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If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right. But probably not in the way you think.
Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.
Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).
In other words, governments -- by issuing cash and managing inflation -- put a floor on how low interest rates can go and how high asset prices can rise. That's hardly a free market.
[...] The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.
[...] If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)
Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.
We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?
Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
(Score: 5, Informative) by bzipitidoo on Tuesday September 06 2016, @01:46PM
> We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets
The Great Recession was caused by massive and systemic fraud, most notably present in the housing bubble. And this guy is trying to blame it all on the government, and the mere existence of cash? So cash has worked okay for, oh, thousands of years, but now he has suddenly figured out that cash causes crashes!
The article is an opinion piece on Bloomberg, which should be trusted no more than the editorial section of the Wall Street Journal, which is to say, not much, maybe not at all. I've noticed that Bloomberg is extremely biased. They are deep in their own world of utter unquestioning faith in the Power of the Almighty Market. They still write as if there is no need for policing because the market is self-regulating.
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @01:55PM
but...but...Gary Johnson!!!
(Score: 2) by Runaway1956 on Tuesday September 06 2016, @02:44PM
Of course government is responsible. Government created the regulations, they created an artificial housing "shortage", they aided and abetted in the pyramid scheme of loans and derivatives - and they supplied the money required to keep the corruption going. If not government, who had the authority to demand that people were given loans that NOBODY expected them to ever pay back?
(Score: 2, Insightful) by Francis on Tuesday September 06 2016, @05:50PM
Interesting how you spin insufficient regulation into excessive regulation.
The problem was insufficient regulation or really, no regulation of the market that was developing and nobody was punished for it.
(Score: 2) by bob_super on Tuesday September 06 2016, @07:55PM
Both.
The banks played by the letter of the law, pocketing any government incentive they could get voted, while using every crack in the regulation system to get away with insufficient due diligence.
That's what happens when you control the people making the laws via "campaign donations", while making them vote on pre-written laws you know they don't read or try to digest.
(Score: 5, Insightful) by eravnrekaree on Tuesday September 06 2016, @03:02PM
Major problems with "markets" often occur when markets are the weakest, that is with massive centralized corporations. Markets work best with lots of small, independant businesses with 1-5 employees. It gives consumers enough choice that businesses are more responsive to consumers,and employees have more places to choose to work which creates a better employee-employer bargain.
People ignore the massive failures of centralized, planned economies. The fact is markets work best, they are not perfect, because they create financial incentives for businesses to serve their consumers.
I do agree that we need regulation to protect the environment from pollution, to protect worker safety, and to protect the consumer from bad products. This does not mean tht government should get involved with actually deciding what products should be made and so on, but as a cop to make sure that the businesses are being run without causing harm to people. When government taxes, it affects the allocation of resources in ways that can end up being contrary to the needs of consumers. Consumers deciding what they want and where to spend money really does create an economy where resources are allocated where the public thinks they should be rather than the government, which means more freedom for us to decide what we want rather than the government decide how to spend our money.
As for utilities and roads, these are natural monopolies, in this case I am for these being run by non-profits such as districts, authorities, counties and municipalities, which are required to be financially accountable. Before these can spend money, ridership and market studies have to be done to prove that they will be feasible. I am people who use roads paying for them, through gas taxes and through toll roads on all larger roads like bridges and expressways. Remember, all of this stuff has to be paid for, there is no free lunch. If you dont pay a toll you pay higher income or property taxes.
I am for nearly all of the retail sector being small business and other areas where larger corporations are unnecessary. We should have constitutional right for people to start businesses within 30 miles of their primary residence, but, towns should be allowed to keep out large corporations operated from far away out of the town in particular areas of economic activity, to reserve the retail and services parts of the local economy for its own citizens.
In the case where large corporations are needed such as with manufacturing, I kind of like the idea of employee owned corporations in a market economy, or the unions to compensate for the weaker employement market. Requiring corporations to be chartered with executive and management salary caps is also a good idea. This is far inferior to locally owned small businesses where it is not necessary to have larger corporations which require a large number of employees to carry out the function of the business. Quite frankly I do not think there is as much of an economy of scale that comes with consolidation of retail into corporations with vast territories, though you have more of an economy of scale being able to make cars on an assembly line in a factory that involves a larger number of employees. Plumbers, electricians, restaurants, retail, barbers, etc should all be locally owned small businesses.
I am for decentralization and markets, and locally owned small business, wherever possible, for locally owned businesses, except where it is vital to have larger corporations due to the expense of manufacturing or where you have a natural monopoly. The fact that we have wal mart and starbucks everywhere is sort of appalling because really these could be locally owned, sure you can have small businesses that are bad, but when you have smaller businesses you have more choices so the market will weed out bad actors. Franchises like mcdonalds are not quite as bad because there is more local ownership. If wal-mart treats its employees or consumers badly, there are far fewer alternatives to shop, you cant go to the next town over because that is dominated by the same one or two big retailers as well.
(Score: 5, Interesting) by Thexalon on Tuesday September 06 2016, @03:23PM
It actually doesn't matter about the size of the business, what matters is that there are enough players in the market on both sides that no single seller nor buyer can individually distort the market price. A market with 10,000 4-person businesses selling a product is no better for the efficiency of the market than 10,000 25-person businesses selling that product. It's when you get down to about 10 players in a market that you stop seeing an efficient free market and start seeing the effects of oligopoly (a few sellers) or oligopsony (a few buyers), where game theory now determines what prices will be rather than the marginal cost of producing the commodity in question.
The trouble is, most technological improvements help increase the amount of a product a business can produce before running into the dis-economies of scale. That causes market saturation, and eventually some of the businesses go bust, reducing the number of players in the market. Eventually, you end up with oligopoly as the norm rather than a competitive market as the norm.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 4, Interesting) by bradley13 on Tuesday September 06 2016, @03:50PM
Well, fraud and government intervention in the markets. It all comes down to revolving doors between government and corporations, plus a huge amount of greed. In the years leading up to 2008, the government made a major push for minority home ownership [washingtonpost.com]. Whether this was clueless SJWs, or a cynical move in the context of the whole fraudulent scheme? It doesn't matter, either way the feds basically forced banks to toss aside the rulebook on credit worthiness, in order to racial quotas on loans.
From a whistleblower at the time: [pbs.org] "I'm confused. What are the standards you use, the criteria against which you make lending decisions?" And the guy looked at me, smiled smugly and said, "If they can fog a mirror, we'll give ‘em a loan."
The banks didn't mind, because they could sell the loans on to the feds. The feds then helped package them up into weird derivatives, to hide the risk, so that they could be sold on to the rest of the financial world.
The worst thing of all is: none of the people who behind this idiocy ever suffered for it. If you look up the high-flying names from the time, they either retired on golden parachutes, or they are still top managers and board members of financial companies.
Everyone is somebody else's weirdo.
(Score: 2) by HiThere on Tuesday September 06 2016, @06:00PM
Cash has NEVER worked well. It has ALWAYS enabled concentrations of wealth and power. But what he's proposing is merely an amplification of the direction that the current system has been moving as the behest of those who want greater concentrations of wealth and power.
Javascript is what you use to allow unknown third parties to run software you have no idea about on your computer.
(Score: 2, Interesting) by Anonymous Coward on Tuesday September 06 2016, @09:20PM
Not only is he blaming cash he goes and REINVENTS cash. But his 'magic' cash that can fix everything that is wrong. /sarc
The actual money we have is a value holder of a transitory time. 'digital' cash is the SAME THING.
If you borrow money you had *better* love inflation. It is the only way you get ahead.
The 2008 recession has its underpinings in the removal of glass-stegall (finished off in 1998). After that we had an immediate boom followed immediately by a bust of 2000. About 8 years later on schedule we had 2008. We have a nice 8-10 year cycle going on. You can see it all the way back into the 1800s. It caused huge consolidations in companies through the use of loans. Reducing competition and causing prices to rise. That was the 2001-2004 era. All these banks were able to leverage small amounts of cash into huge sums and buy out all of the competition.
This dude thinks by removing cash we can somehow magically remove loans. Loans/credit are where the real money is. Most of our monetary supply is loans. 'magic digital cash' would be no different.
This is a 30 min video on how our monetary system works. Do not bother with the dudes other videos, he is selling 'how to fix it'. But he describes the problem set very well here.
https://www.youtube.com/watch?v=PHe0bXAIuk0 [youtube.com]
The problem with controlling cash is that it is only 1 part of them market. The market is thousands of things. From running a tab at the bar to buying a car on loan to buying a pack of gum at a gas station.
To fix the 'issue' you have to present risk in such a way to people that the idea of taking on the risk is high. If the risk is low and there is no blowback then you dont care. For example the 2005-2008 housing bubble. They could produce a loan then turn around and sell the risk to someone else. Their risk was 0. They could capture the originating fees and make money on selling the loan. It was literally no risk to the banks to do so. The US gov had put itself in a position where they would pretty much buy any loan. When it became clear that that people could not pay back at the rate that was being loaned out. The whole credit market froze up. No one would buy/get the loans but everything in flight also froze up. Banks ended up with a huge risk that they thought was 0.
Poor risk management leads to bubbles and crashes. The fed has two ways to control it. As you can not properly define risk as a variable or anything you can really control. They do that through the use of money printing and interest rates (its really all the fed has). The governments of the world can also control risk by setting laws saying what sorts of transactions are acceptable and size of institutions.
Here is a neat trick to borrow money at negative interest rates. Use credit cards and pay them off every month. Inflation is real. But over time you borrow money for 'free' and they get the risk.