And then Went AWOL Stephanie Kelton PhD Economists for Peace and Security Bernard L Swartz Symposium Hyatt Regency Capitol Hill Washington DC November 17 2014 Who or What Saved Capitalism ID: 527157
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Slide1
Deficits Saved the World(And then Went AWOL)
Stephanie Kelton, Ph.D.
Economists for Peace and Security, Bernard L. Swartz Symposium
Hyatt Regency Capitol Hill, Washington DC
November 17, 2014Slide2
Who (or What) Saved Capitalism?
Great Recession and not GD 2.0
Minsky (1982) Can ‘It’ Happen Again?
Could but need notBig Gov & Big BankSlide3Slide4
GFC
Began in 2007 as a
liquidity
crisisTriggered when credit markets seized up and “shadow banks” like Lehman Brothers and Bear Stearns found it impossible to refinance their positions in assets
Next came the wave of insolvencies that led to the failing or shoring up of a large number of home mortgage specialists like
AIG
and
Merrill Lynch
The world watched as central banks around the world
sprung
into action to
contain
the unfolding crisis in the
financial
systemSlide5
“Big Bank” Response
LOLR
Domestically and internationally
TAF provided funding to US banksSwap lines with other central banks for financial institutions in other jurisdictionsPeaked at $580b
Open-ended liquidity provision by Big Bank
$29T?Slide6
“Big Government”
Winter ‘08 job losses 800k/mo
Feb. 17, 2009 ARRA
$275B tax cuts and $500B+ increased spending3-year “stimulus”
White House hails it unequivocal success
Saving or creating 1.6m jobs (Romer & Bernstein, 2009)
Deserved?
Matthew O’Brien, The Atlantic,
Feb.20, 2014Slide7
stimulus signedSlide8
Deficits Saved The World
But not ARRA
Krugman: the
auto-stabilizers did the heavy liftingMinksy and Godley Stabilizing Role of Big Govt Deficit as source of NFAsSlide9
Private Sector Financial Balance
Private sector’s financial balance deteriorated over much of the 90s
By ‘97, it had forsaken its habitual state of surplus
The crisis unfolded at a time of record private sector indebtednessSlide10
Deficits Saved The World
In the 1930s the public sector was very small…This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus…The initial shock – the surge in desired private surplus – was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful – and it’s all because of the rise in deficits. Deficits, in other words, saved the world.
~
Paul Krugman, 2009Slide11
A “Passive” Fiscal Response
I look at this through the lens of sectoral financial balances…The idea that the huge fiscal deficits of recent years have been the result of decisions taken by the current administration is nonsense. No fiscal policy changes explain the collapse into massive deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus…The government responds in a largely passive way.
~
Martin Wolf, 2012Slide12
Deficits Exploded EndogenouslySlide13
Facilitating Deleveraging
Figure 3: Private Sector vs. Public Sector Balance (% GDP)
1952Q1 - 2013Q3
Fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset!
Paul McCulley, 2010Slide14
Helping to Heal Balance Sheets
Deficits are a flow of funds that increase the stock of NFAs to the non-government sector
Deficits (flow) accumulate to financial debt (stock)
But deficits have a counterpart in terms of accounting, showing up as surpluses in some other part of the economy
Deficits provision non-government with net financial assetsSlide15
The Fiscal Retreat
Fear of ending up like the so-called PIIGS
Hardest hit blew through Maastricht limits
Markets developed an aversion to bonds of highly-indebted nationsRisk premiums soaredThe bailouts beganGreece €100B in May 2010 and €130B in Feb 2012
Ireland €67.5B in Nov. 2011
Portugal €78B in May 2011Slide16
The Fiscal Lurch
Obama orders creation of deficit reduction commission (2010)
Meanwhile, deficit quietly falls
By 2012, CBO reports shrinking fastest pace since demobilizationWithout any effort to reduce it!Slide17
A Cry For Help
While Congress fought over ways to reduce the deficit, many worried that fiscal had become too tight
In testimony before Congress, Bernanke confessed:
“Monetary policy is not a panacea. It’s not even the ideal tool. I’d like to see other parts of the government play their roles.” (June 2017)Slide18
The Monetary Plunge
Growing pressure on the Fed as ‘fiscal cliff’ approached
Woodford (August 2012) Jackson Hole
By September, Bernanke had gone all-inOpen-ended bond-buying (QE3) and “forward guidance”Slide19
2013
Likely to be the subject of debate for years to come
Fiscal policy tightened as government raised taxes (effective Jan. 1) and initiated more than $1T in spending cuts (the “sequester”) beginning March 1
Austerity had come to America
Forecasters predicted slowdown 0.6-1.5% of GDP
Bernanke urged Congress to consider a more gradualist approach to deficit reduction
Yet growth accelerated from 2% to 2.6% in 2013Slide20
Why?
Were the fiscal headwinds exaggerated?
Was this proof that austerity worked?
Had Bernanke been too pessimistic about the power of monetary policy at the ZLB?Had monetary policy saved the world?Slide21
Emerging Consensus
Monetary policy
can
counteract fiscal tightening, even at the ZLBWorked primarily through “wealth effect” as investors reached for yield, driving up prices across a range of asset classes (esp. equities, housing and corporate bonds)
Disproportionately
benefiting
those at the top of the income ladder
May have laid the
groundwork
for the
next crisis
by encouraging too much risk-takingSlide22
Yellen
[M]onetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system
.
~
Janet Yelln, July 2014Slide23
Dangerous Lessons
If we just “normalize” rates, then we can go back to using conventional monetary policy to stabilize the economy
New Consensus is new again
Fiscal policy isn’t really necessaryWhen the next crisis comes, the Fed has shown that it has an effective toolkit at its disposalFiscal policy isn’t really neededSlide24
Fiscal Ambitions
Must go beyond allowing deficits to cushion downturns
Need a renewed interest in (and commitment to) fiscal policy if deficits are truly going to save the world
Climate
Joblessness
Inequality
Infrastructure
Education
Innovation/ResearchSlide25
Thank You