Phelps, Lucas, Selten, Stiglitz, and Samuelson

I missed this when it came out last Wednesday, so thanks for the email:

• Edmund S. Phelps: What Has Gone Wrong up until Now more ...
• Robert E. Lucas: The Recession Is the More Immediate Problem more ...
• Reinhard Selten: Regulation of the Financial Market Is Important more ...
• Joseph E. Stiglitz: A Global Crisis, Made in America more...
• Paul A. Samuelson: The Dynamic Moving Center more ...

Lucas says pretty much what I said here about the need to regulate the shadow banking sector (though I only gave past regulation credit for 50 years of stability, he says it was 60):

In a financial crisis things happen fast... The responsibility of the Federal Reserve in this situation is to provide more cash reserves, and in that sense they are doing their job. Total reserves were $47 billion on Sept. 10, $180 billion on Oct. 8 and $329 billion on Oct. 22. This is good central banking.

Should we be concerned that people will just hold on to the new reserves and continue to reduce spending? Some of that is surely happening, but more reserves can always be added.

Should we be concerned about inflation? Of course, always.

But right now the recession is the more immediate problem. If inflation resumes, reserves can be taken out as quickly as they were added. This is a classic lender-of-last-resort situation and it is important to maintain focus.

In my view, these are the most important considerations for US policy today. I think if the current Federal Reserve lending policies are continued aggressively our chances of avoiding a recession larger than that of 1982 are very good. At this point, I think this is the best that can be hoped for and it is a lot better than a replay of the 1930s.

The regulatory structure that permitted these events to occur will have to be redesigned, but this is not a job that needs to be done this week nor can it be done well in time to affect the current crisis.

The regulatory problem that needs to be solved is roughly this: The public needs a conveniently provided medium of exchange that is free of default risk or "bank runs." The best way to achieve this would be to have a competitive banking system with government-insured deposits.

But this can only work if the assets held by these banks are tightly regulated. If such an equilibrium could be reached, it would still be possible for an institution outside this regulated system to offer deposits that are only slightly more risky but that also pay a higher return than deposits at the regulated banks. Some consumers and firms will find this attractive and switch their deposits. But if everyone does, the regulations will no longer protect anyone. The regulatory structure designed in the 1930s seemed to solve this problem for 60 years, but something else will be needed for the next 60.

So money isn't neutral? There's a Phillip's curve after all? Ah.

Samuelson says that if "America turns protectionist, blame past Republican deregulating" as he dismisses both sides of the political divide and declares himself a raging centrist:

Based on my observations of economic history, both short run and long run, I believe that there is no satisfactory alternative to market systems as a way of organizing both economically poor and economically rich populations.

However, using markets is not the same thing as unregulated capitalism so beloved by libertarians. Such systems cannot regulate themselves, either micro-economically or macro-economically. Wherever tried they systematically breed intolerable inequalities. And instead of such inequality being the necessary price to encourage dynamic progress via technological and managerial innovations, it instead breeds dysfunctional shortfalls in what economists call "total factor productivity."

Convincing proof of these points can be found in the deterioration in the US from 2001 to 2008. As CEO pay rose respective to median employee pay -- from a more normal 40 to 1 ratio up to and beyond 400 to 1 -- industrial progress deteriorated rather than accelerated.

In consequence, my view is incurably centrist. ... Libertarians are not just bad emotional cripples. They are also bad advice givers. I refer of course to the views of both Milton Friedman and Friedrich Hayek. The “serfdom” they warn against is not that of Genghis Khan or Lenin-Stalin-Mao or Hitler-Mussolini. Rather, they warn against the centrist states of the modern world. Think only of Switzerland, Britain, the US, the Scandinavian countries, and the Pacific Rim. Why do citizenries there report high indexes of “happiness” and enjoy broad freedoms of speech and belief?

President George W. Bush will figure in the history books as the worst president in the 234 years of US history. One of his inevitable legacies will be, among other things, the danger in 2009-2014 of a US majority that swings leftward far past center. If America turns protectionist, blame past Republican deregulating -- a fine instance of the Law of the Unintended Consequences.

Yes, public policy should regulate (rationally regulate) corporate life and should work to stabilize the macro economy. Yes, future fiscal systems can in a limited degree reduce the more glaring evils of inequality. However, a centrist system can do measurable harm if it acts too strongly to reduce inequality. My goal is the Limited Centrist State.

I am not a centrist because I can’t make up my mind about the Right and the Left. It is because each of those has proved itself to be so non-optimal that rationality and experience move me toward the dynamic moving center.

Comments

[mmckinl]

"Optimal" ? ? ? ? .... How about sustainable ? A new theory of economic and monetary policy is needed. Consumption for the sake of consumption and calling it a 'good" outcome has been met head on by the deterioration of the entire planet

Karl Marx, Milton Friedman, John Maynard Keyes, John Kenneth Galbraith, Joseph Stiglitz and Arthur Laffer all have a fatal flaw in their analysis... They are all what are now called Cornucopians, that is, their theories all rely on unlimited resources and energy while failing to quantify pollution and global warming (unmeasurable externalities).

And because they fail to recognize that the earth is finite they rely on a monetary system designed in the age of colonies to exploit natural resources ad infinitum. This monetary system is fractional reserve banking and survives only through geometric resource extraction and pollution.

What we know today is that the world is finite and that to survive as a species on this planet our numbers will have to be reduced and reduced dramatically.

Enabling and facilitating a sustainable economy will require a new economic and monetary system revolving around a diminishing population and diminishing production, results impossible to achieve using what I call "Archaic" Economics and Monetary Policies without catastrophic results.

New theories of economics and monetary policy must be evolved and implemented to reflect our new paradigm of reality. The finite world.

[a]

" If America turns protectionist, blame past Republican deregulating..."

What? The Republicans did something right (although they didn't intend to...)?

[calmo]

A sparkling post mmckini, until I stumbled on that pair of dimes near the end, (I'm betting your idiosyncrasy thing is "sustainable".) whence it became "shining post".
Do you figure that nationalism gets in the way on this promising and finite recognizing, possibly moral ("good") and just (post-"fractional reserve banking") recognizing...or more starkly, is it going to be a catalyst in "reducing our numbers and reducing our numbers drastically"?

[Bruce Wilder]

Great stuff, but I can't help noticing the URL

www.spiegel.de

Not Fox, of course. Not the New York Times, which hosts the likes of Tom Friedman and William Kristol. Yuck!

Not the Washington Post or the Wall St. Journal. Never the Wall St. Journal.

Not the Los Angeles Times, which publishes the execrable Jonah Goldberg.

Not CNN, or MSNBC, or ABC, NBC, CBS.

American public discourse is rotten. If we're lucky, the Sunday morning public affairs shows have "a" Democrat or a journalist playing a liberal -- once in a great while there's a Krugman to correct George Will's misinformation. But, mostly we treated to endless, mindless tripe.

Thanks for the post, though. The liberal blogosphere may save the world, yet.

[hari]

Bruce - I mentioned it and reproduced Samuelson's stuff earlier but no one took notice - including MT.

Spiegel does some serious and objective commentary in English! You shld read their *version* of Geramn Fin Min speech at G-20 Summit - its very entertaining indeed.

[Patricia Shannon]

mmckinl, true
If we don't reduce our numbers voluntarily, nature will do it for us, one way or another. In fact, it is already happening.

[Mark Thoma]

I have not been able to keep up with comments lately due to other time commitments (I haven't even scanned for spam regularly - I've been lucky just to get posts up). I can only do this once my real job is done.

To bring something to my attention, email is better, but sometimes even that gets to be overwhelming and I reluctantly machine gun through them before they get too stale (apologies, I do try, but there are days when it is not possible to answer every one - and I always feel guilty that I can't get to them). I try to keep up with comments, and mostly I do, but I can't always read every one.

[craig tindale]

centrally planned consumption is not different to centrally planned production

as an aside

fascinating paper written in prison by Martin Armstrong

http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf

a surprising number of solid points if you ignore the ravings

[Meh]

I know it's petty, but it annoys me that Samuelson lists all the reasons not to be a Glibertarian in detail and then just states "but you can't go too far in the other direction, or it will be baaaaad" and declares himself a centrist, without really giving much hint of what that means.

(Yes, I realise he has limited space, that's why I admit it may be petty.)

Still, it annoys me because it seems to me a way of him avoiding facing up to the fact that he's written a lot of newspaper columns in the WaPo that largely didn't support anything truly centrist, but hewed right most of the time...

[ken melvin]

I'm w/ Bruce in re our mediums (and the current/worst ever administration). It pleases me to see the likes of Pelosi (for example) surrounded by economic heavy weights. At least dems know to go with best thinking.

[dale]

Meh,
Your confusing Paul with Robert (no relation) Samuelson.
Paul is the respected professor of economics. Robert the WaPo opinion writer.

[calmo]

"different to" is different craig...you challenging me for the Tomlin Thrown?
Ok, I shall visit the link, but only this once...
77page essay? explaining the entire world economy, the financial cycles, how we should throw Marxism out, and the 9 years of imprisonment?

Sorry, he's got it so right so far that I would B wasting my time looking for mistakes. I need a few easily identifiable mistakes, you?

[Mark]

I'm not defending Bush by any means, but anyone saying he'll go down as the worst POTUS ever clearly doesn't know their history. People may really dislike him right now, but he's hardly the worst ever. After all, he wasn't impeached, nor did he commit purjery while in office or attempt to steal the opposing party's proprietary information, etc. As evidence, I'd recommend reading William Bennett's "America" books.

[Michael Turner]

I don't know if I'm down with Paul Samuelson on Dubya's historical ranking, but I DO know how I'd rank two presidents if I had the following choices

(1) a president who committed perjury, was impeached, engaged in spying on political opponents, but who left the economy in good shape and kept the U.S out of pointless wars

versus

(2) a president who lied about the reasons for going into what turned out to be a pointless war, but didn't testify under oath about it so couldn't have committed perjury, hence wasn't impeached; and who left the economy a smoking ruin.

[RW]

I am sympathetic to Paul Samuelson's -- not to be confused with the frequently rather vile Robert Samuelson -- "dynamic center" but confess that I increasingly look and hope for something orthogonal to that old line from left to right; truly these tired old debates grow wearisome ...but perhaps a period of genuine pragmatism will provide some anodyne, assuming we get it.

As far as the past eight years go it seems highly likely, when future historians are polled, that our 43rd president, George W. Bush, will be ranked at the very bottom along with Franklin Pierce, Warren G. Harding and James Buchanan. Based on what I have heard via academic channels I would guess this is pretty much baked into the cake; e.g., when better people than you correct your errors it does not absolve you of those errors.

However I am inclined to doubt this will matter much to a narcissist like Number 43 even while he lives and am reasonably certain he won't give a fig after he is dead. But then I am fairly certain the hundreds of thousands his febrile masculinist fantasies caused to precede him in death will remain largely indifferent as well; like the oriental tyrants of yore, jolly old Dubya has populated his funeral pyre so copiously with human flesh that what little pain he may feel must surely be assuaged.

[carpingdemon]

mmckinl

How do you see us being "reduced and reduced dramatically" absent "catastrophe"?

[Greg Ransom]

Paul Samuelson is lying about Hayek again.

I remain convinced that Samuelson has never read a word of Hayek.

It's amazing how economists won't shut up about economists they know almost nothing about.

(Note well -- Hayek's _The Road to Serfdom_ makes room for a wide and deep safety net, including socialized medicine. Hayek's _The Constitution of Liberty_ also makes room for a wide and strong government role. I've found Samuelson is talking out of his ass, almost any time he's talking about Hayek.)

>>my view is incurably centrist. That should be the US goal for 2009 and onward. And I nominate it as the target goal for countries big and small. Libertarians are not just bad emotional cripples. They are also bad advice givers. I refer of course to the views of both Milton Friedman and Friedrich Hayek. The “serfdom” they warn against is not that of Genghis Khan or Lenin-Stalin-Mao or Hitler-Mussolini. Rather, they warn against the centrist states of the modern world. Think only of Switzerland, Britain, the US, the Scandinavian countries, and the Pacific Rim. Why do citizenries there report high indexes of “happiness” and enjoy broad freedoms of speech and belief?<<

[calmo]

Er Greg...speaking of reading Hayek, did you get that note from dale upthread?: dale says...

Meh,
Your confusing Paul with Robert (no relation) Samuelson.
Paul is the respected professor of economics. Robert the WaPo opinion writer fledgling comic.

[mmckinl]

Do you figure that nationalism gets in the way on this promising and finite recognizing, possibly moral ("good") and just (post-"fractional reserve banking") recognizing...or more starkly, is it going to be a catalyst in "reducing our numbers and reducing our numbers drastically"?

Calmo ...

I think modern man's view that growth is good unto itself, that growth automatically means prosperity and that "technology" will solve the attendant problems of the means of growth which are an unsustainable usage of raw materials ( the world now uses 1.5 times more resources than the earth is able to produce) and the consequential environmental destruction along with the geometric pollution increase in pollution.

Fractional Reserve banking necessarily causes crisis as without growth it causes a leveraged contraction, devastating the economy and destabilizing society. Politicians then look for enemies to blame after their pyramid of conjectures comes crashing down.

For an orderly and nonviolent retracement of humanity to within sustainable boundaries we need an economy that is based on regenerable resources and a monetary policy that will serve that end.

[mmckinl]

Patricia Shannon says... true ... If we don't reduce our numbers voluntarily, nature will do it for us, one way or another.

I worry that it will indeed that mankind itself will reduce our numbers ... through conflict and humanitarian neglect. Nothing new really ... but the scale will be multiples greater than any depopulation by war or starvation to date.

[mmckinl]

carpingdemon says...

How do you see us being "reduced and reduced dramatically" absent "catastrophe"?

I was hoping for suggestions. My hope is to limit the carnage. I think there is little hope to completely avoid massive starvation. Just avoiding war would be an accomplishment. The first step is to recognize that the economic and monetary systems we use guarantee the worst of outcomes.

[reason]

I think fractional reserve banking is the wrong enemy. Hint fraction of what? The problem is the idea of creating money as ever expanding debt, related but not exactly the same thing!

[reason]

P.S. I think there something rotten in the heart of the (world) financial system. I don't think though the solution is as simple as banning fractional reserve banking (and I'm not sure that is even possible).

[reason]

Hat tip to anarcho for this very good link:
http://anarchism.pageabode.com/afaq/secC8.html

[Luis Enrique]

Hi reason - what do you mean by "creating money as ever expanding debt"?

[macquechoux]

Bruce said,

" -- once in a great while there's a Krugman to correct George Will's misinformation."

I suggest you read Don Boudreaux's analysis over at Cafe Hayek.

http://cafehayek.typepad.com/hayek/2008/11/will-vs-krugman.html

I'll give you a quick summary, once in a while there is a Boudreaux to correct Krugman's misinformation.

[chuck roast]

At the risk of being a non-quantitative; supply/demand-curve eschewing; solvency/liquidity dismissing; neo-Keynesian/Hayek ignoring; fractional reserve banking blinded; micro-macro intolerant Luddite (I loved the Luddites, man!), I am always comforted by a return to the roots – Trade and Markets in Early Empires. This from the New School’s website reminds me why our continued high-level discussions on advanced capitalism as mass anti-social psychosis are so fascinating:

“Polanyi's central thesis is well known among sociologists and economic historians: namely, that capitalism is a historical anomaly because while previous economic arrangements were "embedded" in social relations, in capitalism, the situations were reversed - social relations were defined by economic relations. In Polanyi's view, in the sweep of human history, rules of reciprocity, redistribution and communal obligations were far more frequent than market relations. However, not only did capitalism not exhibit them, its ascendancy actually destroyed them irreversibly. The "great transformation" of the industrial revolution was to completely replace all modes of interaction with the other.”

[Standard]

Phelps..."In buying mortgages for packaging in mortgage-backed securities, the banks exported to the rest of the world a profusion of assets that were overvalued by the financial companies that purchased them..."

There is the problem, from the foreign perspective. The US system brokered bad loans, and pushed them on the rest of the world. The rest of the world wants assurance that this will not happen again, but no effort is being made to tighten US lending standards to conform with the world standard. As a result, the world will only accept treasuries, and GSE guaranteed loans.

Meanwhile, policy is trying to loosen current standards to boost the economy. Every time standards loosen more, less interest is shown in buying the securitized loans by foreign nationals. More and more private debt is being guaranteed so lending doesn't completely stop. This is slowly causing a credibility gap for treasury. Foreign nationals are concentrating on short term debt only. By flocking to short treasuries, the world is signaling that it has no intention of staying in treasuries, but is only moving to them short term until they figure out what to do.

[calmo]

Non-quant chuck
Roasts me, you?
Ok, only the first line
or 2, before total
Incineration promo'd with This from the New somewhat Improved somewhat demolished Old School’s website reminds me why our continued high-level and high-powered ...rifles discussions on advanced and retarded capitalism as mass anti-social psychosis are so fascinating stunning:
I am unable to see this “Polanyi's central thesis is well known among sociologists and economic historians: namely, that capitalism is a historical anomaly because while previous economic arrangements were "embedded" in social relations, in capitalism, the situations were reversed - social relations were defined by economic relations. In Polanyi's view, in the sweep of human history, rules of reciprocity, redistribution and communal obligations were far more frequent than market relations. However, not only did capitalism not exhibit them, its ascendancy actually destroyed them irreversibly. The "great transformation" of the industrial revolution was to completely replace all modes of interaction with the other.” for the smoke...embedded irreversibly therein.

[Deposit]

Lucas..."The regulatory problem that needs to be solved is roughly this: The public needs a conveniently provided medium of exchange that is free of default risk or "bank runs." The best way to achieve this would be to have a competitive banking system with government-insured deposits."

Except that insured US deposits are hopelessly inadequate to meet domestic credit demand. The insured deposit system is thus more or less useless, and getting more useless each day as policy frantically tries to discourage domestic saving. This means foreign loans to US citizens are needed to keep credit flowing, and foreign nationals don't get FDIC insurance on their securitized bonds.

[Town]

"We must ensure that speculative investments are secured by sufficient equity."

By this he includes mortgages. 20% down is the world standard, except in the US. Yet the US must effectively borrow its mortgages from the rest of the world. Is it any wonder that GSE guaranteed mortgages are now the only game in town?

[Patrick]

reason - what do you suggest as an alternative? Gold? So you prefer monetary policy to be hostage to miners and the vagueries of geology? Hardly an improvement. Gold/silver standards where abandoned for a reason.

I'm sympathetic to the desire to underpin reality with physical laws, but the gold standard is just as much a construct of the human mind as fiat currency, maybe even more so. What intrinsic value does gold have, really? It's used in a few industrial processes and for adornments. If there where suddenly no appreciable amount of gold on earth, it might be a little inconvenient, but humanity would not suffer a whole lot.

That's not to say that fiat currencies are without problems. They obviously are. But I'd rather look for new ways to solve those problems than to go back to failed systems of the past.

[Holds]

Stiglitz..."The dollar-based global reserve system is already fraying -- the dollar has proven not to be a good store of value...We need a global reserve system, for a global financial system. Keynes wrote about this at the time of the last big downturn..."

Sadly, this is the case. The dollar has been systematically debased to the point where the world is losing confidence in it. Even many US citizens are desperate to find something that holds its value long term. A world currency that holds its value over time would find widespread support among the savers of the world.

[Patrick]

Town: The bubble was so inflated in some place that 20% down at the height would today be 20% underwater.

The problem was the bubble. And the bubble, by definition, cannot be explained in terms of fundamentals.

says...

Samuelson..."I am not a centrist because I can’t make up my mind about the Right and the Left. It is because each of those has proved itself to be so non-optimal..."

Interesting. Many Euro nations divide power among several political parties. The US winner takes all system results in power being shared between 2 parties. This accounts for some of the differences between Euro and US policies.

[Town]

"The bubble was so inflated in some place that 20% down at the height would today be 20% underwater."

Yes, that's true. However, world experience has shown that people are reluctant to give up their 20% down payment, and tend to keep making home payments regardless of being under water. No/low money down loans encourage people to mail back the keys with even a 2 to 3 per cent drop.

[c roast III esq.]

Calmo…

I’m still trying to get my head around Potlach. The old timey gamesters up there in the Northwest must have been smokin’ big old pipes because they were somehow convinced of the cultural significance of giving away all their blankets and shields and stuff in return for neighborly esteem (of course the alternative may have been a big-old axe in the head). In the old-timey photos, these folks look happy and quite well feed. Of course, this was all before they were asked to receive their first-holy-communion and put a dollar in the basket. Maybe it was the basket-thing that greatly transformed Potlach.

Seems like big-olde Hammerin’ Hank is practicing a form of Neo-Potlach with the country-club brethren. And you know, you can’t even find a good axe when you need one anymore. Anyway, next time I’m out in a foursome with Hank, I’m givin’ him the putt – that’s reciprocity!

Best;
Roast

[Bruce Wilder]

Patrick: "And the bubble, by definition, cannot be explained in terms of fundamentals."

Sez u.

I say, there was an orgy of fraudulent and decadent lending practice driving the whole thing. And, that's fundamental.

[CathyG]

"I suggest you read Don Boudreaux's analysis over at Cafe Hayek."

I suggest you listen to the Krugman-Will exchange. I didn't hear Krugman disputing Will's statement that investment dropped during the Depression - he disputed the reason for the drop. He said with 20% unemployment and factories lying idle everywhere, no one wanted to invest in additional capacity.

This would be a logical take on the conditions of the time and has really nothing to do with who was president.

[Patrick]

Bruce:

"Sez u"

No no, my petulant friend.

"We are asking what caused the housing bubble, and, by definition, the cause cannot be explained by changes in an underlying market fundamental. I don't mean that we can't point to, say, a rumor that led to a rapid increase in the price of some good as speculators rush in, just that bubbles - by definition - are divorced from market fundamentals."

http://economistsview.typepad.com/economistsview/2008/10/what-caused-the.html

[macquechoux]

KathyG actually it was Russell Roberts and he had nothing to say about who was president at the time. Did you actually read the post? Did you read Boudreaux's comment as well as Alex Tabarrok's?

[Steven Earl Salmony]

Perhaps we can all agree that we live in a round and bounded {not flat and limitless} planetary home, one which is rapidly filling up with people and peoples’ products, including millions upon millions of gas guzzlers, other polluting machines and thousands upon thousands of smokestack factories. This is to simply say, absolute global human population numbers are projected to reach 9+ billion people and the leviathan-like global economy is expected to grow in a near-exponential way by many trillions of dollars in the next 42 years......provided we keep choosing to keep doing what we are doing now.

Please consider the following proposal as an alternative to what appears to be a soon to become unsustainable business-as-usual course of action. This idea for change results from the realization that we have to protect both the Earth’s ecology and the human community’s manmade economy.

First, the Earth and its environs are to be spared further wanton dissipation and reckless degradation; and second, the global economy needs to be rescued from becoming patently unsustainable in the relatively small, evidently finite and noticeably frangible world we are blessed to inhabit.

What could be accomplished if the human family determined to provide “stewardship incentives” to people who choose to protect the Earth and its environs, the same kind of incentives that are now routinely handed out in huge annual payouts to people who are supposed to be growing the global economy….. something the economic powerbrokers are clearly not doing now?

Please note that billions of dollars are being proposed in financial bailouts for companies building unsustainable products and factories and that year-end bonuses are being directed to “wonder boys” in investment houses and banks who have been uneconomically growing humanity’s global economy by collusively creating dodgy financial instruments (e.g., credit default swaps) and fraudulent business models (e.g., Ponzi schemes). These self-proclaimed Masters of the Universe have ignored requirements of practical reality and turned a great economic system into a paltry gambling casino, making themselves the primary beneficiaries of pseudo-business activities along the way. In the light of such avaricious risk-taking and conspicuous hoarding behavior, they can no longer be called by any name other than “thieves of the highest order”.

Perhaps reasonable and sensible people can agree that the greed of arrogant, self-serving tycoons and bankstas no longer is to be condoned, much less extolled as somehow good, and that the preservation of Earth and its environs needs to given some immediate attention in terms of funding substantial stewardship incentives equal in size to the financial rewards now directed to the economic powerbrokers.

By redirecting wealth, my generation of elders can begin to put the global economy on a sustainable, more reality-based foundation as well as to more reasonably and sensibly fulfill our responsibilities as good enough stewards of the Earth.

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176