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An interesting read but I think it's just the same old "pushing on a rope" situation that people who have been following economic news are already familiar with
by YZF 10y ago
An interesting read but I think it's just the same old "pushing on a rope" situation that people who have been following economic news are already familiar with.
The problem is that central banks are tasked with trying to solve something they are fundamentally incapable of solving on their own. They can QE or reduce rates until the end of time to try and stimulate growth but it has a limited effect on the real economy. Note that it does have some effect on the real economy so it's not completely useless but on its own it isn't good enough.
The players in the market, including both the finance system and individuals, take note of the low interest rates and just increase their leverage into bubbles. As the central banks keep pumping, so do those bubbles inflate. Why would anyone invest in productivity or infrastructure when the governments are signalling you will make a lot more money speculating on bubbles and we will keep backing you up in doing that. Cheap money is a double edged sword.
The real solution IMO is two-fold. First we must accept that at least right now we will not grow our economy as fast as we used to. Second is that rather than trying to stimulate the economy by QE and lower rates the governments should be investing in infrastructure and start normalizing rates (with respect to new realistic growth targets).
The crazy thing about all of this is that at a time governments should be borrowing like crazy (like everyone is doing) to finance their investments because it's so cheap to borrow they are trying to reduce their debt and expenses (with the extreme being "austerity"). Everyone else is acting fairly rationally except the governments.
EDIT: As some of you already know, there is a direct connection between interest rate expectations and asset pricing. So in a sense it is inevitable that the expectation of long term low interest rates will result in asset bubbles. If the long term rate expectation is zero then assets with any non-zero return should be valued at infinity, i.e. dividend stocks, houses etc. Central bankers are absolutely aware of this as they are aware that raising rates will cause asset prices to go down with all the implications. That's why they are stuck at the token 0.25% raise. If the US ever goes negative rates then you'll know we're in real trouble.
- jamez1 10y agoThe article is about the distinction between the financial economy and the real economy. Everything you wrote seems to lump them together, and then make inferences assuming both economies are one in the same. (Missing the point of the article, from the title down) I feel that you're the one "pushing on a rope", when the best you've got in your framework of the world is that some components of monetary policy correlated to asset prices sprinkled with some vague ideas of government spending.
- YZF 10y agoApologies for having a strong opinion about the roots of the crisis which I think is reasonably well informed. And yes I am operating within some sort of framework. I'm always willing to adjust based on new information. I think I have a pretty good idea about how asset pricing relates to interest rates expectations and inflation expectations. If you want a better idea of where I'm coming from I recommend Coursera's Financial Markets course. I'm not lumping them together. I said: "Why would anyone invest in productivity or infrastructure when the governments are signalling you will make a lot more money speculating on bubbles and we will keep backing you up in doing that. Cheap money is a double edged sword." So I differentiate (to some extent) between the "real" economy (which no one is incentivized to invest in) and what the authors call the FIRE economy. I just disagree where I think the authors are pointing to a root cause where I see something that is just a symptom. I do agree with the authors points about the negative impact of bailouts but this is only part of the equation in my opinion. Also at the end of the day it's really hard to separate the "real" from the "financial". You can use the money created to go buy things in the real world. There is not much new in the paper. Lots of people have talked about the role of debt in the crisis. Lots of people have talked about how bailing out the banks encourages bad banking practices.
- buzzybee 10y agoThe paper's intent is to articulate a particular ideological element within the current mainstream(finance being equated to the real economy), identify its appearance, and set the stage for a counter ideology that pushes finance away from power; it's more historical-political in nature than anything. So yes, saying it says nothing new is missing the point, because it's not really aimed at economists who have already started critiquing these distinctions. If it aimed to craft new theory or policy, it probably wouldn't be referencing more detailed, years to decades old, sources in every other paragraph.
- YZF 10y agoI see. I guess I'm not that familiar with ideologies in the world of economics academia. In the real world I don't think there's anyone, including central bankers, who currently thinks (or really ever thought) that bailing out banks that give bad loans is a good idea or e.g. that companies taking debt to buy back shares is a good idea. Central bankers also don't think (any more) that QE or reducing rates can restore real economic growth to the pre-crisis levels. What do you think looking at "finance" vs. "real" economy is going to get us? How will it impact policies? What does it mean to "push finance away from power" and what are the implications? Not to mention the futility of trying to track what's finance and what's real. Is VC "real" or "finance"? When Microsoft buys LinkedIn is this "real" or "finance"? Is Facebook a part of the "real" economy? Disney? My retirement savings that are sitting in the bank, is that "real" or "finance"?