Keen on Bernanke

[oddlots]

Steve Keen has a great post on Bernanke at the mo:

Addressing Bernanke's academic work on the depression and Fisher's debt deflation model...

"He [Bernanke] then readily dismisses Fisher’s theory, for reasons that are very instructive:
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. ” (Bernanke 1995, p. 17)
This is a perfect example of the old (and very apt!) joke that an economist is someone who, having heard that something works in practice, then ripostes “Ah! But does it work in theory?”.
It is also–I’m sorry, there’s just no other word for it–mind-numbingly stupid. A debt-deflation transfers income from debtors to creditors? From, um, people who default on their mortgages to the people who own the mortgage-backed securities, or the banks?
Well then, put your hands up, all those creditors who now feel substantially better off courtesy of our contemporary debt-deflation…
What??? No-one? But surely you can see that in theory…


Whole piece is worth a read: http://www.debtdeflation.com/blogs/

(Don't think I've ever thanked itulip for finding the likes of Keen, Martin Meyer, Michael Hudson and bringing them to our attention. Huge service.)

[oddlots]

Re: Keen on Bernanke

... just realised that this piece also effectively explains how Fisher, an obviously brilliant man, had blinded himself to seeing the mounting danger: equilibrium theory. Bernanke's endorsement of the "Great Moderation" argument will play a similar role in his biography I fear. Scary thought.

One of the commenters posted this hilarious quote:

In the entire volume (Bernanke, ‘Essays on Great Depression’, 2000, Princeton)there is a single refence to Minsky in Part Two, page 43 - “Hyman Minsky (1977) and Charles Kindleberger (1978) have … argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behaviour.” A footnote adds - “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

HAHAHAHA - we're doooomed!

[*T*]

Re: Keen on Bernanke

A footnote adds - “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

It's a good research strategy. It's not a good policy strategy...

[Sharky]

Re: Keen on Bernanke

I don't think Bernanke's use of the term "creditors" means the banks -- a creditor is a net saver; someone with cash.

I suspect his logic might have been something like:

-- During deflation, prices and income decline, while debt stays constant
-- Debtors will therefore default on their debts
-- When they default, they will sell at artificially-low prices
-- The buyers of the defaulted-on assets are the creditors (anyone with cash)

Therefore, wealth has been transferred from the debtors to the creditors. The total amount of a money in the system will decline, and in the process creditors will acquire assets at artificially-low prices.

Of course one assumption here is that there is a market for the assets. In the case of housing, as we're seeing now, that isn't always the case. When that happens, wealth isn't transferred, it's destroyed.

Also, his statement that large redistributions should have no net effect on the macro scale seems pretty out-there to me. Take an absurd case: all wealth on the west coast moves to the east coast. How could that not have a huge macro impact?

[oddlots]

Re: Keen on Bernanke

Sharky,

I think you're being too easy on Bernanke here, too generous in helping him out.

The key point B. makes in criticism of Fisher at least in that paper is:

"Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors).Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. ” (Bernanke 1995, p. 17)"

You can see the argument clearly when he says "Absent ... differences in marginal spending propensities among the groups."

In other words, the only way Fisher's point is material at the macro-economic level allowed by B's thinking is if the spending propensities were different between the groups. Well that assumes there's something to spend, no. This is not just a one-liner. Keen's point I think - and I'm expanding it here, so apologies to Keen if I mess it up - is that this is "instructive" because it is an example of how the equilibrium model innures those who have accepted it to the possibility that the price of assets can get enormously out of whack in a way that is interesting or important. This is further driven home by the irony that he seems to think that Minsky's work deals with market irrationality, whereas to my mind the whole point of Minsky is that he puts forward a model where asset price inflation rationally leads to ponzi finance and market crashes: to the most extreme dis-equilibrium.

I'm struggling to find an analogy for this. (Alice in Wonderland surely would provide something.) I'd say that its like you arrive in Australia see a black swan and the head of your scientific expedition says "Oh look a white swan." You point out the problem of induction in logic and the scientist gives you a dirty look, points to the black swan and says, "How many white swans do I have to show you before you give up." In other words, economists have sort of blinded themselves to the assumptions of their models (equilibrium) such that neither experience nor logic can open their eyes.

[c1ue]

Re: Keen on Bernanke

Sharky,

A creditor is the entity to which a debt is owed.

A net creditor can be a saver, but could also be a bank. Surely you're not saying a bank is a saver?

Secondly you are merging those with cash and those who lend.

Again this can be true, but is not necessarily true.

The example I would use would be a well run business with little debt vs. a badly run business with lots of debt.

The badly run business owes its money to the bank. When the badly run business fails, the bank forecloses and starts selling assets. The well run business can then buy these assets.

Of course the modern version of this tale is two equally badly run businesses. As they both fail, they run to momma (the federal government) and ask for a bailout. With the bailout money, the two businesses then run out and buy several smaller well run businesses.

[Sharky]

Re: Keen on Bernanke

A creditor is the entity to which a debt is owed.

Strictly speaking, yes. But creditor is also an easy one-word opposite of debtor, and in the inflation-oriented context above, I take debtor to mean a net borrower and creditor to mean a net saver, not a bank.

A net creditor can be a saver, but could also be a bank. Surely you're not saying a bank is a saver?

I'm not saying that a bank is a saver, but I am saying that a bank isn't a creditor in the context of the quote.

Secondly you are merging those with cash and those who lend.

Again this can be true, but is not necessarily true.

Banks might be intermediaries in the lending process, but in the end it is really those with cash who are lending. The money created by banks for loans wouldn't be possible without the savers.

The example I would use would be a well run business with little debt vs. a badly run business with lots of debt.

The badly run business owes its money to the bank. When the badly run business fails, the bank forecloses and starts selling assets. The well run business can then buy these assets.

Yes, exactly. But who benefits in that case? It's not the bank. It's the well-run business -- the net saver / "creditor."

[c1ue]

Re: Keen on Bernanke

Banks might be intermediaries in the lending process, but in the end it is really those with cash who are lending. The money created by banks for loans wouldn't be possible without the savers.

Between the TARP, alphabet soup lending facilities, and such older entities like the FHA and HUD, do you still cleave to the belief that it is the savers who are lendng via intermediaries?

Yes, exactly. But who benefits in that case? It's not the bank. It's the well-run business -- the net saver / "creditor."

That depends on the specifics. For example, quite some time ago the San Francisco Chronicle had an article looking at 4 prototypical 'subprime' borrowers.

Only 1 of the 4 had some possibility of repaying the loan. However, in all 4 instances the amount of money paid in the form of interest was equivalent to the amount of money lost (at that time) by the bank.

Certainly there are going to be significant losses given the drop in home prices to date.

But the point was that whatever paper 'principal' losses the banks are taking are at least partially offset by already paid interest. That's why the beginning 15 years is mostly interest; the bank keeps that as a cushion.

Expanding on this train of thought - the losses banks sustained on the loans they HAVEN'T securitized are similarly offset by gains made by those loans already sold off.

So again, are you certain the banks don't make money on the transaction?

Why then did everyone want to be a banker?

As for the beneficiary - it can be argued that the well run business lost a lot in the time it took for the badly run business to go under. As we are seeing with the auto industry - the process can take decades.

The banks are exactly like arms dealers. And like arms dealers - they don't make the arms (savings to be lent out), but they make plenty of money in the 'intermediary' process.

[Starving Steve]

Re: Keen on Bernanke

In the cross-hairs of Bernanke are the savers, the retired, the elderly, the prudent, the creditors, the people with cash, the people who try to run a well-run business, the hoarders, the gold bugs, etc.... Why do you think Bush and his supply-side Republicans chose the putz from Princeton to head the Fed?

And here in Canada, we have Carney at the Bank of Canada--- the clone of Bernanke and the choice of Goldman Sachs in New York City. The war on savers will be conducted in Canada by Carney.

The conclusion is that economics has little to do with academic mumbo-jumbo and everything to do with politics. To change the course of politics in North America, Bernanke and Carney have to go. And a purge of the whores in the universities who supported supply-side economics ( Reaganomics ) is now in order.

[Sharky]

Re: Keen on Bernanke

Between the TARP, alphabet soup lending facilities, and such older entities like the FHA and HUD, do you still cleave to the belief that it is the savers who are lendng via intermediaries?

"Lending" really means to lend wealth, not just money. If there were no savers, there would be no wealth, and any new money from TARP or whatever would be worthless. So, yes, in a very indirect sense the savers are still lending via intermediaries, though of course not in the conventional sense of what it means to lend (it's involuntary and they don't earn any interest) -- more in the inflationary sense.

This the same idea that underlies the concept that inflation transfers wealth from net savers to net debtors. During a deflation, it's just the reverse.

So again, are you certain the banks don't make money on the transaction?

Sure, banks make money on the whole transaction. What I was talking about isn't that, though, but just the process of defaulting in a typical deflationary environment. The bank loses money at the time of default because they are forced to sell the repossessed collateral for less than the amount remaining on the loan (which is often related to why the borrower defaulted in the first place).

The banks are exactly like arms dealers. And like arms dealers - they don't make the arms (savings to be lent out), but they make plenty of money in the 'intermediary' process.

Banks do create the money they lend. Deposits are the foundation upon which they are allowed to create.

[c1ue]

Re: Keen on Bernanke

Sharky,

Banks do create credit in the process of lending.

However, the credit is created on the cash savings of others. Even the ridiculous 30x capitalization ratios at the banks in the past 10 years still required something input. We never quite achieved Zimbabwe-dom.

As for the default issue - if you focus just on the transaction, banks 'might' lose notional money.

However, if the goal is debt serfdom (read up on Sapiens' stuff), then it is debatable whether the bank is losing money or gaining serfs.

Dr. Michael Hudson also states the same: the game that was played in Russia in the mid-90's; the game that is being played out in Eastern Europe as we speak; and the game that is concluding with subprime/marginal/greedy homeowners in the US today (and UK, and Spain, and Ireland) was loaning money with an eye toward attaching unpayable debts to a large section of the population.

The bank then has the option of foreclosure (to own the underlying asset) or a multiple decade financial servant.

It is like the old joke about the smuggler at Hadrian's wall. A renowned smuggler had his likeness circulated among the centurions and officials at Hadrian's wall with a warning that this was a notorious smuggler and to be watched as closely as possible when crossing the border (the wall).

The smuggler walks up pushing a wheelbarrow full of straw. The guards search the straw, but find nothing.

The next day, again the smuggler shows up pushing a wheelbarrow full of straw. Again an inconclusive search.

This is repeated for several weeks.

Years later the smuggler has retired. At the local pub, the equally retired centurion sees the smuggler, feels almost brotherly given the daily interaction for many years, and asks the smuggler - so, we managed to stop your activities with our diligent actions.

The smuggler replied: no, I was smuggling wheelbarrows.

[oddlots]

Re: Keen on Bernanke

It is like the old joke about the smuggler at Hadrian's wall. A renowned smuggler had his likeness circulated among the centurions and officials at Hadrian's wall with a warning that this was a notorious smuggler and to be watched as closely as possible when crossing the border (the wall).

The smuggler walks up pushing a wheelbarrow full of straw. The guards search the straw, but find nothing.

The next day, again the smuggler shows up pushing a wheelbarrow full of straw. Again an inconclusive search.

This is repeated for several weeks.

Years later the smuggler has retired. At the local pub, the equally retired centurion sees the smuggler, feels almost brotherly given the daily interaction for many years, and asks the smuggler - so, we managed to stop your activities with our diligent actions.

The smuggler replied: no, I was smuggling wheelbarrows.

Beautiful. Why don't our economists factor debt into their models? There's you answer. "Who coulda node?" TM. Thanks.