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posted by cmn32480 on Tuesday September 06 2016, @01:19PM   Printer-friendly
from the everything-electronic dept.

Bloomberg reports:

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.


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  • (Score: 5, Informative) by Thexalon on Tuesday September 06 2016, @01:50PM

    by Thexalon (636) on Tuesday September 06 2016, @01:50PM (#398095)

    If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right.

    It's a good story, except for the small problem of being completely wrong.

    The immediate cause of the financial crisis was investment banks over-leveraging on bad assets to an insane degree, which they managed to do entirely on their own, and they in fact did everything in their power to avoid government meddling. That there might be a problem with the underlying assets was in fact completely obvious: In 2006, before Fannie and Freddie had anything to do with what was going on in the subprime mortgage market, one of the major players in mortgage brokering, Ameriquest, went under. And in June of 2008, Countrywide Financial collapsed. The personal bankruptcy rates were rising as well. It only came as a surprise to investment bankers that all this distress would actually be affecting them.

    The reason the recovery was so lackluster had more to do with the fundamental causes of the slump in the first place, namely that the working and middle classes of the US were broke and not able to spend their money on anything other than absolute necessities or in some cases even their absolute necessities, and were doing the only thing they could do, namely tighten their belts and cut their spending. Which in turn cut into businesses' ability to make sales, which in turn led to them firing 1 out of 20 Americans over a period of 2 years. Meanwhile, the gridlock in Washington prevented all but 2 government responses: Bail out the biggest and most politically connected corporations, and one of the biggest Fed rate cuts in its entire history, both of which probably helped but were also not sufficient.

    The good news is now, almost a decade later, employment is starting to recover:
    http://data.bls.gov/timeseries/LNS12300000 [bls.gov]
    http://data.bls.gov/timeseries/LNS14000000 [bls.gov]

    But we're far from out of the woods, because the fundamentals are still not good.

    --
    The only thing that stops a bad guy with a compiler is a good guy with a compiler.
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  • (Score: 2) by AndyTheAbsurd on Tuesday September 06 2016, @02:37PM

    by AndyTheAbsurd (3958) on Tuesday September 06 2016, @02:37PM (#398126) Journal

    Came here to make this point. Thanks for doing so more clearly and with more detail than I've got handy!

    You missed that the root cause was deregulation, partially the repeal of Glass-Steagall (which had prevented retail banks from being the same institution as investment banks) but I'm sure there were other things that were deregulated as well that contributed.

    --
    Please note my username before responding. You may have been trolled.
    • (Score: 5, Informative) by Thexalon on Tuesday September 06 2016, @02:56PM

      by Thexalon (636) on Tuesday September 06 2016, @02:56PM (#398141)

      The much bigger lapse was not in the rules as written, but the enforcement of those rules.

      For example, Bernie Madoff was engaged in a straight-up Ponzi scheme, a scam that's been around since at least 1920 and is very illegal even after the repeal of Glass-Steagel. Harry Markopolis, an investigator who specializes in financial crimes, alerted the SEC in 2001, 2002, and again in 2005, providing significant evidence, and the SEC did approximately jack squat with it.

      There were similar whistleblowers from inside many of the nation's largest banks. Again, the SEC did nothing. Not coincidentally, some of the SEC regulators who did nothing would soon leave to go work for the bank they were supposedly investigating, for very very cushy jobs that didn't seem to have any job duties.

      As far as we can tell, the SEC regulators were too busy surfing porn at work [go.com] to actually, y'know, do their jobs and enforce the law.

      --
      The only thing that stops a bad guy with a compiler is a good guy with a compiler.
  • (Score: 2) by Thesis on Tuesday September 06 2016, @05:57PM

    by Thesis (524) on Tuesday September 06 2016, @05:57PM (#398217)

    This is more telling than what you posted, as to how the economy currently is....

    http://www.bls.gov/news.release/empsit.nr0.htm [bls.gov]