Things to Read on the Morning of September 29, 2014

September 29, 2014

Must- and Shall-Reads:

 

1.Stephen Golub et al: The Federal Reserve in the run-up to the Global Crisis: “Both Greenspan and Bernanke subscribed to Bernanke and Gertler’s (2001) view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the fallout from systemic financial disturbances through ex post interventions. The successful response to the 2001 dot-com bubble boosted the Fed’s confidence in this strategy. On this basis, Blinder and Reis (2005: 73) conclude ‘[Greenspan’s] legacy … is the strategy of mopping up after bubbles rather than trying to pop them’. The 2001 crisis, however, did not feature leverage and securitisation, unlike in 2008…. Several of the Fed’s institutional routines likely reinforced its complacency. One such feature is the scripted nature of FOMC meetings…. Moreover, the priority on reaching consensus on interest-rate policy limits scope for sustained consideration of broader economic concerns. Further, FOMC staff briefings and FOMC discussions centre on the staff’s ‘Greenbook’ economic analyses and projections, which reinforces the tendency for consensus. Former Governor Meyer jokingly refers to the Greenbook as ‘the thirteenth member of the FOMC’…”

  1. Nicholas Bagley: Medicine as a Public Calling: “The debate over how to tame private medical spending tends to pit advocates of a single-payer approach against those who would prefer to harness market forces to hold down costs. When it is mentioned at all, the possibility of regulating medicine as a public utility is dismissed as a political impossibility — or, worse, as anathema to the American regulatory tradition. Yet there is a rich history in the United States of subjecting private businesses that wield undue power to economic regulation. Growing out of an ancient common law practice of imposing special duties on innkeepers and common carriers, the body of law governing the regulation of “public callings” had evolved by the early twentieth century into a comprehensive challenge to the principles of laissez faire. The rise of the modern medical industry in the years after the Second World War prompted the enactment of federal and state laws emerging from this tradition and directed at the business of medicine. Although the last two decades of the twentieth century saw many of these laws give way to a resurgent belief that market forces ought to guide the distribution of health-care services, an important strain of the law has always treated modern medicine as a public calling. Now that the Affordable Care Act has eased concerns about the uninsured, a stubborn set of economic problems in the medical industry — supply imbalances, access restrictions, and abusive and discriminatory pricing — may spur renewed interest in laws reflecting the principles of public utility regulation. Indeed, nascent interest in such laws suggests that we may already be heading that direction.”

  2. Gavyn Davies: Labour under-utilisation in America: “If there is still a large margin of slack in the labour market, despite tumbling unemployment figures, the Fed is unlikely to tighten monetary conditions very much in the next couple of years. Slack will also keep the wages share in national income low, thus boosting the profits share further. The utilisation of labour resources in America is thus critical not only for monetary policy, but also for the outlook for US equities. The academic discipline of labour economics, which has not really been centre stage since the wage-push inflation of the 1970s, is therefore very much back in vogue…. Despite the fact that the official unemployment rate has fallen close to the Fed’s estimates of its ‘natural’ or equilibrium rate, few empirical labour economists seem to believe, at least with any certainty, that labour resources are near full utilisation at present…. The hawkish case is still represented by some regional presidents on the FOMC… Fisher…. Almost all economists in policy circles acknowledge that there is great uncertainty here…”

  3. Gillian Tett: After a Life of Trend Spotting, Bill Gross Missed the Big Shift: “The power balance between governments and the bond market has shifted. These days it is governments that are intimidating–or, at least, wrongfooting–the bond gurus… unorthodox monetary policy… is shaping bond prices now. And that is making it difficult for bond titans such as Mr Gross to recreate their old magic…. During most of his career, Mr Gross wielded brilliant trend-spotting skills…. Recently his performance has crumbled. This year his flagship fund is in the bottom 20 per cent of industry tables, measured by returns. This partly reflects the fact that low interest rates have cut returns across the board…. But Mr Gross also has been wrongfooted by government. In January 2010 he declared that the British bond market was ‘sitting on a bed of nitroglycerine’, suggesting UK sovereign bond yields would rise. It seemed a rational bet, given that the UK had a 7 per cent structural budget deficit…. Similarly, there was sound logic to Mr Gross’s declarations in 2010 and 2013 that the bull market in bonds was over. But instead of rising, yields fell to new lows in the US and Europe. That is partly because markets are ‘under the spell’ of unconventional monetary policy, as the Bank for International Settlements says…”

  4. Felix Salmon: A Radical Response: “Martin Wolf paints a picture of a global economy being wrecked both by freedom of capital… and by the imprisonment of 18 European countries in a fixed currency system…. It’s a worldview in which central bankers, rather than their commercial brethren, are the people who really determine whether the world crashes and burns: The Jamie Dimons simply end up acting in accordance with the incentives that the Alan Greenspans put in place…. Wolf… has withering scorn for what central bankers have wrought… persuasively argues that central banks should target a much higher rate of inflation, noting that, in the eurozone, “inflation of 3 to 4 percent a year would not be a disaster” and would actually be very helpful…. Wolf… says the French economist Thomas Piketty’s recommendation of a global wealth tax “is unquestionably too ambitious.” Yet Wolf’s own recommendations are more ambitious… attempts to prevent corporations from accumulating cash; an end to the tax-deductibility of interest payments; a scaling back of international banks… a mass refinancing of European sovereign debt into eurobonds… a radical change in debt contracts to make them much more equitylike; and, of course, that idea about abolishing ­fractional-reserve banking…. Despite Wolf’s attempts to don the garb of a revolutionary, this book is actually something more familiar, and more depressing: a wonkish eschatology of how the global economy, and Europe’s in particular, is doomed…. THE SHIFTS AND THE SHOCKS: What We’ve Learned — and Have Still to Learn — From the Financial Crisis. By Martin Wolf.”

Should Be Aware of:

 

  1. Paul Krugman: The New Classical Clique: “International macro went in a different direction, for reasons I’ll get to in a bit. So I have some sense of what was really going on…. While both Wren-Lewis and Waldmann hit on most of the main points, neither I think gets at the important role of personal self-interest. New classical macro was and still is many things–an ideological bludgeon against liberals, a showcase for fancy math, a haven for people who want some kind of intellectual purity in a messy world. But it’s also a self-promoting clique…. Economics as a discipline being what it is, attacks on Keynesian economics as being inconsistent with rational behavior were bound to get some traction, and the stagflation of the 1970s certainly helped that attack, even if it was less relevant than claimed. Animus against government activism also played a key role…. Once the thing had gotten going, however, I think you understand its dynamics much better if you stop assuming that the motives of the movement’s leaders were pure. Consider the extremism of Lucas and Sargent (pdf) in the early days, declaring Keynesian economics a complete failure–or Lucas talking about how Keynesian papers were greeted with ‘giggles and whispers’…. Ken Rogoff wrote about the ‘scars of not being able to publish sticky-price papers during the years of new neoclassical repression’…. The clique’s dominance became self-perpetuating–and impervious to intellectual failure. OK, I know the members of the clique will be outraged–distorting incentives only apply to other people, only bureaucrats hijack institutions to serve their personal aggrandizement, etc… As they say in Minnesota, ya sure, you betcha…. Unfortunately, the rise of the new classical clique had consequences far beyond the academy, because it ended up playing an important role in the failure of policy to effectively confront the Lesser Depression.”

September 29, 2014

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