalize that question by looking at the correlation of the Spanish and Portuguese bonds...

These results also suggest that a firewall is intact, but a bit thinner (greater correlation) than the other study. Investors will also be thinking of what kind of events could trigger a breach of the wall. A few come to mind. Continued pressure on Greece, Ireland and Portugal. Stress tests results that show significantly higher capital needs than the market expects. Perhaps continued ECB rate hikes after the April 7 move. Investors should watch the reception at Spanish bond (not so much bill) auctions.

Matt Franko said...


wrt Matt Stoller over at ND 2.0, he's a bit out of paradigm, bordering on the sensational just like his former boss, Grayson. This is a shame because he probably has some good contacts back on the hill. I've left some comments over there to seemingly no avail. He is a lawyer type in the line of a Barry Ritholtz and Yves Smith, 'not that there is anything wrong with that' ;) but these folks seem to lack the Math Maturity to see how this all is supposed to work together and have go go to some sort of "rulebook" framework for their analysis.

I also take issue with his statement that the Fed lines were "collateralized by junk", Mike published the collateral requirements here and I'm sure the borrowers put up acceptable collateral.

Bottom line though: the whole GFC debacle and the non-regulated lending frenzy leading up to it were grossly mis-handled. I know you have the best handle on the whole thing but Stoller/Yves/Barry are lost in legal details wrt Fed collateral etc, and as you more appropriately point out, the true problems are SYSTEMIC...

In that article he is perhaps opening up a sore subject with Mike wrt it IS the Fed's job to be "lender of last resort" in crisis periods. He doesnt seem to grasp this point as did not the late Mark Pittman over at Bloomberg. Under the emergency powers, imo the Fed can pretty much lend against anything, and the Treasury should back them up with fiscal if necessary. Stoller seems to have a general problem with that, but I hate to break the news to him but that is the way the system is supposed to work. Stoller needs to be careful not to descend into some sort of "conspiracy theory", "Creature from Jekyl Island" type of carnival act.

But again the whole thing was mis-handled top to bottom so I it's easy to point fingers and perhaps this is what Stoller is doing.

Tom, not many people on the planet have your grasp of the whole global (macro and micro) situation the world finds itself in currently. I'd say perhaps maybe 250/500 people or so total at this point out of now 7 billion on earth.


googleheim said...

"MMT cannot be applied in the EZ because they don't have a fiscal authority, i.e., a federal government with a Treasury that corresponds to the ECB"

Yes, I agree and that is the face of it.

But now I think that since reading this blog which pointed out the $600 billion Euro stimulus which went under the radar despite the forbiddeness.

MMT HAS already been applied and they bend the rules and cover up with Austerity measures which give pleasure to the German upon seeing such pain upon the PIIGS.

If you look closer it's there

When QE1 and 2 came here in the USA, dollar goes down, people threaten to sue, and that.

We need to credit the States after they have all be purged of BoA, republicans and tea party deficit terroristas.

Tom Hickey said...

I'm not so sure that Stoller is out of paradigm in that I think he may well understand MMT. I believe that Warren sat down with Grayson and explained it to him.

On the other hand, both Grayson and Stoller realized that today "politics is theater" and to get media attention, you have to give them some theater to make it interesting. Wonkery doesn't cut with the media because it doesn't sell to the public. This is MMT's problem in getting exposure. Professors can't be clowns, and they also have be careful of too much advocacy.

While "taxpayer funded" may be out of paradigm, I thin that marketing types like Stoller, even though they may be in paradigm, figure that they they have to confront "taxpayer funded" arguments in kind in order to be heard. So I am willing to cut allies some slack on this.

While "taxpayer funded" many not be in paradigm, the effect is similar: Public funds get diverted from public purpose by special interests. People get that the trillions that went to bailing out Wall Street and foreign banks were not balanced by a Main Street rescue. Just the opposite. The view of the public, Main Street is being asked not only to pay for Wall Street's mistakes, but also to reward them with bonuses. That's galling, and it underlies a lot of the unrest.

The point that Stoller makes, and the one I was interested in, is that the cb is OK with being the LLR for the financiers, not only Wall Street but even foreign ones, but Main Street, not so much. Ordinary people are enraged about this when they see enormous sums going to the top and austerity being forced on the middle and bottom.

This is what happens when a small group of interested and ignorant men are put in charge of national and international finance. It is bad for democracy and ordinary people get handed a bad deal that they cannot anything about, since the people in charge are "politically independent." This is running the country and the world for the bondholders and creditors.

Stoller gets this and is using a bit of theater to get it across. I'm OK with that to the degree that it gets in the way of business as usual. Same with Yves, and other allies. We can step in and set the record straight about the paradigm. There is a good deal of MMT at New Deal 2.0, and also at NC, for example. Others get people stirred up and receptive; MMT provides the understanding and solutions.

But sometimes, you have to pick up a sign and march, even though maybe you don't agree will all of the other signs. Now is one of those times.

Tom Hickey said...

MMT HAS already been applied and they bend the rules and cover up with Austerity measures which give pleasure to the German upon seeing such pain upon the PIIGS. If you look closer it's there

Backdoor MMT. :)

Warren Mosler said...

i don't agree with tri

we can't all set our interest rates individually, and it wouldn't make sense to all issue our own currency.
The only question is how high up the chain to go.

Should every US state have its own currency? Like europe did?

I think a national currency or even world currency would make perfect sense, but in both cases only if monetary operations were understood, the terms of fiscal 'distribution' were understood (the world monetary authority funding a job for anyone willing and able to work, etc. etc.), and safeguards were put in place to prevent 'races to the bottom.'

this is all much like we attempt to do in the US, but critically fail because we don't understand our own monetary system and its monetary operations.

Tom Hickey said...

That's interesting, Warren. I agree that the direction is toward globalism, which inevitably involves greater federation.

How do you see this could be accomplished practically while maintaining national sovereignty and democracy, if you think that the trilemma is flawed? Maybe do a post on it at your place?

My view is to accept limitations on national sovereignty — the US states retain sovereignty of a sort — but retain liberal democracy by making global institutions accountable to voters as we move toward a united states of the world under a common currency over time.

Tom Hickey said...

Let me put it the issue more clearly. As I said previously, it's a control issue.

Who is to be in control of the world's future development?

Right now, under the neoliberal paradigm, it is the owners of capital and those in charge of allocating capital.

Is this is the best interest of humanity? Is this the most efficient and effective way to manage the future of the species and its environment? Or is there a better way forward? One that is more democratic?

googleheim said...

how about crediting a bunch of state owned banks and building factories, farms, military bases, and particle accelerators

the chinese would not allow it

but it would be fun and off set that creepy "everything going towards globalism" feeling

Tom Hickey said...

There already is a movement toward creating state banks. Ellen Brown is spearheading it.

The Chinese would not allow it? They are going to threaten to sell their tsys?

The "everything is going toward globalism" thing is about expanding world trade. This is a direction that is going to continue to expand (although it is contracting now due to the recession), and this expansion is going to put pressure on systems that keep things more or less in equilibrium.

The issue is command and control. There are many ways to do this. Neoliberalism (free markets, free trade, free capital flow) is only one way. Most countries have recognized that markets are insufficient to deliver politically practical solutions, so command and control is mixed between market and non-market solutions. For example, EM's are becoming less inclined toward neoliberalism, after the credit implosion and consequences that were supposed to be a black swan.

There's an increasing push for a return to a fixed rate regime like the gold standard, for example, to the point where it is no longer ridiculous to consider this a possibility. Some countries are abandoning resource markets for long term contracts.

The harsh reality is that in the developed world, millions of people are unemployed and underemployed, and in underdeveloped nations millions of people are starving.

This is essentially a demand problem and it is being ignored due to vested interests pursuing private agendas, "expert" ignorance, and moral apathy.

The problem is one of scale. Command and control becomes more complicated with scale. On one hand, the military and large corps solve this through regimentation. This is however not a practical solution politically and economically for a global economy. On the other hand, markets alone allow nature to take its brutal course, and that has costs, which often involve blowback like wars and revolutions. When people don't have enough food, they get more than just anxious.