Rates go up again down here

This time last month I was trying out the mobile office concept up the coast (see blog). The experiment was a success but the blog I wrote that day coincided with the decision of the Reserve Bank (RBA) to hike short-term interest rates again, which I considered to be a mistake. Exactly, one month later, the RBA is at it again however I am in Newcastle and there is no surf! The RBA announced today, quite predictably, that the policy rate will rise by 0.25 per cent which will push mortgage rates above 7 per cent. Our greedy private banks get another free ride out of this and the decision confirms that the crisis has not really changed the neo-liberal economic policy dominance. Inflation targeting which uses labour underutilisation as a policy weapon and fiscal surpluses which further drag the economy down – are well and truly entrenched. Spare the thought.

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Lending is capital- not reserve-constrained

Today I have been reading up on the new proposals from the Basel Committee to tighten the capital requirements and introduce new liquidity rules as a further strengthening of the regulatory framework on banks. There is a mountain of literature to get through on all of this. But I came across two divergent views on the new proposals. Some commentators are arguing that these requirements hinder the banks’ ability to create credit and hence put a regulative drag on growth. If they are tightened then growth will be lower than otherwise. The other view expressed by a noted “progressive” economist disputed this view but then got confused in a mainstream macroeconomics labyrinth. It brought home the fact that people often confuse capital adequacy requirements and reserve requirements.

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Saturday Quiz – April 3, 2010 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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When you’ve got friends like this … Part 3

Today is a continuation of the theme developed in these past blogs – The enemies from within and When you’ve got friends like this … Part 1 and When you’ve got friends like this … Part 2 – which focuses on how limiting the so-called progressive policy input has become. One could characterise it as submissive and defeatist. But the main thing I find problematic is that its compliance is based on faulty understandings of the way the monetary system operates and the opportunities that a sovereign government has to advance well-being. Progressives today seem to be falling for the myth that the financial markets are now the de facto governments of our nations and what they want they should get. It becomes a self-reinforcing perspective and will only deepen the malaise facing the world.

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Robin Hood was a thief not a saviour

I quite liked Robin Hood on TV when I was young. After each episode, there were famous sword duals in backyards, with usually some oppressive older brother playing the role of the sheriff and the youngest least defenceless kids were “his men”. The rest of us were the outlaws and we hid in bushes and sharpened dangerous bits of wood and fired them from powerful home made bows at the oppressors. Mothers had first-aid kits constantly in use. Neighbourhood girls were usually attracted to the outlaws which was always a useful by-product that the sheriff and his “men” seemed to overlook, although most of the “men” were too young to gauge the significance of this. Yes, 1960s suburban Australia. Anyway, Robin is back in town but this time some do-gooders are invoking his name to solve the problems of the world. However, none of their “solutions” are viable and are based on faulty understandings of the way monetary systems operate.

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Operation twist – then and now

A number of readers have asked me to clarify what I mean when I say that the central bank can control the yield curve at all maturities. This came up again when Marshall Auerback commented that the 1961 Operation Twist exercise in the US provides a model for central bank policy options. In 1961, the US Federal Reserve attempted to flatten the yield curve to bring down long-term rates for an economy that was mired in recession, yet at the same time, push short-term rates up to deal with a balance of payments crisis. The fixed exchange rate system meant they were losing gold reserves and desired to stop that drain. It is an interesting story though as to what happened and whether it has implications for the present. As you will see, the fact is that the central bank can control the yield curve and eliminate the influence of the bond markets if it chooses. The only reason it doesn’t do this is ideological.

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Another economics department to close

Today I decided that there is another macroeconomics research unit that needs to be closed down. My decision was reached after I read the latest paper from the Bank of International Settlements – The future of public debt: prospects and implications – which confirms that the Monetary and Economic Department of that organisation is publishing deficit terrorist literature. The paper is so bad that I am sorry I read it. I may avoid BIS publications altogether in the future. But if I apply that reasoning I am going to be back to reading Stieg Larsson novels and there are only three of them and I have already read them!

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EMU posturing provides no durable solution

Today I have been looking over documents from the EMU which emerged from last week’s summit in Brussels. Within the plush environs of their meeting halls and probably over very sumptuous dinners the best they could come up with was a half-baked plan to stop the daily headlines which have been indicating impending Greek default. Such a default would damage the Eurozone monetary system and probably show the way for other nations, which are being similarly bullied by the EU bosses into impoverishing their nations. Given some reporting today they may have succeeded … in stopping the headlines … for the moment. But the approach of the EMU leaders will do nothing to address the fundamental structural flaws in the their whole system. With the prospect of an extended period of austerity throughout the zone, they are really just making it more certain that the next major global downturn sinks them for good. That is, if social instability doesn’t do it beforehand.

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Saturday Quiz – March 27, 2010 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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