Bernanke’s ‘Septaper’ Debacle
Why didn’t the Fed begin tapering yesterday? Matt O’Brien (twitter: @ObsoleteDogma) thinks he knows:
“The short version is it didn’t make sense. The longer version is it didn’t make sense, because the recovery is still rotten — and might get even more so.”
The cause of this rottenness is clear for O’Brien:
“The Fed won’t be willing to withdraw any stimulus until House Republicans give up their fantasy of using a government shutdown or debt default as leverage to defund Obamacare.”
This is a rather unconvincing explanation in my opinion. In 2002, Bernanke looked at Japan and asked why, if he was recommending quantitative easing if deflation struck the US, quantitative easing didn’t work for Japan. He came up with an interesting explanation: Japan was rocked by an economic and political crisis in addition to deflation:
” First, as you know, Japan’s economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan’s overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan’s long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. “
Which is to say, in Japan, monetary policy did not work because Japan suffered huge political and economic problems having nothing to do with the technical feasibility of counterfeiting money and there was a political crisis over how to address these problems. The US was fortunate, said Bernanke, that it faced no such problems.
So, when Bernanke began his own quantitative easing program he already knew how political and economic crisis affected monetary policies. These problems, therefore, cannot be offered as reasons for yesterday’s debacle.
This means, clearly, it never occurred to Bernanke that the political crisis was secondary to the economic crisis itself. Which means if the US did slide into a deflation, it too would likely experience a political crisis. Addressing deflation is, therefore, anything but a simple technical problem of counterfeiting currency to inflate the money supply.
But the real problem, which Bernanke never addressed, is actually deeper than politics. It is a basic flaw in his monetarist policies. Bernanke is of the opinion counterfeiting the currency can fix the problem of overproduction. In other words, if there are too many unsold commodities in the world market, counterfeiting money will make it possible to buy them. This is part of the reflexive approach in bourgeois economics where the symptoms of the crisis is taken for its cause.
If there are unsold commodities and unemployed labor power, Bernanke believes this can be fixed by printing and handing out currency to buy the excess. In other words, beyond the channels through which this policy allegedly works, the idea is that the crisis can be fixed by changing the standard of prices. If the dollar represents 1/20 of an ounce of gold, depressions can be fixed by reducing it to 1/35 of an ounce of gold. No one has ever explained how changing the standard of prices works to do this nor has any empirical data ever been advanced to show that it works.
The standard response to the failure of monetary policy is to suggest it has not been tried with enough vigor. This is essentially what Bernanke argued in the case of Japan. O’Brien offered the same argument about Bernanke’s debacle yesterday. The argument that monetary policy has not been vigorous enough was posed in the form of the hurdles it has to jump: Washington’s political crisis. Monetary policy would be working and could be tapered if it weren’t for those GOPoseurs trying to kill Obamacare.
The question here is not whether the GOPoseurs are trying to kill Obamacare, or even whether it should be killed. The real question is what evidence was ever put forward to suggest QE was working as advertised in the first place. There are too main expectations of quantitative easing (QE):
- It can produce inflation and
- it will create hyperinflation.
Most mainstream neoclassical economists fall in the “QE will create inflation” camp while some Austrians fall in the “My God, we’re all going to die in a mass of bloodshed and hyperinflation! Buy gold now!” camp. To put it mildly, neither of these expectations has panned out, although the Federal Reserve is counterfeiting the currency at the rate of $1 trillion a year.
No one, apparently, falls in the “You can’t fix overproduction by counterfeiting currency” camp.
Even if you print the currency, someone still has to go out and actually buy the overproduced commodities. The fascist state could print the currency and purchase the goods itself and hand it out, or it could give the money to people to buy the excess. This, as Carchedi shows, addresses the unsold commodities already in existence, but not the overproduction of commodities itself.
Thus, when the counterfeiting of the currency stops, prices simply begin falling again.
The problem on display yesterday was not about the need for QE given the political crisis in Washington. It was about the complete and utter failure of neoclassical theory that says the prices of commodities is determined by the quantity of money in circulation. If we can increase the quantity of money in circulation then we should be able to raise prices — a little, as most economists expect, or a shitload, according to the fears of many from the Austrian school.
The idea of how money works is wrong and Bernanke admitted as much yesterday. However, the failure of neoclassical theory of price on display will never be acknowledged openly; no more than Friedman, cofounder of the monetarist school, ever admitted he was wrong about gold becoming a base metal.