First, welcome from the Seattle Economics Council, the region's association of economists. Our second Wednesday of the month luncheons at Ivar's on the Waterfront concentrate on regional issues and speakers.
We have had Steve Lerch, the state's chief forecaster, Bill Bryant from the Port, Matthew Gardner on real estate, Yoram Baumann, Dick Conway, Dan O'Neal, Gary Smith from PNREC whose conference was held just last week in Spokane, wearing his hat from the, and our last speaker was Jon Talton of the Seattle Times. Next June 13 we have Ross Hunter from the House Ways & Means Committee in to debrief us on what went on this year at the state. Look for all of that at Seattle Economics Council dot com. Our officers, President Sarah Lawer, Tim Mitchell, Paul Tefft-Meeker and I am Alan Harvey.
We encourage those of you who have the rogue chromosome that makes economics a fascination to join us. Practicing, retired, just interested.
Today we step outside the regional framework a bit, recognizing the continuing macroeconomic stresses and looking at global issues with Gerard Fitzpatrick and Steve Keen. After this introduction, Gerard has consented to relay an outline of the topic and then we'll get into it.
I will begin introductions with Steve Keen, here from Australia via the rest of the world. Steve has been cited as the economist who above all others predicted the Great Financial Crisis and the Great Recession, both in scale and timing, receiving the Revere Prize from the Real World Economic Review after a vote of over 2,500 economists worldwide. Steve polled ahead of such others as Nouriel Roubini -- Dr. Doom, Dean Baker, Joseph Stiglitz, Robert Shiller, and others. To be fair, the competition was limited to a small minority of economists who predicted it. The great majority, we have to acknowledge as a discipline, including virtually all those in responsible positions, saw neither the scale, the timing, nor the causes.
This is an issue I believe Steve will spend some time on in his 6 PM talk this evening to a more general audience. We encourage you to -- if you can -- visit us again here at Town Hall, same space, different configuration, for that event.
Title "The Great Financial Crisis and the Great Recession: How we got here and the way out."
Steve's book Debunking Economics is available here today. A provocative title, it might have as easily been called "Recasting Economics." It explores the range of economic sticking points over two centuries. Steve also has a chapter in my much less sophisticated book Demand Side Economics. Copies available here.
The underlying question was framed by Queen Elizabeth II when she asked, "If this thing was so big, Why did nobody see it coming?" I would suggest Steve's answer....
Well, John Maynard Keynes may have anticipated him in the concluding chapters of the General Theory:
Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the problems of the actual world." Continuing: "But if your central controls succeed in establishing an aggregate volume of output corresponding to full employment (as nearly as practicable), the classical theory comes into its own again from this point onward."
We are very grateful that Steve has made such an effort to be here with us.
Gerard Fitzpatrick is a native of Ireland, and I should note that both men have a lot of energy, a lot to say, and perhaps unfamiliar versions of spoken English. Steve from Australia and Gerard from Ireland. So I guess we'll challenge the audience in another way.
Gerard is now based here in Seattle with Russell Investments. He operates in the very challenging environment of today's financial markets as strategic bond fund manager. During the Global Financial Crisis period, Gerard was Global Bond portfolio manager. One of the largest of these funds, Russell's RIC II Global Bond fund garnered numerous awards from Lipper, including best performing fund in its class over three and five years. So Gerard is skilled and willing to act inside a pressure-packed environment.
Although Irish, as I mentioned, Gerard has spent his professional life entirely outside that country, in London, Bermuda and now in the United States. In 31 years of continuous education, he has at present two degrees and four professional qualifications. He survived the ultimate left tail risk, as he calls it, with a successful bungee jump.
I omitted a portion of my introduction of Steve for time's sake, a part about a bet he lost -- technically lost -- which turned into a remarkable trek that generated benefits to the homeless of Australia. You can hear that this evening. But the point here is also, with regard to Gerard, that these two men have both escaped the obsession of self-interest sometimes trained into economists. Gerard helped raise over half a million dollars for United Way last year as co-manager of Russell's United Way campaign.
Perhaps too much introduction, let me get out of the way. Gerard as I said, will provide a review of the topic and then get into his perspective on the challenges, opportunities, issues, experience. he will then hand it off to Steve for another segment, then we'll get into Q&A and discussion. I will set the ground rules then.
Gerard Fitzpatrick.
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Money
At a key point in the response to the crisis, President Obama stood on the White House steps and said, "First the banks, then the economy." He was supported by most economists, including many on the Left, on the basis of the money multiplier. Every billion dollars in support to the financial sector would translate into nine billion in economic activity. Hasn't happened.
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Monetary Policy
Beginning with the crash of 1987, monetary policy as executed by the Fed has been to provide lots of liquidity in crises and to support financial markets. During his long tenure at the Fed, the practice became known as the "Greenspan put," a guarantee of financial market stability.
The dot.com crash was met by Greenspan and the Fed with a long period of one percent short-term rates, which some say was instrumental to the housing bubble. Under Ben Bernanke, a remarkable series of special facilities was instituted by the Fed during the crisis to liquify various financial markets and keep the system from freezing completely. Subsequent to crisis, the Fed has maintained zero percent rates on teh short end and instituted a series of quantitative easings, QE's, to attempt to push rates down on the long end.
"Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield."(Source - Wikipedia)
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Financial Repression
Many view financial repression as any action by governments and central banks that keeps interest rates artifically low and penalizes savers or investors, or forces them into risk they may not want in a search for yield.
A definition from the bond fund PIMCO runs as follows:
Any sovereign policy that interferes with free market activity and the pricing of debt or currency can be thought of as an act of financial repression. Policies can be designed to alter market prices of debt or currency through direct intervention, or indirectly through altering the amount of debt or currency demanded at a given price.Much of the recent work on financial repression has been done by Carmen Reinhart, whose credibility suffered recently from a review of the data supporting "This Time It's Different," and the proposition that over 90% Debt-to-GDP is associated with a contraction of growth. Apparently not so.
The most common motive for financial repression is to improve a country’s ability to finance government debt without resorting to painful fiscal adjustment. By artificially lowering the cost of debt financing below what would be demanded by free market forces, governments are able to reduce borrowing costs and slow down debt accumulation rates. One can think of financial repression as a form of “stealthy default”: a gentlemanly way for modern countries with fiat currencies to stiff their creditors while still ostensibly paying interest and principal in full.
Notice the drastic influence of inflation in the immediate post-war, and the 1970s, on this ex-post measure. Also notice that the period identified as financial repression corresponds to strong and stable growth, and since the 1980s, government debt to GDP has grown.
Now reaching well above this 2011 number,
On 2 April 2013, debt held by the public was approximately $11.959 trillion or about 75% of GDP. Intra-governmental holdings stood at $4.846 trillion, giving a combined total public debt of $16.805 trillion. As of January 2013, $5.6 trillion or approximately 47% of the debt held by the public was owned by foreign investors, the largest of which were the People's Republic of China and Japan at just over $1.1 trillion each. (Wikipedia)
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Issues
There is concern that a massive unwind of the Fed's balance sheet would be devastating in terms of inflation. That is, an inevitable inflation will arise from all the money creation, and the Fed will not be able to walk back the easing in time.
Bernanke:
"I am confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way, for example, by increasing interest on bank reserves." (speech, Indianapolis, October 1, 2012.)
Many savers and investors feel punished by low interest rates. Savings that were estimated to be adequate for retirement at 4% rates are inadequate at 2% or lower.
Bernanke:
- We are dealing with a crisis
- Savers are also homeowners and own stocks or bonds, areas supported by Fed policy.
"If the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drip, and unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else."
