The big flaw with a collaborative policy negotiated under terms informed by the conventional wisdom is that the conventional wisdom is wrong, so rather than mandating sound economic policy, for much of the business cycle the negotiated terms forbid sound economic policy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

There was a vicious fight at the Jackson Hole symposium this year, between Willem Buiter and Alan Blinder. See the round-up of the symposium here, links to Buiter/Blinder fight are in the very last paragraph.

The WSJ blog said, in particular:

Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst marks to the Fed, saying it's too close to Wall Street and financial markets -- responding to their needs to the detriment of the wider economy. Mr. Buiter, a former member of the BOE's Monetary Policy Committee, said the Fed overreacted to the economic slowdown -- misjudging the importance of financial stability to the overall economy -- and created a deeper inflation problem as a result.

An essence of Blinder's remarks, from the same WSJ source:

One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. "The companies that built this dike did a terrible job," the boy said. "They don't deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain." The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.

Mr. Blinder continued: "You might have heard an alternative version of this story circulating around the Fed."

In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. ... It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways.

As you see, Buiter is aghast at the very thing those two French papers seem to agree on: too much flexibility by the Fed. However, Buiter isn't really worried about Fed's flexibility regarding the economy, he's more concerned about Fed caring too much about the Wall Street's perception of the economy.

The most recent cycle has seen median incomes end up below where they were at the beginning of the cycle, for the first time in a very long while.

Beyond the fact that GDP as a measure of the overall economy is not very good, its repartition is becoming the biggest problem.

Don't forget: "growth" = "growth for the top 0.1%'s incomes" these days. Thus GDP goes only so far.

Should we worry that the European institutional framework is less favorable to the ultra rich?

In the long run, we're all dead. John Maynard Keynes

There will be no happy "recapitalize and privatize" ending to this saga. The bill to the taxpayer is now growing rapidly - along with GSE [Government Sponsored Gnterprises] exposure - and will balloon into the trillions over the coming years and decades. And for how long the holders of GSE debt and MBS [Mortgage Backed Securities] will be allowed such handsome returns at taxpayer expense is a quite intriguing question.

I also read and hear too much about the continued need for "Keynesian" stimulus. Regrettably, the system has been in non-stop government (fiscal and monetary) stimulus mode for years now. It may have been indirect at the time, but it is now apparent that GSE obligations should be included today right along with debt owed directly by the Treasury.

Before all is said and done, the taxpayer will also be on the hook for enormous losses from various federal guarantees of deposits, student loans, pensions, and the like. The bottom line is that a whole range of direct and indirect federal guarantees - especially since the 2001/02 recession - have played an integral role in spurring credit and economic bubbles. "Keynesian" ammunition - fired way too early and freely in order to sustain multiple bubbles - has definitely buoyed the US bubble economy, although such measures will have only limited effect down the road when they're sorely needed.

This author may be right the US economy was in non-stop stimulus mode for years, though that "bubble" stimulus was far from Keynesian. How much Keynesian "ammunition" was inside the bubbles? What would Keynes would do now?