Monday, June 20, 2011

Why the economics profession gets it so wrong so often

Not long ago, I met a freshly-minted economist who was a perfectly pleasant young man who was unfortunately wrong about just about everything.  The contrast between this otherwise delightful person and his hideous belief structure was just jarring.  In a world where the prescriptions of economists send millions into the streets to protest and millions more into suicidal depression over their impossible circumstances, the certainty with which he held to a core set of disastrous beliefs reminded me of the religious cranks I knew as a child.

It turns out that these heartless scoundrels are actually the designed outcome of the world's central banks.  The so-called "Nobel" prize in economics has actually nothing to do with Nobel at all but is just a prize awarded by the Swedish central bank--which bullied its way into a ceremony designed to honor achievements in the hard sciences like physics and chemistry.  And in places like USA, it has now become impossible to become a member of the economics "profession" without a stint in the service of the Federal Reserve.

Priceless: How The Federal Reserve Bought The Economics Profession
First Posted: 09-07-09 
Ryan Grim  ryan@huffingtonpost.com 
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.
"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."
One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past. more
Breaking out of this insane cult of the uber banksters usually means a sharp improvement in any country willing to try.  Like, for example, Brazil (sort of).
Macroeconomic Changes Have Helped Increase Growth, But Much More is Needed
Brazil Breaks From the Neoliberal Era
By MARK WEISBROT   June 16, 2011
From 2004 to 2010, Brazil's economy grew at an average of 4.2 percent annually, or more than twice as fast as it had grown from 1999-2003; or for that matter, more than twice as fast as its annual growth from 1980-2000. This was despite the impact of the world recession of 2009, which left Brazil with no growth for that year.
This faster growth enabled an accelerated reduction in poverty, a reduction in income inequality, and a reduction in unemployment to today's record lows. In a detailed and important paper, economists Franklin Serrano and Ricardo Summa of the Universidade Federal do Rio de Janeiro argue that this was not only the result of favorable external conditions, but some moderate but important policy changes. Most importantly, the government allowed a more expansionary fiscal policy, including increased public investment. This helped especially to keep the damage from the world recession to a minimum and allowed for a faster recovery.
But another major macroeconomic policy problem remains: the central bank has been almost continually increasing the value of the real for years in order to meet its inflation target. It does this by raising short-term interest rates, as it has been doing recently. This increases capital inflows, which raises the value of the real. This lowers inflation mainly by reducing the price of imports.
But cheaper imports hurt Brazilian producers of tradable goods, which must compete with imports. The same is true for Brazilian exporters of most goods other than commodities – a higher real makes their goods less competitive in world markets. This has seriously hurt Brazil's manufacturing potential, especially in the more technologically advanced sectors. For example, from 1996-2008 the imported content of "communications and electronic equipment" produced in Brazil rose by about 33 percentage points.
In some ways Brazil is similar to the United States, in the roots of its macroeconomic policy mistakes: the financial sector is too powerful. Just as Wall Street contributed massively to the financial crisis and Great Recession in the U.S., the financial sector in Brazil fights all too successfully for policies that stifle Brazil's industrial development in order to promote its own interests. more
Of course, the neoliberal establishment still has a great deal of clout.  Why just last week we saw the hated IMF pushing the Germans (?!) around.
Hardline IMF forced Germany to guarantee Greek bailout
Acting IMF chief threatened to trigger sovereign default if Berlin failed to come to rescue of Greece
Ian Traynor in Brussels
The Guardian, Friday 17 June 2011
Germany was forced to agree to bail out Greece for the second time in a year under strong pressure from the International Monetary Fund following the resignation last month of its head, Dominique Strauss-Kahn, the Guardian has learned.
Under its acting chief, the American John Lipsky, the IMF has taken a more hardline stance. The fund warned the Germans in recent weeks that it would withhold urgently needed funds and trigger a Greek sovereign default unless Berlin stopped delaying and pledged firmly that it would come to Greece's rescue.
Senior officials and diplomats in Brussels confirmed that the IMF threat to pull the plug on its funding, in stark contrast to the more emollient line of Strauss-Kahn, had been defused because of a German climbdown.
As political turmoil continued in Greece on Thursday, with the prime minister, George Papandreou, scrambling to form a fresh government, the stage was being set for a political struggle between Europe's powerbrokers over the fine print of the proposed new €100bn-plus rescue of Greece.
Berlin is deeply at odds with France and with the key EU institutions – the European Central Bank (ECB), the European commission, the presidency of the EU, and the head of the eurozone, Jean-Claude Juncker, prime minister of Luxembourg – over the terms of a deal.
While conceding the need for the fresh bailout, Berlin is insisting that the banks and other private creditors holding Greek debt take losses as part of the rescue plan, which is expected to amount to €125bn (£110bn), or about €90bn if the Germans succeed in forcing losses on holders of Greek bonds. more
So the central banks have become austerity ghouls who use their powers to wreck the real economies of the world.  They have the power to actually do some good but choose rather to facilitate plunder.
Free Money Creation to Bail Out Financial Speculators, but not Social Security or Medicare
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College   FRIDAY, JUNE 17, 2011
Financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid-19th century. Much like the buildup of plaque deposits in human veins and arteries, an accumulation of debt gained momentum exponentially until the economy crashed, wiping out bad debts – along with savings on the other side of the balance sheet. Physical property remained intact, although much was transferred from debtors to creditors. But clearing away the debt overhead from the economy’s circulatory system freed it to resume its upswing. That was the positive role of crashes: They minimized the cost of debt service, bringing prices and income back in line with actual “real” costs of production. Debt claims were replaced by equity ownership. Housing prices were lower – and more affordable, being brought back in line with their actual rental value. Goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system.
Financial crashes came suddenly. They often were triggered by a crop failure causing farmers to default, or “the autumnal drain” drew down bank liquidity when funds were needed to move the crops. Crashes often also revealed large financial fraud and “excesses.”
This was not really a “cycle.” It was a scallop-shaped a ratchet pattern: an ascending curve, ending in a vertical plunge. But popular terminology called it a cycle because the pattern was similar again and again, every eleven years or so. When loans by banks and debt claims by other creditors could not be paid, they were wiped out in a convulsion of bankruptcy.
Gradually, as the financial system became more “elastic,” each business recovery started from a larger debt overhead relative to output. The United States emerged from World War II relatively debt free. Downturns occurred, crashes wiped out debts and savings, but each recovery since 1945 has taken place with a higher debt overhead. Bank loans and bonds have replaced stocks, as more stocks have been retired in leveraged buyouts (LBOs) and buyback plans (to keep stock prices high and thus give more munificent rewards to managers via the stock options they give themselves) than are being issued to raise new equity capital.
But after the stock market’s dot.com crash of 2000 and the Federal Reserve flooding the U.S. economy with credit after 9/11, 2001, there was so much “free spending money” that many economists believed that the era of scientific money management had arrived and the financial cycle had ended. Growth could occur smoothly – with no over-optimism as to debt, no inability to pay, no proliferation of over-valuation or fraud. This was the era in which Alan Greenspan was applauded as Maestro for ostensibly creating a risk-free environment by removing government regulators from the financial oversight agencies. more

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