Bernanke vs. Meadows+Issing

I was quite disappointed to read the transcript of the interview that Liaquat Ahamed (I loved his book, ‘Lords of Finance’) conducted with Ben Bernanke, shortly before the latter retired from the Federal Reserve. You can find the full transcript of the interview here. The transcript appears long but is an easy-read simply because there were no challenging questions or deep answers.

I was amused to read this remark by BB:

There’s interesting work, there’s an economic historian named Alexander Field, who’s written that the 1930s was actually a period of great innovation, but it didn’t show up in the productivity statistics because with the economy and depression there weren’t markets sufficient to make those innovations commercial. So something similar may have happened to some extent here.

Now all that being said, you know, these are important effects, but none of them are permanent — truly permanent. I mean, eventually the economy will return to the growth path it was on prior to the crisis or something close to that. So these are long-lasting and very serious potential effects, but I don’t think that they are truly permanent. [page 20 of 26]

What comes through loud and clear is this unshaken and unshakable belief or faith that economic growth is their birthright and entitlement and that it would return.

Michel Danino, the well-known Indologist sent me this thought-provoking interview that Der Spiegel had with Dennis Meadows. He had written a book in the 1970s titled, ‘Limits to growth’. I have not read that. The interview with Der Spiegel is worth reading. Reflect on what he says about why and how innovations occur. Also, he distinguishes between global and universal problems. Universal problems can be solved locally but global problems cannot be. Ask yourself if nations are co-operating with each other.

There is another interview of him with ‘Format’. It is even better. Just sample two of his questions and responses:

FORMAT: Could a major technological development to save the earth?

Meadows: Yes. [But] Technologies need laws, sales, training, people who work with them – see my above statement. Moreover, technology is just a tool like a hammer or a neoliberal financial system. As long as our values are what they are, we will [try to] develop technologies that meet them. [Emphasis mine]

FORMAT: All the world currently sees salvation in a sustainable green technology.

Meadows: This is a fantasy. Even if we manage to increase the efficiency of energy use dramatically, use of renewable energies much more, and painful sacrifices to limit our consumption, we have virtually no chance to prolong the life of the current system. Oil production will be reduced approximately by half in the next 20 years, even with the exploitation of oil sands or shale oil. It just happens too fast. Apart from that you can earn more than non oil with alternative energy. And wind turbines can be operated, with no planes. The World Bank director (most recently responsible for the global airline industry) has explained to me, the problem of peak oil is not discussed in his institution, it is simply taboo. Whoever will try to anyway, is fired or transferred. After all, Peak Oil destroys the belief in growth. You would have to change everything. [Emphasis mine]

As long as our values are what they are, technological advancements are not going to be answers to problems but would turn out to be ones that compound our problems in ways that we would never know or comprehend. Bernanke does not get it. He has plenty of company. A generation schooled to demand, expect and get instant gratification will not understand what it takes to sustain humanity or economic growth or life on earth.

As Dennis Meadows explains in his interview with Der Spiegel, debt is about borrowing the future for the present. This generation, especially in the West  – not just Americans – is addicted to debt. They are hard at work, trying to globalise it. They have succeeded very well in Korea, for example, where household debt is very high. That is what a diet of zero interest rates and quantitative easing aims to achieve – get more people addicted to debt for speculation and consumption.

I was amused when John Mauldin wrote in one of his weekly missives, ‘Thoughts from the Frontline’ thus:

This has been a very brief inventory of the headwinds for economic growth in the next few years. It counterbalances the rather joyous view of the future that I outlined last week. I get the incongruity. How could one be so excited about the future on the one hand and so dismal on the other? That is the main thought conundrum of my life. [Link]

Really, there is no incongruity at all. The debt accumulation reflects how we are wired. Technological advancements are cosmetic and at the material level. They do not change ‘how we are wired’ and hence as long as that is the case – and there is no way to change that because that is how we are – technological advancements by themselves cannot be the cause of optimism about the future.

Again, Dennis Meadows puts it well:

We are basically now just as programmed as 10,000 years ago. If one of our ancestors could be attacked by a tiger, he also was not worried about the future, but his present survival. My concern is that for genetic reasons we are just not able to deal with such things as long-term climate change. As long as we do not learn that, there is no way to solve all these problems. [Link]

At least at some level, some policy-makers grasp this even if they may not grasp the full implications. What follows is a not-so-great transcription but one Mr. Doug Noland who writes  the weekly ‘Credit Bubble Bulletin’ had listened to Ottmar Issing, former Chief Economist of the Deutsche Bundesbank, at the Bundesbank Financial Stability Forum held last week. In highlighting bubble risks, Issing raises the question of how much economic value there really is in allowing bubbles to fester when its collapse eliminates all the gains (jobs, income, homes, etc.) later:

But I think there is no defence for the concept of asymmetrical policy once a Bubble – or whatever you will call it – is building up. One argument was that monetary policy is too blunt a tool. I think this argument has lost its credibility. We know from many studies that even small early increases in interest rates would have an impact on interest rate structure, risk-taking, etc. In the context of an asymmetric approach and “risk management,” ………… I’m reminded of many, many meetings here or especially in the U.S. with my friends from the Fed. Their reaction was absolutely clear: when I referred to a potential Bubble in real estate, what I heard always was “never in the last 50 years have real estate prices fallen on a nationwide aspect. For me, this was not a comfort. …………. and once this happened their reaction to my critique or argument was very relaxed: “In the meantime, we have had much higher GDP, higher employment , more houses, etc. So compared to (these benefits), the cost of raising interest rates would be much too high – much too high.” I have never seen so far the comparison of the high cost of the mess we are in if we take this “risk management” approach. [Emphasis mine] – LINK

I too have been making this point repeatedly in my presentations. The so-called ‘inhuman’ policy of bubble intolerance is not ‘inhuman’ after all. Or, rather, the so-called ‘human angle’ towards tolerating (or, fostering) bubbles is no human angle at all because all the gains (higher GDP, more jobs, more incomes) are eventually lost and other distortions too creep in. This so-called moral argument in favour of tolerating/fostering asset bubbles is thus convenient, specious and immoral.

My MINT column dated 25th March 2014 was a modified and condensed version of this blog post.


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