Trends in European politics

Here are some interesting stories from The Economist:

1.  With each generation, Britain becomes more and more libertarian:

Young Britons are classical liberals: as well as prizing social freedom, they believe in low taxes, limited welfare and personal responsibility. In America they would be called libertarians.

More than two-thirds of people born before 1939 consider the welfare state “one of Britain’s proudest achievements”. Less than one-third of those born after 1979 say the same. According to the BSA, members of Generation Y are not just half as likely as older people to consider it the state’s responsibility to cover the costs of residential care in old age. They are also more likely to take such a hard-hearted view than were members of the famously jaded Generation X (born between 1966 and 1979) at the same stage of life.

“Every successive generation is less collectivist than the last,” says Ben Page of Ipsos MORI, a pollster. All age groups are becoming more socially and economically liberal. But the young are ahead of the general trend. They have a more sceptical view of state transfers, even allowing for the general shift in attitudes (see first chart).

Polling by YouGov shows that those aged 18 to 24 are also more likely than older people to consider social problems the responsibility of individuals rather than government. They are deficit hawks (see second chart). They care about the environment, but are also keen on commerce: more supportive of the privatisation of utilities, more likely to reject government attempts to ban branding on cigarette packets and more likely to agree that Tesco, Britain’s supermarket giant, “has only become so large by offering customers what they want”.

2.  Some argue that monetary policy “errors,” are intentional, as policymakers cater to various special interest groups.  I’ve never understood that argument.  If, as I claim, most academic economists are very misguided about monetary policy, and obviously have no axe to grind, why would we expect a bunch of government bureaucrats to do better?  Are government employees that much smarter than economists?

In any case, the conservatives at the Riksbank are about to drive their fellow conservatives out of power:

In the pair’s jousts, Mr Reinfeldt casts his rival as a political gamble, given the unanswered question of which other party the Social Democrats might draw into a putative government. But Mr Lofven has stronger ammunition: he refers to the government’s lacklustre economic results, and promises to tackle unemployment vigorously. “Nothing is more important than this,” he says.

Swedish unemployment is flat at 8.7%, as the economy struggles with faltering demand from the euro zone and a strong currency.

So much for self-interest.

3.  It’s natural to be a bit skeptical when you hear about a new right-wing party in Germany, but this one doesn’t sound bad at all:

WHEN a German newspaper in January headlined the success of populists across Europe and their absence in Germany, Frauke Petry thought: “We are here, but nobody sees us yet.” Two months later the Alternative für Deutschland (AfD) party, which calls for the euro to be broken up, started making news. These days its leaders (Ms Petry is one of a triumvirate) are on television talk-shows. Euroscepticism, or at least scepticism of the euro, has a voice. Germany’s Christian Democrats have for decades seen off all foes on the right. This is a worrying new one.

AfD is a strange group of rebels. It is a movement mainly of professors, not revolutionary students. Its policies have seemingly little in common with Eurosceptics elsewhere. Unlike Nigel Farage’s UK Independence Party, it wants to stay in the European Union. Unlike Geert Wilders’ Freedom Party in the Netherlands, its driving force is not resentment of Muslims and immigrants. Unlike Beppe Grillo’s Five Stars Movement in Italy, it does not seek to smash a corrupt political class. And unlike radicals of all stripes in France, Germany’s new sceptics embrace markets and liberalism. “They cannot call us crazy,” says Ms Petry.

4.  The curse of The Economist.  They put Abe on a cover story entitled “Is it a Bird?  Is it a plane?  No . . . It’s Japan!”  That was the May 18-24 edition.  The Nikkei peaked at 15,627 on May 22, and it’s now at 12,877, down 2750.

5.  And this made my head spin:

EUROPEANS like to blame America for their crisis.

Really?  At the risk of sounding like the Ugly American:

1.  Did we force them to create the euro?

2.  Did we tell the ECB to run a tight money policy?

3.  Did we cause the Irish and Spanish housing bubbles?

4.  Did we tell the Greek government to lie about the size of their debts.

It’s not just that America is innocent if my theory of the crisis is correct; I can’t think of ANY theory that would imply America is responsible for the euro-crisis.  Can you?

6.  And don’t you wish that you too could live in a post-ideological country?

SAINT GORAN’S hospital is one of the glories of the Swedish welfare state. It is also a laboratory for applying business principles to the public sector. The hospital is run by a private company, Capio, which in turn is run by a consortium of private-equity funds, including Nordic Capital and Apax Partners. The doctors and nurses are Capio employees, answerable to a boss and a board. Doctors talk enthusiastically about “the Toyota model of production” and “harnessing innovation” to cut costs.

Welcome to health care in post-ideological Sweden. From the patient’s point of view, St Goran’s is no different from any other public hospital. Treatment is free, after a nominal charge which is universal in Sweden. St Goran’s gets nearly all its money from the state. But behind the scenes it has led a revolution in the relationship between government and business. In the mid-1990s St Goran’s was slated for closure. Then, in 1999, the Stockholm County Council struck a deal with Capio to take over the day-to-day operation of the hospital. In 2006 Capio was taken over by a group of private-equity firms led by Nordic Capital. Stockholm County Council recently extended Capio’s contract until 2021.

.  .  .

Sweden has gone further than any other European country in embracing the purchaser-provider split””that is, in using government money to buy public services from whichever providers, public or private, offer the best combination of price and quality. Private firms provide 20% of public hospital care in Sweden and 30% of public primary care. Both the public and private sectors are obsessed with lean management; they realise that a high-cost country such as Sweden must make the best use of its resources.

St Goran’s also acts as a hare for Capio, one of Europe’s largest health-care companies, with 11,000 employees across the continent and 2.9m visits from patients in 2012. Sweden is Capio’s biggest market, accounting for 48.2% of its sales (France comes second with 37.6%). The firm performs 10% of all Swedish cataract operations, and much more besides. Capio thinks it can make huge savings in other countries by transferring the lessons it has learned in Sweden. The average length of a hospital stay in Sweden is 4.5 days, compared with 5.2 days in France and 7.5 days in Germany. Sweden has 2.8 hospital beds per 1,000 citizens. France has 6.6; Germany, 8.2. Yet Swedes live slightly longer.

Capitalists under the bed

Spreading efficiency will not be easy, however. Europeans instinctively recoil from private companies making money from health care. British placards protest against modest reforms with pictures of fat cats helping the health minister to disembowel a patient labelled “NHS” (National Health Service).

7.  I bet the French do:

The French left has long been split between those, such as Pierre Moscovici, the finance minister, who see themselves as Social Democrats in tune with Germany or Scandinavia, and a wing embodied by Arnaud Montebourg, the industry minister, that still draws on anti-capitalism, the Socialist Party’s founding doctrine. A protégé of Jacques Delors, Mr Hollande is commonly linked to the pro-European moderates. But, even in office, he refuses to say so. When asked at his press conference if he would acknowledge that he was a Social Democrat, Mr Hollande paused and then replied: “I am a Socialist.”

“The tragedy of the Socialist Party is that it keeps putting off its rupture with the revolutionary left,” argues Arnaud Leparmentier, a journalist at Le Monde. This leaves Mr Hollande ruling in deliberate ambiguity. He will not make the case for a more Scandinavian left, for fear of provoking a backlash. So he pursues reforms with one hand, while throwing red meat to the left””persisting with the 75% top tax rate, keeping Mr Montebourg in government””with the other. In practical terms, this means all reform is constrained. A new labour-market law, for instance, gives flexibility over hours and pay to employers of lower-paid workers, but also raises costs through a compulsory health contribution. Mr Hollande’s aides call this reform through dialogue and consensus. Jacques Attali, a Socialist grandee, says the result so far is “extraordinarily limited”.

As I expected,  Hollande is starting his Mitterrand-style U-turn.  BTW, here’s what I said when he was elected:

The French just elected Leon Blum Francois Hollande, who is committed to fiscal policies aimed at boosting AD and reducing AS.  Good luck with that.

A long post, but I saved you 3 hours reading three issues of The Economist.


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36 Responses to “Trends in European politics”

  1. Gravatar of foosion foosion
    8. June 2013 at 06:31

    >>Some argue that monetary policy “errors,” are intentional, as policymakers cater to various special interest groups. I’ve never understood that argument. If, as I claim, most academic economists are very misguided about monetary policy, and obviously have no axe to grind, why would we expect a bunch of government bureaucrats to do better? Are government employees that much smarter than economists?>>

    The claim is that special interest group (extremely high wealth/income) has extraordinary influence over policy and over academic economists.

    The interest group can reward those it favors with jobs, influence, funding, media attention, etc. It is not implausible that some academic economists have decided they want senior policy positions in a Republican administration, funding from Pete Peterson, etc. and are tailoring their statements to toward that end.

    The notion that academic economists have no axe to grind is not credible.

    BTW, is Bernanke an academic economist or a government bureaucrat? Are his current actions consistent with his policy prescription for Japan not that many years ago?

  2. Gravatar of Bill Woolsey Bill Woolsey
    8. June 2013 at 06:33

    I think interest rate targeting exists because of special interests.

    I think that economists focus on interest rate targeting because central banks like to do it.

    The entire “optimal monetary policy” literature was based upon the policy makers loss function.

    Who are the policy makers? And we know getting central bankers to do anything other than control money market interest rates is like pulling teeth.

    The successful academic economist accommodates himself to what the central bankers want. He helps the central bankers do what they want, rather than criticize them for being wrongheaded.

    Why was Milton Friedman and the monetarists marginal? Could it be because manipulating the base to control M2 is not what central bankers want to do?

    Why the focus on interest rates by central bankers? I think it has to with the special interests of bankers, especially investment bankers.

    Why is the target interest rate in the U.S. .25 rather than -.1? I think Bernanke has said it is to protect Wall Street “bankers.”

    Stabilizing short term interest rates is important to them for the same reason corn farmers like stable corn prices. (Or maybe beef ranchers like stable corn prices.)

  3. Gravatar of foosion foosion
    8. June 2013 at 06:35

    In case you missed it, it appears your old friend PK shares your disdain for Draghi’s recent statement:

    “First, “with low inflation, you can buy more stuff”???? Don’t we teach students in Econ 101 exactly why that’s a naive fallacy, that lower inflation also means lower growth in earnings, and that the cost of inflation has nothing to do with reduced purchasing power?”

    http://krugman.blogs.nytimes.com/2013/06/08/depressing-draghi/

  4. Gravatar of 123 123
    8. June 2013 at 06:48

    Let me try. The best theory is that Bernanke made lots of mistakes in 2008, this drove the global rates down, and the ECB today has got a huge ZLB problem.

    But wait. That theory was true but incomplete. If Bernanke did everything right in 2008, the PIGS credit bubble would have stopped growing perhaps only now. It would have gotten so huge, that the reversal would certainly kill the euro.

  5. Gravatar of Mike Sax Mike Sax
    8. June 2013 at 06:50

    “It’s not just that America is innocent if my theory of the crisis is correct; I can’t think of ANY theory that would imply America is responsible for the euro-crisis. Can you?”

    I’d say that we caused the original worlwide financial meltdown. However, their problem over the last 4 years has been the euro straitjacket.

    I’d say we kind of got them sick but it’s not our fault that they still use leeches rather than modern medicine to treat the illness.

  6. Gravatar of Marcos Marcos
    8. June 2013 at 06:55

    Funny: Mr Hollande is the most unpopular president in French history.

    In the UK the precandidate Nigel Farage and his right-wing party (UKIP) is jumping the the polls he’s a libertarian and believes in limited government low taxes and austerity and well… judge for yourself:

    “Why I’m the first leader to support a looser Bank of England mandate”
    http://www.cityam.com/article/why-i-m-first-leader-support-looser-bank-england-mandate

  7. Gravatar of Steve Steve
    8. June 2013 at 07:14

    “1. Did we force them to create the euro?
    2. Did we tell the ECB to run a tight money policy?
    3. Did we cause the Irish and Spanish housing bubbles?
    4. Did we tell the Greek government to lie about the size of their debts.”

    1. The Euro was a necessary counterweight against American Imperialism. America made us do it.
    2. The ECB isn’t tight, it’s easy. But America’s reckless money printing is undermining the ECB stimulus.
    3. Alan Greenspan did it. He drove global interest rates too low for too long. The ECB wisely strengthed the Euro but the American shadow banking system did us in.
    4. Goldman Sachs did it. None of this would have happened if there were a Financial Transaction Tax on American Cowboy Bankers.

    Also, you forgot,
    5. George Bush did it. He screwed up the Middle East which raises our energy prices and creates conflict on our borders.
    6. Americans burn too much carbon, which creates global warming, which has produced unusually cold snowy harsh winters in recent years.

  8. Gravatar of Saturos Saturos
    8. June 2013 at 07:27

    “I can’t think of ANY theory that would imply America is responsible for the euro-crisis. Can you?”

    I’d suppose that the popular view is some sort of financial contagion theory, where an American financial sector collapse causes debt-crises in Europe because of the inherent interconnectedness of the global financial system.

    It is sad to see the Economist describe pension privatization as “hard-hearted”.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. June 2013 at 07:27

    ‘I can’t think of ANY theory that would imply America is responsible for the euro-crisis. Can you?’

    Sure, it’s easy. We infected the European banking system with our MBS that Karl Rove invented to re-elect George W. Bush.

    Of course, it was our mimicking European socialist housing policy that got us started down that road in the first place….

    If Fidel Castro can still be blaming imperialismo yanqui for Cuba’s problems more than a half century later, the Eurocrats can get away with it too.

  10. Gravatar of W. Peden W. Peden
    8. June 2013 at 07:28

    “Don’t we teach students in Econ 101 exactly why that’s a naive fallacy, that lower inflation also means lower growth in earnings, and that the cost of inflation has nothing to do with reduced purchasing power?”

    Lower inflation need not lead to lower earnings (either real earnings or nominal earnings) if productivity rises and nominal earnings do not change. Even deflation is compatible with nominal wage increases.

  11. Gravatar of W. Peden W. Peden
    8. June 2013 at 07:31

    Marcos,

    He comes close to talking about “The Insane ECB”, in the manner of David Glasner. That’s one of the few times I’ve had reason to broadly agree with Farage and UKIP.

  12. Gravatar of W. Peden W. Peden
    8. June 2013 at 07:32

    The article is amusing, if only for making the Austerians go ape…

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. June 2013 at 07:42

    “EUROPEANS like to blame America for their crisis.”

    You can relax. No need to feel guilty anymore. Not only is the crisis over, it made Europe and France even stronger. So, even if America did cause it, we can now expect une longue salve d’applaudissements:

    ‘”What you need to understand here in Japan is that the crisis in Europe is over. And that we can work together, France and Japan, to open new doors for economic progress,” he said in the speech at the Imperial Hotel organized by The Nikkei, a major financial newspaper.’

    http://news.yahoo.com/french-president-says-eurozone-crisis-over-120621430.html

  14. Gravatar of ssumner ssumner
    8. June 2013 at 07:57

    foosion, I know many academic economists, and 99% have no expectation of working for the administration. Their beliefs are sincerely held, as are mine.

    Regarding Krugman, great minds think alike.

    Bill, I disagree, The vast majority of economists I know sincerely believe interest rate targeting is the way to go. That’s how they visualize policy. And I can’t see how interest rate targeting helps banks. It doesn’t cause interest rates to be higher or lower than money supply targeting.

    123, But if the ECB has a zero rate problem why have they been raising and lowering rates over the past 4 years? And why didn’t Bernanke have a zero rate problem in 2008? Why is he more to blame? And why did the ECB cut rates more slowly than the US?

    Mike and Saturos, But the European banks made even more bad investments than the American banks, so that won’t work either.

    Marcos, Hmmm, what monetary regime would fit his criteria?

    Steve, You’re right!

  15. Gravatar of Becky Hargrove Becky Hargrove
    8. June 2013 at 08:20

    Scott,
    Bill has a valid point, in that interest rate targeting benefits special interests by obscuring the differences in equilibrium between production levels in services and manufacturing.

  16. Gravatar of TGGP TGGP
    8. June 2013 at 08:42

    “the purchaser-provider split”
    AKA “outsourcing”. I agree with Matthew Yglesias that it doesn’t resolve any of the principal-agent problems with government programs and you need a well functioning political system (the sort that would do a decent job of public provisioning) to work well.

  17. Gravatar of Max Max
    8. June 2013 at 09:15

    Bill, interest rate targeting accommodates random money demand shifts in between Fed meetings. What’s wrong with that?

  18. Gravatar of Ashok Rao Ashok Rao
    8. June 2013 at 10:19

    “Regarding Krugman, great minds think alike.”

    Sorry, I’m sure you’re both brilliant, but regarding Draghi I can only deduce “anyone who’s not an ostrich with his head in the sand thinks alike”.

    “EUROPEANS like to blame America for their crisis.”

    I’d blame the 60% who think “inflation” is their worst enemy. And they, unlike America, can vote too! But hey, we’re neo-imperialist clownish idiots. So yeah.

  19. Gravatar of Bill Woolsey Bill Woolsey
    8. June 2013 at 11:28

    It isn’t the level of interest rates but the stability of interest rates that matter.

    I don’t think interest rate targeting developed because it benefits ordinary commercial banks, though they do worry about spikes in financing costs.

    It is investment banks underwriting stocks with short term funding benefit from keeping short term interest rates stable.

    Why do most of the economists you know think targeting interest rates is desirable. That is what they were taught. Why were they taught that? It is what central banks want to do. Why do central banks want to do that? There are special interests.

    Cattle farmers would like low corn prices. But what they more worry about is spikes in corn prices.

  20. Gravatar of Bill Woolsey Bill Woolsey
    8. June 2013 at 11:57

    Max:

    What law of economics says that the central bankers should meet every six weeks?

    I don’t favor having periodic meetings to fix the quantity of money, with it staying constant between meetings.

    I see no value in a constant quantity of money over any period.

    But, of course, there are special interests who prefer to see interest rates constant. Ideally, the interest rate would just stay the same forever. Unfortunately, that can lead to disaster, so central bankers must meet periodically and determine whether they will be compelled to change interest rates.

    I grant that interest rate targeting will allow the accommodation of some shifts in the demand to hold money “between meetings.”

    But I don’t favor holding the quantity of money constant “between meetings.”

    More importantly, I think changes in interest rates are desirable “between meetings” when they are due to shifts in the supply or demand for credit.

    Why is it so hard to distinguish between money and credit?

    Of course, from the perspective of the special interest of bankers, it doesn’t matter if their funding costs spike due to a decrease in the quantity of money, an increase in the demand to hold money, a decrease in the supply of credit, or an increase in the demand for credit. From their special interest, higher funding costs are bad.

    Why would they want to distinguish between money and credit?

    Anyway, I prefer continuous changes in both the quantity of money and short term interest rates. I oppose efforts by a central bank to keep any measure of the quantity of money constant for any period of time or an effort by any central bank to keep any interest rate constant for any period of time.

    What I want to see kept on target is the market expectation of nominal GDP.

  21. Gravatar of ssumner ssumner
    8. June 2013 at 12:20

    Becky, Maybe, but I don’t see it.

    TGGP. It does reduce the problem, but I agree that it doesn’t completely eliminate the problem. It’s still a step forward.

    Progressives need to be careful with that argument, as it can equally well be used against the entire welfare state—you need a well-functioning society to make it work.

    Bill, Is that why Woodford believes that? If so, how come you were able to see through the evil plot, but he wasn’t able to. I’m confident that most economists think that way because it reflects common sense. People can visualize how interest rates affect spending decisions, it’s harder to visualize why OMOs affect spending, as you are no richer after the OMO.

  22. Gravatar of Marcos Marcos
    8. June 2013 at 12:43

    He’s talking in favor of what he call in a recent video a “competitive devaluation”

  23. Gravatar of Jean Jean
    8. June 2013 at 13:08

    The Europeans are blaming sub-prime for their woes – and Lagarde has backed them up on this. As far as I can tell, the Germans are using the ISLM to target the interest rate.

  24. Gravatar of Sina Motamedi Sina Motamedi
    8. June 2013 at 15:47

    And I really do appreciate those 3 hours.

  25. Gravatar of AldreyM AldreyM
    8. June 2013 at 18:38

    I was doing some research on Farage and I have to say that It’s really impressive, the economic adviser of Nigel Farage is Tim Congdon: http://www.timcongdon4ukip.com/ some UK market monetarists bloggers like http://uneconomical.wordpress.com/ have support the Congdon views on monetary policy.

  26. Gravatar of 123 123
    8. June 2013 at 19:41

    Scott: “But if the ECB has a zero rate problem why have they been raising and lowering rates over the past 4 years? And why didn’t Bernanke have a zero rate problem in 2008? Why is he more to blame? And why did the ECB cut rates more slowly than the US?”

    I’m mostly playing devil’s advocate in this transatlantic blame game. But still:
    The ECB is on the ZLB since July 2012 when they cut IOR to zero.

    They raised the rates in 2011 to preserve the anchoring of inflation expectations. They got the size of the increase completely wrong though.

    The ECB has eased the policy much faster than the Fed in 2008:
    1. Inflation expectations derived from Tips were more stable in the Euro area.
    2. Interest rates are a poor indicator, but for a different reason in this case. Bernanke did cut the FFR target, but interest rate expectations 6 months ahead did not go down as much due to the disruption in dollar money markets.
    3. Trichet was much more creative with the quantitative tools.
    The exchange rate and labor market developments in 2008 support the points above.

    And finally, because Trichet decided to print unlimited amount of dollars in October 2008, the principle of transatlantic solidarity requires that Bernanke should buy unlimited amounts of Greek debt in 2012 😉

  27. Gravatar of libertaer libertaer
    9. June 2013 at 03:30

    “It’s natural to be a bit skeptical when you hear about a new right-wing party in Germany, but this one doesn’t sound bad at all”

    Their leading man, Bernd Lucke, is a real academic, even better an economist, and -hold your breath- a macroeconomist! Teaching in my hometown Hamburg.

    But don’t get excited, he and his party are misdiagnosing the crisis just like everybody else here. For them, German savings are in danger because Draghi is keeping interest rates artificially low by printing too much money! Lucke: “Die EZB flutet die Märkte mit billigem Geld, und die Realverzinsung für viele Geldanlagen ist sogar negativ.”(The ECB floods the markets with easy money and the real interest rate on many investments is even negative.) The usual “interest rates are low ergo money must be easy”-fallacy…

    Their solution isn’t even to leave the eurozone, instead -step by step- everybody else (except Austria, the Netherlands and Finnland) should leave. Since Germany can’t force countries to leave, this is not a real policy option, just wishful thinking.

  28. Gravatar of Bill Woolsey Bill Woolsey
    9. June 2013 at 04:44

    Scott:

    I don’t know why Woodford emphasizes interest rates exactly. As I said before, I would suspect it is because he was taught to think of it that way.

    I don’t think that the quantity theory approach (money is what is spent, more money, more spending; less money, less spending) is hard to understand. The problem is getting people to realize that the demand to hold money must be taken into account as well.

    Central banks started targeting interest rates under the gold standard.

    Do you explain what central banks do? Is policy about helping them do what they want?

    Or do you propose reforms that central bankers hate–that sideline the central bankers?

    I will grant that if Woodford changed his stripes and decided to use McCallum’s approach, he would have a big impact. I think his move to NGDP targeting had a major impact.

    But if he had never adopted interest rate targeting, and had all along just had an approach like McCallum, his base money targeting approach would not be used as the leading macro textbook.

    I don’t identify special interests with the rich. Investment bankers tend to be pretty rich, I guess. But they are politically influential, and stabile short term interest rates are important to them.

    By the way, nearly all economists favor free trade. Protectionism is not all that unusual. Why is that? I think it is special interests. Didn’t Krugman win a Nobel Prize for work that rationalized the infant industry argument?

    How about this. The Fed listens to elite economists when they tell it what it wants to hear. If academic economists change what they say to something the Fed doesn’t want to hear, or else, the Fed changes what it wants to hear, then monetary policy will have no more connection to elite academic opinion than does trade policy.

    If the Fed’s political masters determine that inflating away the national debt will help, there will be able to find “economists” perhaps some with Ph.D.’s in economics, who will explain how this is the best thing to do. That most economists are aghast would not be a problem.

    Gee, they have quotas on sugar imports. Most economists are aghast. That stops them, right?

    After the Great Inflation, politicians decided they didn’t like inflation. Voters hate it and it doesn’t generate a perpetual economic boom. Central banks began to vary interest rates to make sure that inflation or unemployment didn’t get too high. It worked well in the Great Moderation. Then it broke down.

    I don’t think central bankers caused the Great Recession on purpose to benefit special interests. We had an evolved policy framework that they want to keep. Why is interest rate targeting a central element? Why is quantitative easing, which from a quantity of money approach _is_ monetary policy, considered somehow unnatural?

    I think there are special interests who want stable interest rates, central banks deliver, and economists who help them have a leg up.

  29. Gravatar of ssumner ssumner
    9. June 2013 at 05:47

    Marcus, Yes, but that’s not a regime.

    Jean, The Europeans think the US subprime crisis caused their depression? Are they mentally ill?

    AldreyM, Thanks. But for some odd reason Congdon opposes NGDP targeting.

    123, Then you agree that the ECB was not at the zero bound before mid-2012, in which case America could not possibly be to blame. BTW, The ECB raised rates in mid-2008.

    And I don’t think Trichet printed any dollars in 2008, that would be counterfeiting.

    Libertaer, Why don’t those 4 countries leave, and they can adopt strong currency of their own (although I can’t imagine the Dutch would like to see a strong currency right now.)

    Bill, You said;

    “I don’t know why Woodford emphasizes interest rates exactly. As I said before, I would suspect it is because he was taught to think of it that way.”

    You make him sound like a robot. I think he had very good reasons to write Prices and Interest the way he did.

    And Krugman is not a protectionist, so I very much doubt his views on trade were shaped by special interest groups. I believe almost all academic economists sincerely believe the stuff they claim to believe. I do, and I see no reason to assume others are different from me.

    And I also reject your deeper premise, that interest rate targeting helps banks more than money supply targeting. I don’t find that argument plausible at all. If interest rates were more volatile then banks would make a fortune selling derivatives to hedge interest rate risk. In Brazil the standard argument is that inflation volatility helps the rich because they have the expertise to take advantage of it. The same would hold for interest rate volatility.

    The “special interest” argument also completely fails to explain why the Fed ran a high inflation policy in the 1970s and a low inflation in the 2000s. Or why we set up Bretton Woods, and then abandoned it. Or why we abandoned the gold standard.

  30. Gravatar of Pemakin Pemakin
    9. June 2013 at 08:10

    Scott,

    You wrote “But the European banks made even more bad investments than the American banks, so that won’t work either.” I think Europeans would argue that “American Banks” manufactured lots of bad investments (CDOs) and sold them disproportionately to relatively naive European financial institutions. It matters not whether the bank name was UBS or DB, they are still perceived as Americans in these transactions. Of course, not a reasonable accusation, but did you expect reasonable!

  31. Gravatar of libertaer libertaer
    9. June 2013 at 08:44

    “Libertaer, Why don’t those 4 countries leave, and they can adopt strong currency of their own”

    3 of these countries don’t matter.
    :-)

    In Germany, it think, there are several strong forces in favor of the status quo. Export industries are doing better than anyone else, while banking and insurance industries fear defaults in southern countries.

    The forces behind the new right-wing party are mostly upper middle class savers (lots of risk averse academics with secure jobs) who believe they would get higher interest rates through tighter money. When people are joking that Germany is the only eurozone country which still has its own currency, they forget that Germans are a lot like Japanese. Germans would prescribe themselves tighter money if they could. This would be bad for AD even in Germany, so in a way Germans are getting via the eurozone a somewhat appropriate monetary policy (appropriate for Germany!) against their own will. But most German don’t agree, they don’t believe tighter money would turn us Japanese but in a high real interest rate wonderland.

    Being upper middle class savers but not entrepreneurs or bankers is, I think, the reason why they want the other countries to leave instead of leaving themselves. If Germany leaves, debt would be paid back but in a devalued currency. If the others leave, debt won’t be paid back, there would be defaults instead. If you talk to them, you realize that upper middle class savers fear inflation, but not defaults. Why? Maybe they feel protected by deposit insurance (in Germany up to 100 000 Euro per account, not capita!).

  32. Gravatar of libertaer libertaer
    9. June 2013 at 08:56

    Sorry, I wasn’t clear: the accounts have to be in different banks. If you open up two accounts in different banks, you can raise your insurance up to 200 000 Euros.

  33. Gravatar of 123 123
    9. June 2013 at 09:12

    Scott, Bernanke allowed Trichet to print as many dolars he likes in 2008. Presumably Bernanke was unhappy with tight dollar, so he established the swaps program. Do you remember the swaps scandal and the amateurish Congressional questioning:
    http://zerohedge.blogspot.com/2009/07/grayson-grilling-bernanke-on-half.html
    It was a very good thing that Trichet said he will supply an unlimited amount of dollars instead of toying with dollar quantities and getting them all wrong as Bernanke did.

    Before the mid 2012, the ECB thought ZLB was at 25 bps. They have changed their thinking, and they are researching negative rates.

    Raising rates in the summer 2008 was a mistake. Trichet did it explicitely, Beranke via signalling. I am sure Bernanke’s tight money talk did more damage in the summer of ’08 than the explicit hike by Trichet.

  34. Gravatar of Jon Jon
    9. June 2013 at 10:04

    Bill,

    The 30yr mortgage is a set of innovations that reflect a balanced war between debtors and creditors. Who benefits from stable interest rates–this is shared by reducing risk symmetrically. Who benefits from gradually falling inflation? Do bankers alone? Maybe ceteris paribus with an unexpected drop in inflation. But, Im not convinced, the prepayment option is a hedge against falling rates. Even sophisticated borrowers take mortgages with prepayment options, so it sounds as if it is priced fairly.

    Who benefits from stable employment? both do.

    The one sham is the FDIC. The people think the FDIC is for them but that’s dubious. Risk weighted capital rules is probably another related sham. Although in both cases the beneficiaries are the regulators who set their own budget, drawing from a very large pot and special interest politics protect the system from reform.

    On the other hand, I favor customary rule over dense legal contracts. If you look at a mortgage from the 1800s, it is a single piece of paper stating the size of the loan, the payment schedule, interest rate, and property pledged. That’s a commodity like transaction with the meaning of the loan terms truly market determined for everyone by way of the courts. This is more like how prices are determined and resolves some informational disadvantages between the debtor and the creditor.

  35. Gravatar of ssumner ssumner
    10. June 2013 at 06:53

    Pemakin, You said

    “It matters not whether the bank name was UBS or DB, they are still perceived as Americans in these transactions. Of course, not a reasonable accusation, but did you expect reasonable!

    No I didn’t, and I’m glad to see my suspicions were confirmed!

    (Not to mention that euro-bank losses on US subprime debt have nothing to do with the current eurozone recession.)

    Libertaer, So why don’t the rest of the eurozone members just out-vote Germany in the ECB?

    123, I find it hard to believe that Trichet “printed” any dollars. Who got the seignorage?

  36. Gravatar of 123 123
    10. June 2013 at 16:51

    Scott, this is from NY Fed (www.newyorkfed.org/research/epr/11v17n1/1105gold.pdf):
    ” According to monthly balances published by the Federal Reserve, peak CB dollar swap balances reached $291 billion for the European Central Bank (December 2008)”

    and

    “Ultimately, fourteen foreign central banks entered into swap arrangements with the Federal Reserve. From an initial aggregate of $24 billion in December 2007, the amount authorized grew to nearly $620 billion following the bank- ruptcy of Lehman Brothers. The quantity was soon “uncapped” for several central bank swap counterparties on October 13, 2008, as markets experienced extreme pressures. The dramatic move to uncapped, full-allotment auction formats was made by the European Central Bank, the Swiss National Bank, the Bank of Japan, and the Bank of England. Under the full- allotment auction format, the Federal Reserve made dollars available to these four central banks in quantities not subject to prespecified limits. The foreign central banks, in turn, made dollar loans to financial institutions within their jurisdictions and took on the related collateral and counterparty risks, although the Federal Reserve engaged in swap transactions only with the foreign central banks. The swap lines were a coordinated effort among central banks to address elevated pressures in global short-term U.S. dollar funding markets and to maintain overall market stability. ”

    I think they have split the seignorage. 291 billion figure is less important than the fact that ECB’s dollar auctions were in the full allotment mode with plenty of collateral available. So for some time, the ECB was operating as a Federal Reserve Bank of Frankfurt.

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