Wednesday, January 7, 2009

The fiction of a liquidity trap

Christopher Lingle has excellent article in Mint particularly it is important to note the following: 

  • In the current climate of global economic uncertainty, central bankers are creating vast amounts of paper money from thin air to pump into the global economy. 
  • central bankers are perpetrating and perpetuating the problems they claim to be seeking to avoid. 
  • In the current setting, interest rates in the US and Japan should be much higher than their present low levels at near zero. 
  • In other words, investment depends more upon spending rather than upon increased savings. 
  • As a modern proponent of the liquidity trap, Paul Krugman is as confused and confusing as Keynes. Krugman suggests that an economy caught in a liquidity trap will slide into deflation. But he then states that deflation can push an economy into a liquidity trap. Like Keynes, he seems to like to have it both ways”.

Whereas T.N. Srinivasan who is Samuel C. Park Jr. Professor of Economics at Yale University says “Unless the private sector sees the current slowdown as an essentially temporary phenomenon and believes that the economy will be bouncing back to 8.5 per cent or more [growth rates], simply reducing the interest rates will not help,” he said.

1 comment:

MC Shalom P. Hamou said...

Prof. Benjamin Shalom Bernanke Exposed

"The debate about the ultimate causes of the prolonged Japanese slump has been heated. There are questions, for example, about whether the Japanese economic model, constrained as it is by the inherent conservatism of a society that places so much value on consensus, is well-equippedto deal with the increasing pace of technological, social, and economic change we see in the world today.

The problems of the Japanese banking system, for example, can be interpreted as arising in part from the collision of a traditional, relationship-based financial system with the forces of globalization, deregulation, and technological innovation (Hoshi and Kashyap, forthcoming). Indeed, it seems fairly safe to say that, in the long run, Japan’s economic success will depend largely on whether the country can achieve a structural transformation that increases its economic flexibility and openness to change, without sacrificing its traditional strengths.

In the short-to-medium run, however, macroeconomic policy has played, and will continue to play, a major role in Japan’s macroeconomic (mis) fortunes. My focus in this essay will be on monetary policy in particular. Although it is not essential to the arguments I want to make—-which concern what monetary policy should do now, not what it has done in the past—-I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis).

Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously

Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better. Bank of Japan officials would not necessarily deny that monetary policy has some culpability for the current situation. But they would also argue that now, at least, the Bank of Japan is doing all it can to promote economic recovery.

For example, in his vigorous defense of current Bank of Japan (BOJ) policies, Okina (1999, p. 1) applauds the “BOJ’s historically unprecedented accommodative monetary policy”. He refers, of course, to the fact that the BOJ has for some time now pursued a policy of setting the call rate, its instrument rate, virtually at zero, its practical floor. Having pushed monetary ease to 2 Posen (1998) discusses the somewhat spotty record of Japanese fiscal policy; see especially his Chapter 2.its seeming limit, what more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”?

I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—- objections which, I will argue, could be overcome if the will to do so existed.

My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism."

Prof. Benjamin Shalom Bernanke
Japanese Monetary Policy: A Case of Self-Induced Paralysis?
For presentation at the ASSA meetings, Boston MA, January 9, 2000.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money [For Economists].

Press release of my open letter to Chairman Ben S. Bernanke:

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

Yours Sincerely,

MC Shalom P. Hamou
Chief Economist & Master Conductor
1776 - Annuit Cœptis.