Wednesday, April 1, 2015

The Road Ahead, "Post" Bernanke

Ben Bernanke is blogging. Great! Or, might one say...argh, really? First, apologies to readers that I left some recent references and responses to Bernanke off this week's Market Monetarist links. There's a bit of uncertainty about the initial "aftermath", which is stirring a wide variety of reactions and not just to Bernanke by any means. Somewhat understandably, Bernanke is backing the Fed in their desire to "normalize" economic conditions. Just the same, his backing comes with predictable claims that the economy is once again a success story. As far as this blogger is concerned, that story simply is not true.

One reason I'm concerned about his early postings, is the fact these arguments for normalization sow further confusion - much of which shouldn't have to be necessary. Too many efforts for a better economic understanding could still be lost. Especially since some factions either didn't consider real reform necessary, or else believed it was impossible to achieve. In the meantime, I don't want to react too strongly to anyone who appears "convinced" by Bernanke's reasoning. One thing is for certain - proving him "wrong" (with near term negative economic fallout) is no one's gain. Instead I'll look for ways to move ahead with what has made more sense all along.

The main problem in all this? The Fed is still not willing to own up to that all too recent mistake, of dropping aggregate spending capacity like a stone in reaction to rising oil prices. That initial blunder - which was never corrected or accounted for - has left marketplace results which are anything but normal.

It's difficult to parse the extent to which (remaining) problems are due to Bernanke's influence while he was in charge. Of course, Fed minutes in the onset of the recession provide important clues just how cognizant he was of what he was doing. In the meantime, no one among the FOMC has admitted to - or explained - the biggest monetary mistake of all. That refusal could make the Fed more fragile as an institution than they realize. However - in their defense - I admit their present desire to "move on" is partly due to an overly confident governmental stance. Washington also believes that economic recovery is complete - at least so far as anyone is willing to define success in the present.

Another aspect of the entire dilemma: who to identify with in terms of public discourse, given the story lines which don't really intersect? In that vein, I can even find something to appreciate in the response of Larry Summers to a recent Bernanke post. From the finale:
I would like nothing better to be wrong as Alvin Hanson was with respect to secular stagnation. It may be that growth will soon take hold in the industrial world and allow interest rates and financial conditions to normalize...But throughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now. So, I continue to urge that it is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment. If that is the case, monetary policy will not be able to normalize...Macroeconomists can contribute by moving beyond their traditional models of business cycles to contemplate the possibility of secular stagnation.
Hey, why didn't he talk about meaningful action in the first place?? In a nutshell it comes down to this. When Larry Summers first advanced his stagnation argument, I initially felt he presented stagnation not as a problem to be solved, but as something which could not be overcome. Indeed, one got the impression he was representing economic decline as practically "inevitable". If anyone needed proof, this turned out to be the "takeaway" across ideological lines! In particular, Summer's initial stagnation arguments contributed to a "do-nothing" approach on the part of both conservatives and progressives, who both presented moral arguments towards that end.

Did Summers realize how literally his earlier stagnation arguments would be taken? As luck would have it, his reasoning could just be the "lesser evil" in the present outcome. How so? The "New Optimists" - and also the Fed - are ready to heed an "all clear" message. So how does this circumstance matter for the New Optimist? If one didn't believe in stagnation in the first place - i.e. if stagnation isn't "real", then...hey, cool, everything is fine! Proceed accordingly...

Also: as someone who studies economics from the sidelines, I have struggled with the language and thought processes of the savings versus investment arguments. Yet there is a version in my mind which continues to make sense. Everyone needs investments which actually make a difference for the trajectory of their lives. And right now, the marketplace is seemingly hell bent on refusing to allow room for incremental growth. It's be the strongest or get cast aside, and please pay attention because today's youth have received this message loud and clear. Wait too long and they will pass it to the next generation.

A lot of economic problems come down to sticky markets. But that seemingly puts the onus on everyone to change, which is not really possible - at least in the sense of everyone being willing to do so. So why not seek change and production reform through decentralization and experimentation, for targeted future growth? It's not time to declare economic normal. It's time to try something new.

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