Mainly because I no longer feel frustrated by what I see and read about the global financial crisis. It was that frustration which drove me to write the blog as a way of working off steam.
Why am I no longer frustrated?
Because what I believe to be a misunderstanding of, and incorrect response to, the global financial crisis is gradually being corrected. Conventional wisdom is shifting in the right direction and more appropriate measures are being introduced.
The ECB has finally accepted a role as the lender of last resort, willing to use its power to created unlimited money to prevent a collapse of the euro. They have allowed national central banks to fund unlimited transfers of Euros into creditor countries and they have pledged unlimited support for government debt. This was unexpected as I thought Germany would veto it. Merkel has shown that she is pragmatic and sensible.
There has also been a shift in mainstream opinion. For example in a post in January I criticised Martin Wolf, the Chief Economist at the Financial Times for arguing that ways must be found to reduce private sector saving in order to allow governments to reduce their deficits. Recall that private and government sectors balances must add up to zero, so changed in the one have to be matched by the opposite changes in the other. He correctly noted that the reason for collapse in growth following the global financial crisis was that the private sector drastically reduced spending and increased saving. This resulted in a massive increase in government deficits. His mistake was the lazy assumption that such government deficits are problem and need to be reduced. This lead him to conclude that ways must be found to stop the private sector from paying off its debts. I felt that this was seriously mistaken.
In a more recent column and 5 subsequent blog posts starting with this one his analysis has evolved. Here are parts two, three, four and five. These blogs are worth reading because of the wealth of data they include to bolster his typically clear reasoning.
In short, he accepts that:
Why am I no longer frustrated?
Because what I believe to be a misunderstanding of, and incorrect response to, the global financial crisis is gradually being corrected. Conventional wisdom is shifting in the right direction and more appropriate measures are being introduced.
The ECB has finally accepted a role as the lender of last resort, willing to use its power to created unlimited money to prevent a collapse of the euro. They have allowed national central banks to fund unlimited transfers of Euros into creditor countries and they have pledged unlimited support for government debt. This was unexpected as I thought Germany would veto it. Merkel has shown that she is pragmatic and sensible.
There has also been a shift in mainstream opinion. For example in a post in January I criticised Martin Wolf, the Chief Economist at the Financial Times for arguing that ways must be found to reduce private sector saving in order to allow governments to reduce their deficits. Recall that private and government sectors balances must add up to zero, so changed in the one have to be matched by the opposite changes in the other. He correctly noted that the reason for collapse in growth following the global financial crisis was that the private sector drastically reduced spending and increased saving. This resulted in a massive increase in government deficits. His mistake was the lazy assumption that such government deficits are problem and need to be reduced. This lead him to conclude that ways must be found to stop the private sector from paying off its debts. I felt that this was seriously mistaken.
In a more recent column and 5 subsequent blog posts starting with this one his analysis has evolved. Here are parts two, three, four and five. These blogs are worth reading because of the wealth of data they include to bolster his typically clear reasoning.
In short, he accepts that:
- aggregate private sector debt rose too fast in the previous 20-30 years, primarily as a result of irresponsible credit creation by banks,
- this excessive money creation by banks inflated an asset price bubble,
- the inevitable collapse of this bubble precipitated the global financial crisis,
- the drop in growth was primarily the result of a collapse in private sector demand as the private sector switched very rapidly from net borrowing to net saving
- this change, and the bank bailouts, resulted in an explosion in government deficits and debt
- these deficits were essential preventing a Depression
- recovery continues to be slow because the private sector is still paying of these huge debts accumulated in the previous 20 years,
- this deleveraging is necessary,
- this deleveraging requires that government deficits stay high until private sector debts stabilise at lower levels.
- these deficits and the debt can be safely ignored until normal growth resumes and inflation picks up.
- Other ways of reducing excessive aggregate private sector debt, such as inducing inflation or mass default, are dangerous and replete with moral hazard. Is it fair to punish creditors such as pensioners for the sins of debtors?
This analysis is exactly in line with the views posted on this blog. However, my blog (understandably) has almost no influence. Martin Wolf, on the other hand, is highly respected and very influential.
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