‘Stay on hold’, says FT!

The Financial Times has an editorial advising the Bank of England to stay on hold at 0.5% and not shrink its balance sheet because Brexit uncertanties loom large, they argue. It is wrong on many counts.

Ten years after the crisis started, the FT is still advocating that the BoE stayed with 0.5%. Do the writers even sit back for a second in their chairs and reflect on what they wrote, before hitting the ‘Gut zum druck’ button?  Quite how the monetary policy connects to the travails or woes that the British economy might experience with Brexit is never explained because, in the opinion of the FT writers, it is axiomatic.

The UK economy would need different set of policy responses to deal with the economic shocks, if any, arising out of Brexit. In the meantime, the costs of ‘too loose for too long’ would keep piling up. In July 2012, the BoE published a paper on the distributional effects of asset purchases. Five years later, the consequences have gotten worse and not better.  If policymakers appear incompetent and make wrong decisions, we do not have to look too far to identify their source of inspiration.

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UK’s non-recovery and the Labour Party

I came across a link to Andrew Haldane’s speech at Port Talbot on 30th June 2016 in a WSJ article that was trying to dissect the UK election results. Andrew Haldane is the Chief Economist for the Bank of England.

I had analysed the UK election results briefly in my weekly column for MINT on Tuesday. The Conservative Party had managed to score two self goals in two years. My article also took a closer look at Eurozone economic health and outlook. First, about the UK.

Andrew Haldane asks the right questions in his speech. Significant that it was delivered in Port Talbot where the closure of the Tata-run steel plant dominated the news last year. He said that the recovery in the UK economy post-2008 has been felt largely by middle-to-old age Britons who own property or more generally, asset-rich and who live in London or more generally in the Southeast.

Clearly, this group would have voted against Brexit. But, will this group have voted for Labour’s James Corbyn? Unlikely. But, how much of their votes did the Conservatives capture? It will be interesting to know the breakdown. The Conservative Party also lurched towards the Left. The ‘Economist’ notes that here. Although, I must state that I did not find any of them necessarily wrong or incompatible with ‘Enlightened capitalism’. For example, minimum wages and caps on executive compensation are not necessarily incompatible with capitalism.

It is very likely that those who have not been touched by the UK economic recovery – that is a good, vast majority, especially the young and renting, compared to the very narrow that have benefited as mentioned earlier – chose to vote for James Corbyn. FT has an analysis here.

Tim Price has some good points to make of James Corbyn:

That 262 British parliamentary seats fell to a party led by a self-confessed Socialist is bad enough. That said leader lacks the support of 172 of his own MPs is troubling. But that someone who has publicly supported the IRA, Hizbollah and Hamas could attract 12.9 million votes while the United Kingdom is under attack by terrorists simply beggars belief. Sir Richard Dearlove, the former head of MI6, the British Secret Intelligence Service, points out that Jeremy Corbyn – who seeks the office of Prime Minister – would not be cleared to join either his former agency, or GCHQ, or MI5; and indeed would, in the past, have been actively investigated by the latter. [Link]

What is interesting and disappointing about Andrew Haldane’s speech is that he does not link his admission that the recovery has been narrowly based to the monetary policy of the Bank of England although he does cite one of the most important discussion paper of the Bank of England on the distributional consequences of asset purchases by the Bank of England (‘The distributional effects of asset purchases’, Bank of England Quarterly Bulletin, 2012). That paper is worth a read.

Haldane went on to reassure his audience that the Bank of England would further ease monetary policy in response to the Brexit referendum – the speech was after the Brexit referendum. But, really, to what extent would a further ease of monetary policy help broadbase a recovery? If anything, it would (and it did) boost asset prices, particularly home prices in London putting them further out of reach of the young who found homes increasingly unaffordable and were spending close to 30% of their income on rents.

It is astounding to me that, despite such a lucid analysis of the problem, he came up with a solution – further monetary easing – that would not only do nothing to solve the problem but would only aggravate it further.  No surprises that the Labour Party did far better than it should have or it deserved to.

As Tim Price put it,

The millennials and Generation Z are right to be angry. But last week this anger manifested itself in the form of some Corbyn supporters burning newspapers. To anyone with a sense of history, the UK today feels like a very strange, and disturbing, place. [Link]

Millennials and the hard Left

I came across this interesting article in my mailbox (ht: Vaidy).  It talks about how voters in the age group of 18-24 favour hard Left candidates. That is not quite ‘Millennials’. But, the short-hand works for expository convenience.

It was the case with Bernie Sanders in the American Presidential elections, with Jean-Luc Mélenchon in the French Presidential polls last month and with James Corbyn, now in the UK elections due on June 8. They have made the race a lot tighter than it appeared in April.

There was one sentence that I could not quite understand:

As the world is going against a concrete wall of debt, the youngsters may think accelerating one more time could work.

Was the writer being ‘tongue-in-cheek’? Perhaps. That remains a big risk with hard Left policies.

The young just do not want the Left but the hard Left. That is a bit  worrying because Theresa May’s Conservative Party is not Margaret Thatcher’s Conservative Party. Her speech at the Party Annual Conference in 2016 was a watershed moment. I wrote a column in MINT on it in October last year.

Coincidentally, only last morning, I had finished reading Kenneth Arrow’s ‘A cautious case for Socialism’, a speech delivered at Columbia University in 1978. Yes, Kenneth Arrow!

While he was not sure if democracy and socialism could co-exist, he said the following about democracy and capitalism:

In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham. In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.”

Even more breathtakingly, he said that it was near impossible to have prices for all State-Contingent situations in future because the market for uncertainty was not developed. In other words, he was prepared to throw a big pail of water on his groundbreaking work with Debreu on the allocative efficiency of a competitive market equilibrium.

In practice, it simply did not exist. In that sense, perhaps, we had misinterpreted their work, all along!

I recall my professor in the Grad School at UMASS Amherst back in the 1990s telling us that Modigliani and Miller, they did not set out to prove that capital structure was irrelevant. By showing that it was irrelevant only under extreme assumptions that did not prevail in reality, they actually proved that capital structure mattered. It had stuck with me ever since.

In a way, Arrow and Debrew were doing the same thing. Only by knowing all future States, the state contingent claims and if a market existed that priced all State contingent claims, could the allocative efficiency achieved by a competitive market economy be superior – without scarcity or surplus – to that of a planned economy.

Since those conditions are never met, the case for the superior allocative efficiency of a competitive market economy was never established! Professor Arrow was actually admitting to that in that speech!

The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance. Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term “capitalism,” refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not. Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future. Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force.

The nonexistence of future markets is no doubt linked to uncertainty about the future. But this points to an even more severe shortcoming of the actual capitalist system compared with an ideally efficient economic system. The uncertainties themselves are relevant commodities and should be priced in such an economy. Only a handful of insurance policies and, to a limited extent, the stock market serve to meet the need for an efficient allocation of risk-bearing.

In the ideal theory of the competitive economy, market-clearing prices serve as the communication links that bring into coherence the widely dispersed knowledge about the needs and production possibilities of the members of the economy. In the absence of suitable markets, other coordinating and communicating mechanisms are needed for efficiency. These come close to defining the socialist economy, although admittedly wide variations in the meaning of that expression are possible.

Of course, I would admit to a few caveats. He was speaking in 1978, at the height of the period of economic turbulence in the West – wars, oil shortage, stagflation, etc. The weaknesses of the Soviet economy had not been exposed yet (sub-caveat: to a large extent, the Soviet economy was undone by a combination of arms race with America in the Eighties combined with the collapse of the price of oil in the same decade).

Further, many state-contingent financial products were developed in the Eighties and Nineties. But, of course, they did zilch to the allocative efficiency of the economies nor did it prove that financial markets knew how to price uncertainty. To date, the answer is an emphatic NO. Financial markets know next to nothing about how to price risk, let alone uncertainty.

So, who is to say that the hard-Left policy agenda – Sanders, Corbyn, Mélenchon – would be worse, in economic terms? I feel certain about lesser and lesser things these days.

Where the Hard Left worries me is with their their conflation of secularism and appeasement of hardcore Islamists. They are very likely wrong on that one and that would be disastrous for the rest of the society and the country. What has been happening in Britain in the last few months is, perhaps, a culmination or lagged effects of misguided policies of the last several years or even decades. But, that is a separate topic.

[Postscript: I just read two tributes to Kenneth Arrow who passed away few months ago. I liked this one a lot better than this one. But, both do not mention the speech I mention here. Pity. He was teaching a class even at 94. Incredible.]

Government-Central Bank interaction

What do other central banks do?

(1) This is what happens in England:

“A representative from the Treasury also sits with the Committee at its meetings. The Treasury representative can discuss policy issues but is not allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government’s economic policies, and that the Chancellor is kept fully informed about monetary policy.​” [Link]

(2) This is what happens in Japan (from the Bank of Japan Act)

Article 4 The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

(Attendance of Government Representatives)

Article 19 (1) The Minister of Finance or the Minister of State for Economic and Fiscal Policy prescribed in Article 19, paragraph 2 of the Act for Establishment of the Cabinet Office (Act No. 89 of 1999) (referred to as the “Minister of State for Economic and Fiscal Policy” in the following paragraph; in the case where the office is vacant, it shall be assumed by the Prime Minister) may, when necessary, attend and express opinions at Board meetings for monetary control matters, or may designate an official of the Ministry of Finance or the Cabinet Office, respectively, to attend and express opinions at such meetings.

(2) The Minister of Finance, or a delegate designated by him/her, and the Minister of State for Economic and Fiscal Policy, or a delegate designated by him/her, may, when attending the Board meetings for monetary control matters, submit proposals concerning monetary control matters, or request that the Board postpone a vote on proposals on monetary control matters submitted at the meeting until the next Board meeting for monetary control matters.

(3) When a request has been made to postpone a vote as prescribed in the preceding paragraph, the Board shall decide whether or not to accommodate the request, in accordance with the Board’s practice for voting.

(Publication of Transcripts, etc.)

Article 20 (1) After each Board meeting for monetary control matters, the chairperson shall promptly prepare a document describing an outline of the discussion at the meeting in accordance with the decisions made by the Board, and make public the document following its approval at another Board meeting for monetary control matters.

(2) The chairperson shall prepare a transcript of each Board meeting for monetary control matters in accordance with the decisions made by the Board, and make public the transcript after the expiration of a period of time which is determined by the Board as ​appropriate. [Link] and [Link]

Financialisation is hale and healthy

There was so much talk about revolving doors between Wall Street and regulators. Mervyn King who wrote so eloquently about banks in ‘End of Alchemy’ ended up an advisor to Citigroup. Willem Buiter who was in the MPC in BoE did the same. Former Heads of Government do the same. Robert Zoellick and Robert Rubin come to mind. Former as Goldman Sachs advisor and the latter in Citigroup.

It is not for nothing that financial firms pay huge sums to have these people in their rolls. The latest is Blackrock that has agreed to pay a very generous sum to George Osborne, former British Chancellor, for very little work. The story is here.

So, the dominance of Finance has not really ended. The fight still has to be made and the road ahead remains long.

This blogger makes some good comments:

What are they buying? It’s not his economic expertise – he’d struggle to get a minimum wage job on that account – nor even his contacts. Instead, BlackRock is offering an incentive to the world’s finance ministers. It’s telling them that they too can get big money if they behave themselves in office*.

Such behaviour consists of giving the industry a favourable tax regime, lightish regulation, and ensuring a good flow of easy money. Osborne’s policy of fiscal conservatism and monetary activism had the effect of boosting asset prices (pdf), to the benefit of firms like BlackRock**.

It’s through mechanisms like this that capitalists gain undue influence over the state: there of course several other mechanisms, not all of which are exercised consciously or deliberately.

This influence isn’t perfect – we’d probably not have had Brexit if it were – but it exists. The idea that democracy means equality of political power is a fiction in capitalism.

You might think this is a Marxist point. I prefer, however, to think of it as a Cohenist one:

Everybody knows the fight was fixed
The poor stay poor, the rich get rich

Except that not everybody does know the fight is fixed, because the question of how capitalist power is exercised – like other questions such as whether capitalism impedes productivity or whether hierarchy is justifiable – is not on the agenda. But then, the issue of what gets to be a prominent political question and what doesn’t is another way in which power operates to favour capitalists.

I like this blog. Just ‘stumbled’ upon it. Don’t remember how. Even this post is a simple one and it makes sense.

Philip Stephens imagines Orwell

FT’s Philip Stephens has a piece on what George Orwell would make of Donald Trump. Really? Have they all become so unimaginative that they cannot think of any other topic than President Trump?

This is what he wrote in the article:

An “America first” foreign policy is part of the same construct. Mr Bannon, the ideologue who informs Mr Trump’s impulses, anticipates a civilisational clash with Islam and a war with China. The flirtation with Mr Putin is about confessional and cultural solidarity against an imagined barbarian threat.

This is the comment I posted underneath the article:

Imagined barbarian threat? Probably, Mr. Stephens does not read real news stories of ISI attacks on Sufi worshippers in Pakistan and, in general, four attacks in five days, etc. Plus, a steady stream of research from Europe and the U.S., have documented the impact of imports from China on communities and not just on jobs.

Some references for him:

(1) http://voxeu.org/article/globalisation-and-economic-nationalism (ht: Niranjan Rajadhyaksha)

(2) http://voxeu.org/article/globalisation-and-brexit

(3) Dippel, C, R Gold and S Heblich (2015), “Globalization and Its (Dis-)Content: Trade Shocks and Voting Behavior,” NBER Working Paper 21812

(4) ‘The surprisingly swift decline in U.S. manufacturing employment’ (Peter Schott and Justin Pierce)

Is there any law that forbids ‘liberals’ from being intelligent and being able to face, accept and address reality? Don’t they know that denial does not solve problems and hardens positions, making problems difficult to solve and conflicts inevitable? May be, I am being too harsh on them. May be, that is what they are craving for – conflict.