Gordon lines up with Silicon Valley entrepreneur Peter Thiel, who has said that, “We wanted flying cars, instead we got 140 characters.” Despite all the hype coming out of Silicon Valley, Gordon believes we are in a period of modest progress. Whereas many observers worry that because of technology there will no longer be work for an increasing share of able-bodied adults, he thinks there will be work for all, but very little increase in productivity. Disturbingly, his reading of history and his assessment of a variety of factors in the current environment that he calls “headwinds” lead him to the judgement that, “headwinds are sufficiently strong to leave virtually no room for growth over the next 25 years in median disposable real income per person.”
The IMF says Larry Summers is right—and Ben Bernanke is wrong—about economic stagnation
Summers has proposed “secular stagnation” (pdf) as the explanation for economic weakness since the 2008 recession: Private investment is falling because firms see slow population growth and innovation as a sign that future returns aren’t likely, creating a self-fulfilling prophecy of slow growth. His answer is more government investment—to jump-start demand, and the economy.
.. Bernanke, meanwhile, thinks recent slowdowns in private investment are merely a result of the recession’s economic hangover, and that the big, structural problem for advanced economies is a “global savings glut” that is forcing US interest rates lower than they otherwise would be—so in essence, blame Germany. In the former Fed chair’s view, better government policies on global capital flows and trade could solve this problem. Otherwise, efforts to keep interest rates low enough to maintain full employment will lead to more financial bubbles... The reports conclude, first, that the reason for slower growth isn’t the lingering effects of the crisis but the pressure from slowing population growth and innovation; and second, that private investment is falling because companies don’t see enough demand from their customers, not because of diminished returns from low interest rates.
My views and the Fed’s views on secular stagnation
First, the Fed assigns a much greater chance that we will reach 2 percent core inflation than is suggested by most available data. Inflation swaps suggest inflation on the Fed’s preferred PCE deflator measure will average only 1 percent over the next 3 years, 1.2 percent over the next 5 years and 1.5 percent over the next 10 years. Survey measures of expected inflation are falling not rising. Moreover, if account is taken of quality change inflation measures would have to be further reduced.
Second, the Fed seems to mistakenly regard 2 percent inflation as a ceiling not a target.
.. It is suggested that by raising rates the Fed gives itself room to lower them. This is tautologically true but I know of no model in which demand will be stronger in say 2018 if rates rise and then fall than if they are kept constant at zero.
.. The complexity is that zero rates may be less abnormal than is supposed because of fundamental shifts in the saving investment balance,
The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed
The fact that a member of Goldman Sachs’ board at the time of the 2008 crisis was the “public interest” Chairman of the New York Fed board is to put it mildly indefensible.
.. But it is hard to imagine an appropriate governance activity for business figures with respect to the Federal Reserve System. Nor is it clear why banks should in any sense be “shareholders” in the Federal Reserve System.
.. Franklin Roosevelt was hardly a pushover to the financial industry. He famously made former stock-operator Joseph Kennedy the inaugural leader of the SEC on the theory that it takes a thief to catch a thief.
.. If there are lacunae in current procedures, these should be pointed up and repaired. This is not the focus of current proposals like those of Ron and Rand Paul who would prefer to abolish the central bank and whose ideas are not so much about auditing the Fed as subjecting it to political control and straitjacketing it.
.. On the substance of monetary policy, I have been clearly on the dovish side of the Fed for quite sometime and think the risks of the last rate increase exceeded the benefits so I agree with Sanders general thrust. I prefer the “do not raise rates until you see the whites of inflation’s eyes” to Sanders rather arbitrary 4 percent unemployment target.
.. Indeed the majority of the world’s banking crises over the last three centuries and over the last quarter century have come from traditional lending especially against real estate. Making banks safer means reducing their dependence on traditional lending activities so balances must be struck.
.. I think there is a good case to be made that capital requirements should be further increased and further graduated with size and complexity. This would tend to encourage deconsolidation and is I think the right 21st century response to the concerns about concentration in banking.
.. First, the financial regulatory agencies would be adequately resourced and would not be under pressure to kowtow to legislators pushing their contributors interest. CFTC head Tim Massad had it right when he condemned the recent budget agreement as undercutting the ability to regulate derivatives in a serious way.
.. Third, the current SEC and CFTC would be combined and charged with regulating in a coherent way all financial markets with respect to market integrity, manipulation issues, insider trading, transparency, fairness of execution, and systemic risk.
.. The current system persists only so that multiple congressional committees can maintain jurisdiction over financial regulation and reap the benefits in terms of campaign contributions.
.. And ETFs are as likely as anything else to be the source of the next major bit of financial drama.