Monday, September 21, 2015

Krugman figgers something out about the dischord between the Fed and commercial bankers re: rate hikes

One reason why K-dog is a genius is that he manages to figure out strange goings-on in economics by referring to sociological theory - and in doing so, he gives us a fantastic way to go contra the herd:

The Krugginator - rate rage. Quote:

OK, I should have seen that one coming, but didn’t: the banking industry has responded to the Fed’s decision not to hike rates with a primal cry of rage. And that, I think, tells us what we need to know about the political economy of permahawkery.

The truth is, I’ve been getting this one wrong. I’ve tried to understand demands that rates go up despite the absence of inflation pressure in terms of broad class interests. And the trouble is that it’s not at all clear where these interests lie. The wealthy get a lot of interest income, which means that they are hurt by low rates; but they also own a lot of assets, whose prices go up when monetary policy is easy. You can try to figure out the net effect, but what matters for the politics is perception, and that’s surely murky.

But what we should be doing, I now realize, is focusing not on broad classes but on very specific business interests. In particular, commercial bankers really dislike a very low interest rate environment, because it’s hard for them to make profits: there’s a lower bound on the interest rates they can offer, and if lending rates are low that compresses their spread. So bankers keep demanding higher rates, and inventing stories about why that would make sense despite low inflation.

I would suggest to K-dog that the ultrarich own stocks not for capital appreciation, but for their dividend flows. Capital appreciation is nouveau-riche.

But still, P to the K nails it on the head. Why were we all deluded into thinking that the investment bankers' calls for higher rates were correct? Why did nobody listen to Kocherlakota? Why do they think Yellen is dumber than some hedge-fund clown?

It's because the bankers want higher interest rates, and they will profit from higher rates even if the rate hike tanks the economy.

Good work, Kruggers! You taught me something! And PS, since I know you read this blog, I will be happy to have you for my thesis advisor at CUNY, provided the CIA lets me over the border (doubtful due to my past terrorist affiliations) and you can find me a $5000/month job (Manhattan is expensive y'know).

Here's a couple more Krugginator articles around the topic, which also go into more general political-economy discussion, which I love because political economy proves mainstream economics to be just a childish fantasy:

The Krugmeister - more on the political economy of permahawkery. Quote:

So we’ve had a long discussion of the distributional effects of QE and all that, which are ambiguous but also, I now realize, irrelevant. Is QE good or bad for capital, for rentiers, whatever? No matter — it’s bad for bankers, because it leads to a compression of the net interest margin, the spread between deposit rates and lending rates. And that is why there’s so much agitation for rate hikes on the part of finance. Furthermore, while I don’t think institutions like the BIS are corrupt in any direct sense, they probably pick up by osmosis from all the bankers they meet the general prejudice against easy money, leading to increasingly baroque attempts to justify rate hikes despite low inflation.

Incidentally, this also means that the common claim that QE is a giveaway to bankers is the opposite of the truth; to the extent that journalists with close ties to bankers spread this story, it’s Orwellian. Remember, the Fed isn’t lending money at low interest to banks — banks, with their $2.5 trillion (!) of excess reserves, are lending vast sums at low interest to the Fed.

and, while we're on the topic:

The Kruggatollah - the receding NAIRU. Yo, K-dog - you think that maybe the plutocratic elite might also be worried about unemployment dropping too low? You think maybe 30 years of inflation-targeting Fed policy based on the Phillips curve might have had the effect of causing working-class wage losses and a falling labour share of income? You think maybe the kleptocrats are afraid of the possibility of an increase in market power for labour?

No comments:

Post a Comment