Friday, September 9, 2011

Jean-Claude Trichet's a real piece of work

Central bankers tend to have a lot in common—smug, arrogant, self-righteous, and narrowly focused.  The current head of the European Central Bank merely takes these occupational characteristics to extremes.  Think about it, the bank he manages and the currency he issues are on the verge of going out of business.  Germany, the most prosperous member of the European Union is making serious noises about returning to their precious Deutschmark.  The southern Euro nations are  on the verge of sovereign default.  There is so much youth unemployment in Europe that serious commentators are talking about a lost generation.  And Trichet actually talks about his Bank and its policies as a success!

Of course, since Trichet is one of the least original men on planet earth, his defense of his bank's performance is straight out of the central banker's playbook 101.  He prides himself on the bank's "fierce independence" which is bankster code for treating elected officials with utter contempt.  And then he brags about how the ECB has delivered "impeccable price stability."  Of course, this claim is utter bullshit—the price of food, housing, and energy has skyrocketed under his watch. In fact, there was a recent housing bubble that got so far out of hand, collapsing it threatens the very existence of some of the biggest banks on earth.

But even if Trichet's claims for price stability were not brazen lies, the more interesting question would be, "Why does he consider this an accomplishment so important, he is willing to lie about it?"  And trust me on this—he does.  Price stability is essentially the only real assignment Trichet has—everything else about the man including the world-class arrogance are just style points.  And herein lies the fatal flaw of the ECB as it is currently organized—its singular focus on price stability to the exclusion of all other considerations has triggered a global economic crises.  These hard-money strategies always do.

Here's The Angry Trichet Moment That Everyone's Talking About
Simone Foxman | Sep. 8, 2011, 10:20 AM

European Central Bank President Jean-Claude Trichet launched into a mini tirade in response to a question about Germans talking about leaving the euro zone at his press conference today.

Here's the crux of his answer, which got him really animated.

"Can I remind us, that in 2004 and 2005 some important governments in Europe were asking for weakening the Stability and Growth Pact? Do you remember that? Do you remember which governments?" He asked ironically, citing France, Germany, and Italy as the countries pulling for looser restrictions on eurozone rules.

According to Trichet, the ECB has performed with flying colors since the birth of the euro as a "fiercely independent" institution divorced from the whims of EU governments -- even during what he calls "the worst crisis since WWII."

"We have delivered price stability over the first 12 years and 13 years of the euro -- impeccably, impeccably," Trichet emphasized. "I would like very much to hear the congratulations for an institution which has delivered price stability in Germany" at a level which is "better than what has ever been obtained in this country over the last 50 years."

He also called controversial interest rate hikes earlier this year "appropriate" given the inflationary situation at the time, although he announced that the ECB now sees inflation risks as balanced.

The ECB chose to maintain interest rates at 1.50%, and revised growth expectations for 2011 and 2012 downward. more
Here is Krugman writing about the failure of the economics profession to learn anything meaningful from the past dozen catastrophes brought us by clowns like Trichet who cling to their conventional wisdom—even if they must tell ridiculous lies to prove their fealty to ideas and policies that should have been discarded LONG ago.
The Profession and the Crisis
Paul Krugman 
Woodrow Wilson School, Princeton University, Princeton, NJ 08544-1013, USA

So we’re having an economic crisis. I say “having,” not “had,” because we have by no means recovered. Financial panic may have subsided, stocks may be up, but employment remains far below pre-crisis levels, and unemployment — especially long-term unemployment — remains disastrously high. And while you can make the case that the economy is slowly on the mend, slowly is the operative word. We have already been through two years of economic purgatory, and there's no end in sight.
There is a real sense in which times like these are what economists are for, just as wars are what career military officers are for. OK, maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns. This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for. 
We have not, to put it mildly, delivered. 
What do I mean by that? As I see it, there are three main complaints one can make about economists and their role in the current crisis. First is the complaint that economists fell down on the job by not seeing the crisis coming. Second is the complaint that economists failed even to see the possibility of this kind of crisis — and that by pointing out the possibility, they could have helped head the crisis off. Third is the complaint that they have either failed to offer useful advice on what to do after the crisis struck, or that they have offered such a cacophony of voices as to provide no useful guidance for policy. 
As I see it, the first complaint is mostly — though not entirely — unfair. The second is much more substantial: anyone with some knowledge of history should have realized that the age of financial crises was far from over. But the most damning failure of economists, I’d argue, was their acquired ignorance of what I’ve called depression economics — the principles that should govern policy after a financial crisis has left conventional open-market operations impotent.


Early in 2009, when the Obama stimulus was under discussion, I was stunned to read statements from a number of well-regarded economists asserting not merely that the plan was a bad idea in practice — a defensible idea — but that debt-financed government spending could not, in principle, raise overall spending. Here's John Cochrane:
“If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about ‘crowding out.’” 
I won’t go into detail here about why that's wrong. Let's just say that statements like this reveal a complete ignorance of almost 80 years of macroeconomic analysis. Even the simplest multiplier model tells you that while it's true that S=I, that equals sign cannot be replace with an arrow running from left to right. 
But what became clear in the policy debate after the 2008 crisis was that many economists — including many macroeconomists — don’t know the simplest multiplier analysis. They literally know nothing about models in which aggregate demand can be determined by more than the quantity of money. I’m not saying that they have looked into such models and rejected them; they are unaware that it's even possible to tell a logically consistent Keynesian story. We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans. 
As long as monetary policy could bear the burden of macroeconomic stabilization, this didn’t seem to matter too much: even as equilibrium business cycle theory became increasingly dominant in graduate study, central banks, like medieval monasteries, kept the old learning alive. 
But once we were hit with such a severe banking and balance sheet crisis that monetary policy hit the zero lower bound, it was crucial that the economics profession be able to weigh in knowledgeably and coherently on other possible actions. And it turned out that it couldn’t. 
You often hear people saying that the crisis has revealed the need for new economic thinking, for new ideas about macroeconomics. Yet the first priority seems to be to resuscitate old ideas. Brad DeLong describes an interview of Larry Summers by Martin Wolf as follows: “Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.” And in my view, Summers basically got it right. 
How did all this knowledge get lost? Well, being the age I am, I was able to watch the transformation of macroeconomics in real time, and I’d say that what happened was a runaway social process. 
First, success in academic economics came from publishing “hard” papers — meaning papers that used rigorous and preferably difficult mathematics. This in itself biased publication toward equilibrium business cycle models, as opposed to the ad hoc modeling typical of what I consider useful macroeconomics. Graduate education, in turn, became increasingly focused on the kind of work that could get published and lead to tenure. Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field's previous intellectual achievements. 
And as these cohorts became professors in their turn, they closed off both publication and promotion to anyone who questioned the dominant academic approach. Robert Lucas wrote more than 30 years ago — approvingly! — about how participants in seminars would “whisper and giggle” when someone presented a Keynesian analysis. No wonder that any non-equilibrium ideas dropped out of the curriculum and the conversation. 
All of this would have been OK if the triumph of anti-Keynesianism was justified by superior empirical success. But it wasn’t. As I read the history of the equilibrium approach, it's a story of failing upward. Lucas-type models clearly failed to account for the duration of slumps; rather than reconsider flexible prices and rational expectations, Lucas's followers moved on to real business cycles (RBC). RBC models failed to generate any strikingly successful predictions, and in fact lost whatever plausibility they had once productivity started becoming pro-cyclical rather than counter-cyclical. But by that time the people doing these models didn’t know that there was any alternative. 
And the result was that faced with a severe economic crisis, the profession spoke with a cacophony of voices. Or maybe a better way to put it is that the policy debate of 2009–2010 was virtually indistinguishable from the policy debate of 1931–1932. Long-refuted doctrines that should have been consigned to the dustbin of history were stated as if they were fresh new ideas — and they were fresh and new to many economists, because our profession had lost so much of its heritage. 
In short, in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier. And all of this, of course, made the profession mostly useless at a time when it could and should have been of great service. Put it this way: we would have responded better to this crisis if macroeconomics had been frozen at the level of knowledge it had in 1948, when Paul Samuelson published the first edition of his famous textbook. And the result has been to leave actual policy discussion without any discipline from the people who should be shaping that discussion: politicians and officials have been free to follow their prejudices and intuitions, never mind the lessons of history and analysis. Economists have failed to fulfill their social function. more

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