Reinhart and Rogoff: “Shifting Mandates: The Federal Reserve’s First Centennial”

This post was written by Philip Lane

New paper here.

24 Responses to “Reinhart and Rogoff: “Shifting Mandates: The Federal Reserve’s First Centennial””

  1. paul quigley Says:

    From the paper:

    ‘Years of unambiguous easing include 1933 and 1934 after the abandonment of the gold standard, 1983 (the Fed actually began lowering rates in August 1982) and the early 1990s. Recent years do not figure in this list.’

    Wonder why ?

  2. The Dork of Cork. Says:

    Excellent & in my opinion funny talk from last year.

    “The models Central banks use have no banks……………”

  3. The Dork of Cork. Says:

    Also go to the question and answer section at 7.00 m

    Brutally simple & cutting logic without any sniff of horseshit that seems to emanate from the other speakers

    “Money is not like a commodity
    From the supply side - You can produce it in limitless quantities

    From the demand side - when I have my 5 spuds I don’t want a sixth…… however”

    The look on the face of the BoE Spiv after he cuts through the fecal matter of the debate starting at 36.20 is priceless.

    “Credit is what credit does , you cannot speak of liquidity as a thing , liquidity is a relation”

    37.40 - Moderator
    “We would not have talked like that in Cambridge ………….have a nice lunch”

  4. Gavin Kostick Says:

    Thanks for posting the paper.

    Relevant question, I think, to the Dork.

    ‘“The models Central banks use have no banks……………”’

    Here is the ECB’s Smets-Wouters model

    And here is a paper on the ECB’s new Multi Country Model

    (I read the non-technical bits)

    Is this the kind of thing you have in mind?

    I’ve been reading a bit on economic models and the debates ranging from ‘worse than useless’ to ‘generally a given’. Karl Whelan has them at the centre of the UCD MA in Macroeconomics.

    What thoughts do contributors have in this area and ‘rational expectations’ in general?

  5. The Dork of Cork. Says:

    “The model features three types of economic agents: households, firms and the central bank……………………”

    I rest my case.

    We are obviously dealing with a crooked money cartel as nobody can be that stupid.
    They seem to employ economists whose function is to weave a beautiful but useless tapestry.

    This is how the real world works
    The banks create credit money in governments unit of account and also bend the ear of government for various tax / law concessions.

    The assets utility is not important be it mortgages or fiscal debt……
    As Riche boy said its all about the cash flow - or as I put it - farming the value hidden within fiat.

  6. The Dork of Cork. Says:

    In Europe of course they take the process a step further.

    The money is a banking unit of account.

    A market state nightmare of useless assets.

  7. The Dork of Cork. Says:

    Forbes thought of the day………..

    The end of European civilization.

    The banks can now officially farm the entire European hinterland rather then engage in messy nation state politics.

    Less redundancy = more Efficiency = more growth ?

    They continue to drive resources to the top of the food chain - even when the ecosystem is collapsing.

  8. paul quigley Says:

    @ Gavin

    ‘At the center of Bourdieu’s sociological work is a logic of practice that emphasizes the importance of the body and practices within the social world. Against the intellectualist tradition, Bourdieu stressed that mechanisms of social domination and reproduction were primarily focused on bodily know-how and competent practices in the social world.

    Bourdieu fiercely opposed Rational Choice Theory as grounded in a misunderstanding of how social agents operate. Social agents do not, according to Bourdieu, continuously calculate according to explicit rational and economic criteria. Rather, social agents operate according to an implicit practical logic—a practical sense—and bodily dispositions. Social agents act according to their “feel for the game” (the “feel” being, roughly, habitus, and the “game” being the field)’

  9. paul quigley Says:

    For a complementary social psychological analysis. It’s a question of seeing the limits to the Enlightenment, wonderful as it was/is.

  10. paul quigley Says:

    @ Dork

    Smashing. That was a mighty session at INET. All sorts of rare, and not so rare, economic tunes.

  11. The Dork of Cork. Says:

    Great link from the FT

    “And the other thing to note is this. In the BIS model, each currency-issuing nation has a public savings bank – government – and a public fractional reserve lending bank – the central bank. The fractional reserve lending bank acts as lender of last resort for the savings bank – hence debt monetization. And it is itself backed by government, because as a last resort government would use tax income to recapitalise the central bank. There are two massive assumptions underlying this: firstly, that central bank insolvency is never an issue because it can always meet its liabilities by creating money, and secondly, that populations can always be taxed sufficiently to meet all government liabilities including (if necessary) central bank recapitalisation. I don’t propose to discuss either here, though I have serious reservations in particular about unlimited taxation: people can only be taxed to the extent that they are willing and able to pay that tax. And the whole thing looks dangerously circular to me. I can’t help feeling that if the world is really so dependent on safe assets remaining safe there may be a need for a supra-national monetary backstop”

    Or perhaps, more accurately, welcome to the World Central Government. For if governments are banks, and are backstopped by banks, and exist primarily to serve banks and investors, then who is it who really runs this show?”

  12. The Dork of Cork. Says:

    Another Cracker.
    1995 -
    “One of the things I had to model was cash, and cash-like instruments. And as I did so, I became more and more concerned about the unreality of the entire financial system. I saw the house of cards forming – and I saw the abyss upon which it is built, the black hole from which it draws its energy. At the time, I didn’t know what was in the black hole. But now I do. That black hole, I know now, is the real economy……………

    Not only is finance a looking-glass world, it is a world of impossible contradictions. At the same time as unconventional monetary policies are raising prices to enable the black hole to continue to produce the amount of money the financial system needs, the fear of inflation drives fiscal actors to cut spending and raise taxes, reducing real incomes and seriously constraining activity in the real economy, resulting in price cuts in non-essential goods and a falling money supply. The arguments used by economists to justify such behaviour in a recessionary environment are among the most convoluted I have ever seen. It seems that the economics profession has an ivory tower all of its own, in which it develops theories such as “expansionary fiscal contraction” that have nothing to do with economic reality and everything to do with trying to resolve the distortions in our financial image of the economy.

    The house of cards is bigger and more fragile than it has ever been, and it draws more and more money from the black hole to keep it alive. But the black hole is shrinking”

  13. The Dork of Cork. Says:

    All economic activity is stopping on Europa so that the Asian systems activity can increase……

    Whats really happening ?

  14. OMF Says:

    What thoughts do contributors have in this area and ‘rational expectations’ in general?

    As a mathematician, most economic models I have come across are at best “sophomoric”(i.e. close inspection reveals they are full of holes), and at worst either fraudulent or just complete nonsense.

    I view economic modelling as the world’s premiere example of cargo cult science.

  15. Michael Hennigan - Finfacts Says:

    The paper has some interesting facts: “In 1913 when the US Federal Reserve was founded, prices were only about 20% higher than in 1775 and around 40% lower than in 1813, during the War of 1812.”

    The price falls after the Civil War hurt farmers and in 1896, the 36-year old William Jennings Bryan of Nebraska, captured the Democratic Party’s presidential nomination with his ‘Cross of Gold’ speech arguing for a bimetallic currency standard to help rural residents who had endured 3 decades of deflation. Silver mining was an important earner for western states such as Colorado and Nebraska and the government was already mandated to purchase silver for coinage.

    I wrote about the origins of the Fed in 2009:

    The Federal Reserve and the paranoid style in American Politics

    The most important chairman of the Federal Reserve in the past century, was Marriner Eccles in the period 1934-1948 - - a multimillionaire banker and industrialist from Utah. Being a Mormon, organised community aid was not socialism to him

    In the weeks before Roosevelt became president in early March 1933, Eccles was part of a group of 47 people invited to give testimony to the US Senate Finance Committee on the crisis. The banking system was collapsing and he realised that thrifty individualism was not the solution. He proposed deficit spending and programs for the unemployed.

    Roosevelt’s policy was to cut the regular federal budget by 25% in order to win support from Congress for emergency spending — in effect still aim to balance the budget.

    The New York Times lauded Roosevelt in 1933 for the “greatest retrenchment in (American) history.”

    The federal budget was less than 10% of GDP in 1933 but in a year domestic spending would be quintupled.

    Eccles had been an important adviser on the New Deal.

    “Yours is the only revolution on record,” John Kenneth Galbraith once wrote to Eccles, “that entered government by way of a central bank.”

  16. Michael Hennigan - Finfacts Says:

    Jekyll Island and the Creation of the Federal Reserve

  17. The Dork of Cork. Says:

    There is a great danger that the anti Fed thingy will be hijacked by the false libertarians of the Mises institute gold standard types……….

    The Anglos only use national credit like systems in extremis so as to make the extraction rate more sustainable but obviously its a slightly better then the eurozone which resides within the ninth circle.

    But people must understand that those Mises guys are twisted.
    Their words are poison.

  18. The Dork of Cork. Says:

    OK we did the Spain thingy ……whats next.

    Morocco here we come……………

    Anybody see a general pattern here ?

    Give them modern toys in exchange for debt……..

    When the country has lost all redundancy you pull the rug from under it.

    Its the Ceausescu gambit played over and over again.

    This is where Irish “austerity” is ending up.

    Its money without a political input.
    So therefore we don’t use money.
    We use capital tokens.

    The $ post 1922 was the first modern global (petro) currency.
    The Euro is their perfected abomination.

    Ask yourself why the core snake of the 70s did the wage deflation thingy………so that it could export oil inflation elsewhere…..i.e. to Ireland , Spain etc.
    These societies are now completely destroyed……….its time to move on to greener pastures.

    The dangers of now fully privatized money is seen all around us.

  19. The Dork of Cork. Says:

    So get this into your little heads lads………..

    Spain is collapsing simply because it cannot produce any national tokens to use its previous massive investments.

    Now France is leaving its southern neighbour which it shares a very long border with to rot in a debt stew while it engages in a manic effort to sell stuff to its former colonies in Africa…………

    Industrial co-localization…………..I like that.

    It produces nothing net.
    Its more labour extraction of value.
    The Euro is a expression of pure evil.

    The wastage of present intact resources to build more junk is simply fantastic.
    Because the Euro is a capital tokens rather then a money token it must build more and more stuff.

    It is like a Shark - it must keep swimming and hunting.
    If not it becomes organic rain for the various bottom feeders.

  20. The Dork of Cork. Says:

  21. DOCM Says:

    This blog link will be of interest.

    Courtesy Alphaville!

    It is somewhat surprising that it has taken this long for commentators to wake up to the fact that governments have become banks as this has been rather obvious for some time. Adalbert Winkler, for example, who seems to have considerable difficulty in getting his voice heard, has made the point by observing that both share the essential characteristic of “maturity transformation” in relation to financial assets.

    The “circular nature” of the arrangement between them has been equally obvious.

    This can hardly be described as a take-over of the former (governments, assumed to be good) by the latter (banks, assumed to be evil). The relationship is clearly symbiotic. The question is how to organise it to the general benefit of all concerned given that, by its very nature, it is in a constant state of unstable equilibrium (if that is not a contradiction in terms).

    As to the well-founded argument that the current system should be scrapped and replaced with another, the same argument could be made with regard to dominant positions of various systems, Microsoft being the best current example. The system has to continue not because it is the best but because it is the dominant sytsem in use.

  22. Gavin Kostick Says:

    @ DOCM

    That’s the same link as the Dork at 1.34am.

    ‘Governments as banks’: it certainly makes one think.

    I do not think though, that governments have become banks per se, but have bank-like qualities.

  23. DOCM Says:

    @ Gavin Kostick

    I do not think it is a question of either/or. It is rather a question of getting the economic fraternity to address something that appears to the general observer to be rather obvious. Neither do I think that there is any contradiction between government borrowing to promote investment and still having regard to the essential role that bond issuance - or, rather, roll over - evidently has with regard to the operation of the global economy generally. Borrowing to maintain consumption is another matter.

    Winkler is practically alone in high-lighting the symbiotic links between governments and banks (in a manner which underlines the utter silliness of the mantra of “breaking the vicious link” between them which European politicians are selling to a gullible public). The BIS paper seems finally to have brought the issue into the open (although that in relation to “safe assets” has been identified by Philip Lane and colleagues some considerable time ago).

    Looking back on 2012, it seems the unscripted comment by Draghi (in the European home of high finance, if I am not mistaken) that the “ECB would do whatever it takes and, believe me, it will be enough” will enter the history books as a watershed moment.

    The other development that seems to me to be of the utmost importance is that the “markets” seem to be returning to contributing to maintaining the unstable international financial equilibrium rather than undermining it now that governments appear to be getting an overall grip on the situation cf. this item on French bond rates falling below those of the UK from the Telegraph.

    There are also reports that Schaeuble is aiming for a balanced budget this year which one would assume, although I am no expert in this area, will reduce the volume of “safe assets” - as the need to issue bonds will be reduced - at a moment in time when they are most required. It seems that when Germany gets stuck in the wrong policy rut, it is well nigh impossible for the system to dislodge itself from it. Another glaring example is the negative impact of the “mini-jobs” distortion introduced by Schroeder which cannot but be having a dampening impact on consumption and growth in the domestic German economy. Amazingly, Osborne seems to be considering something similar.

    There are more and more hints from the CDU, however, that there will be a change in direction in the course of the coming election campaign, with the introduction of a statutory minimum wage also being on the agenda.

  24. DOCM Says:

    @ All


    The main conclusions are covered in an article by the author in El Pais.

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