EXTRACT: Don't get the point of Paul Krugman drawing such a simplistic-puppy picture of Financial Intermediaries....Is Dr. Krugman sure that there will be an Administration he will be able to command into bailing out the burned commons - like he seeks to ease "strained household balance sheets" today?
And Isn't this the same path for which we (including P. Krugman) are throwing brickbats at Alan Greenspan today?
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Paul Krugman: Growth in the Naughties. From this bizzare post in the NY Times:
Profound Gibberish.
Lose monetary policies are at the heart of the problem, at least an important one. The TRUE 'Role' of Wall Street, especially over the 2000s has become this:
TOO Much money has been thrown out there via lose monetary policies and banking leverage. Wall Street engages this money until the recepients find some productively investible opportunity. If too much of this money were to begin seeking goods and services, hyperinflation would result. That becomes the logic of keeping Wall Street intact, especially with this engaged money seen as "societal wealth" that controlledly secretes appropriate level of "wealth effect" consumer spending.
It's not correct to think "One person's saving will automagically become another's spending because money has to get spent on something". And Dr. Krugman has himself said things to that affect. Let us understand it with what I would like to call the Casino Analogy:
(my apologies if such an analogy has aleady been given by another! It's no big deal to think this up.)
CASINO ANALOGY:
5 people receive an endowment of $200,000 each. Now between them they have $1 million. If they spend this $1 million, they can create some dent in the price levels. If they invest in production of some goods and services, they are adding this money into the economy but their entrepreneurship will also add additional supply of goods and/or services, so eventually we will get growth with a possibility of some inflation, which would be good.
BUT imagine that these guys are seeing no investment opportunity at this point in time. If they just spend it, they contribute to inflation. But then someone gives them the idea that they can actually multiply their money playing Poker in Las Vegas. So they get to Vegas and join poker tables. NOW, as long as their money is on the poker table, it can't really get spent on consumption. Except the drinks that they order while playing (if not complimentary) or any other ways in which the Casino sucks out something from this $1 m. That suckout (rent) pays the Casino employees and the owners' income, and they might decide to spend it -- or play poker themselves!
THE above is effectively a key 'Role' of the Wall Street Casino in a modern economy - as a bulwark against inflation - because the Central Banks don't want to do any Math around how much monetary base is sufficient, and in who's hands it should really be introduced: Just hoping that the money will come out of the recepient's (borrower's) hands when they find production opportunity, until that time, Wall Street will keep it busy in circular flow of financial "assets" (i.e. on the Casino table). Since the size of the "unproductive!" monetary base is rather large, the Wall Street rent in running the game is HUGE. When they screw up, their rent still needs to be paid, else they will not repair the game! So bailouts with public money.
I just don't get the point of Paul Krugman drawing a simplistic picture of Financial Intermediaries. If the money on the table of Wall Street Casino comes off, it could well go into buying property. THAT might be a better way (not that home values should ideally even be a concern of policy) to support the false housing "wealth" (and to get that "wealth effect" consumer spending), Rather than asking for more wanton monetary base that has already liabilitized the public with carrying the weight of a bloated Wall Street, and furthermore, with gargantuan "compensation" packages. And the ZIRP is pushing common people to, perforce, put their money into risky assets against their better judgement. Who will make the 70 year old retirees whole when a ZIRP supported stocks boom crashes? Is Dr. Krugman sure that there will be an Administration he will be able to command into bailing out the burned commons - like he seeks to ease "strained household balance sheets", I suppose with debt Liability writeoffs/reductions + ZIRP support to Asset Values, today!?
Isn't this the same path for which we throw brickbats at Alan Greenspan now?
And Isn't this the same path for which we (including P. Krugman) are throwing brickbats at Alan Greenspan today?
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Paul Krugman: Growth in the Naughties. From this bizzare post in the NY Times:
....even with fairly strong assumptions about phony financials and wasted investment, you can’t make more than a minor dent in growth estimates. On the financial side, the point is that we measure growth by output of final goods and services, and fancy finance is an intermediate good; so if you think Wall Street was wasting resources, that just says that more of the actual growth was created by manufacturers etc., and less by Goldman Sachs, than previously estimated.
...further reinforcing the case that stressed household balance sheets are at the core of our problem. Indeed. What this says, however, is not that the economy couldn’t and shouldn’t be producing more; it just says that we should be pushing harder on unconventional monetary and fiscal policies.
Profound Gibberish.
Lose monetary policies are at the heart of the problem, at least an important one. The TRUE 'Role' of Wall Street, especially over the 2000s has become this:
TOO Much money has been thrown out there via lose monetary policies and banking leverage. Wall Street engages this money until the recepients find some productively investible opportunity. If too much of this money were to begin seeking goods and services, hyperinflation would result. That becomes the logic of keeping Wall Street intact, especially with this engaged money seen as "societal wealth" that controlledly secretes appropriate level of "wealth effect" consumer spending.
It's not correct to think "One person's saving will automagically become another's spending because money has to get spent on something". And Dr. Krugman has himself said things to that affect. Let us understand it with what I would like to call the Casino Analogy:
(my apologies if such an analogy has aleady been given by another! It's no big deal to think this up.)
CASINO ANALOGY:
5 people receive an endowment of $200,000 each. Now between them they have $1 million. If they spend this $1 million, they can create some dent in the price levels. If they invest in production of some goods and services, they are adding this money into the economy but their entrepreneurship will also add additional supply of goods and/or services, so eventually we will get growth with a possibility of some inflation, which would be good.
BUT imagine that these guys are seeing no investment opportunity at this point in time. If they just spend it, they contribute to inflation. But then someone gives them the idea that they can actually multiply their money playing Poker in Las Vegas. So they get to Vegas and join poker tables. NOW, as long as their money is on the poker table, it can't really get spent on consumption. Except the drinks that they order while playing (if not complimentary) or any other ways in which the Casino sucks out something from this $1 m. That suckout (rent) pays the Casino employees and the owners' income, and they might decide to spend it -- or play poker themselves!
THE above is effectively a key 'Role' of the Wall Street Casino in a modern economy - as a bulwark against inflation - because the Central Banks don't want to do any Math around how much monetary base is sufficient, and in who's hands it should really be introduced: Just hoping that the money will come out of the recepient's (borrower's) hands when they find production opportunity, until that time, Wall Street will keep it busy in circular flow of financial "assets" (i.e. on the Casino table). Since the size of the "unproductive!" monetary base is rather large, the Wall Street rent in running the game is HUGE. When they screw up, their rent still needs to be paid, else they will not repair the game! So bailouts with public money.
I just don't get the point of Paul Krugman drawing a simplistic picture of Financial Intermediaries. If the money on the table of Wall Street Casino comes off, it could well go into buying property. THAT might be a better way (not that home values should ideally even be a concern of policy) to support the false housing "wealth" (and to get that "wealth effect" consumer spending), Rather than asking for more wanton monetary base that has already liabilitized the public with carrying the weight of a bloated Wall Street, and furthermore, with gargantuan "compensation" packages. And the ZIRP is pushing common people to, perforce, put their money into risky assets against their better judgement. Who will make the 70 year old retirees whole when a ZIRP supported stocks boom crashes? Is Dr. Krugman sure that there will be an Administration he will be able to command into bailing out the burned commons - like he seeks to ease "strained household balance sheets", I suppose with debt Liability writeoffs/reductions + ZIRP support to Asset Values, today!?
Isn't this the same path for which we throw brickbats at Alan Greenspan now?
Posts
Hello, Ohm. The first paragraph you excerpt from Krugman -- I had my eye on that same excerpt :)
ReplyDeleteYour idea is very interesting -- the idea that the financial sector keeps money out of the productive sector where it would only lead to inflation. I'd have to note that we get inflation in specific sectors like housing or oil whenever finance gets a bubble going in one of those sectors. And I think this note strengthens your argument.
I hesitate, though. It may be okay to say the central bank uses finance that way now. But I don't think it was part of any master plan. I think we have to go back and look at how the problem developed. You write:
BUT imagine that these guys are seeing no investment opportunity at this point in time. If they just spend it, they contribute to inflation. But then someone gives them the idea that they can actually multiply their money playing Poker in Las Vegas.
The problem arises when the rate of profit in the productive sector falls to a low level, so that "these guys are seeing no investment opportunity" as you say. And then Reaganomics (or whatever) comes along and changes the rules. And by accident or design, finance benefits by those changes.
Then you have the situation that finance is more profitable than production. And then you have created a vicious circle.
Good post.
Hi Art!
ReplyDeleteThanks! Always a pleasure to read your comments:) Actually, exactly right. I didn't really mean to say that this role was intended by policy makers, but that it simply has come about. Yes, agree that Central Bank is not conciously using Finance sector this way, but their work will require great more thinking and analysis on money supply injection optimization if WS party shrunk greatly, somewhere Fed might be aware of it in their mind. They just continue this 'easy way' (negative connotation) even though they may not realize how exactly they are riding this tiger they did not create by design,.....and it's all so inefficient.
Cldn't agree with more:
"The problem arises when the rate of profit in the productive sector falls to a low level, so that "these guys are seeing no investment opportunity" as you say. And then Reaganomics (or whatever) comes along and changes the rules. And by accident or design, finance benefits by those changes.
Then you have the situation that finance is more profitable than production. And then you have created a vicious circle. "
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Looks like to me that Krugman, in this article, is 'simply!' (mis)presenting Finance as "Intermediate Good - period" merely to appropriate his grand vision/approach of more QE than Ben Bernanke probably has planned in Krugman's guess. maybe Krugman'll tomorrow even support the idea of negative interest rates that Goldman Sachs 'asked for' in 2009 I think, in a research paper they funded - Although it will be difficult for Krugman to talk negative rates after fanning the term "Zero LOWER BOUND" for rather long time.
Monetary easing is not a substitute for Fiscal Investements or Trade Policy or Industrial Policy. Krugman seems to think it is, provided monetary easing is bold enough. And he is going to the extent of using a simplistic (to the point of inaccurate) description of Finance as 'background' to sell even Bolder Monetary easing, I think.
Hey, Ohm. You wrote:
ReplyDeleteI didn't really mean to say that this role was intended by policy makers, but that it simply has come about.
And (as it turns out) you didn't. But a door was left open, I think, and I wanted to shut it :)
Looks like to me that Krugman, in this article, is 'simply!' (mis)presenting Finance as "Intermediate Good - period" ...
That's exactly the piece of the Krugman post that was bothering me. Re-reading PK's post, he seems to me to understate the effect that finance has on our economy. But he's a fast talker, and slick, and I have to think long and hard about such things.
In an old post, I reviewed some stats: Finance accounts for 40% of corporate profits, which squeezes other sectors of the economy, and finance accounts for 8% of GDP, which is twice what some people think it ought to be.
And, as I am completely certain that the excessive reliance on credit is the cause of our economic troubles, I am completely uncomfortable when Krugman brushes the problem aside.