Wednesday, February 29, 2012

Low Interest Rates = Rape and Plunder

Via Mike Konczal, here is Carmen "Eight Centuries of Financial Folly" Reinhart indulging in a bit of folly of her own:
Reinhart is the toast of economic circles these days for speaking out about the newest way Western governments are using financial repression to liquidate their debts, particularly after a financial crisis. They’re doing this on the backs of savers, including pension funds... financial repression can lead to “the rape and plunder of pension funds,” Reinhart tells Institutional Investor. Financial repression consists of very low nominal interest rates combined with captive lending by large banks or pension funds to a government. The low, stable interest rate facilitates the servicing costs of large public debts. Sometimes modest inflation is added to the mix. This results in zero to negative real interest rates that reduce government debt. Hence, broadly defined, financial repression is a wealth transfer from savers to debtors using negative real interest rates — with the government as one of the key debtors. 
... Low interest rates are a fact of postcrash economic life, designed to kick-start greater borrowing. ... “Financial repression is an expedient way of reducing debt,” she says. For banks as well as the government, debt overhang is a major economic problem. But every tax has costs, including distortionary effects. Because financial repression punishes savers, it’s unknown to what degree it inhibits savings.
Rape and plunder? Owners of financial wealth definitionally are savers? Low interest rates are a transfer to debtors? (Are high interest rates a transfer to creditors, then?) Financial asset-owners are morally entitled to low inflation and high interest rates? Not getting the risk-free, passive income you expected is "punishment"? RAPE and PLUNDER, seriously? This article is so exactly everything that I'm against that I'm kind of speechless. All I can do is point at it and say, But! Gha! But it's! Bhehe!

* * *

In possibly related news, over at Crooked Timber, Daniel Davies contemplates the possibility that in Europe today, there might be a conflict of interests between debtors and creditors. But no there isn't, he decides, default would be equally bad for everyone:
The example that comes to my mind of a defaulting debtor that isn’t a commodity producer is Germany and their experiences with default have been absolutely awful. Graham Greene’s The Third Man is a story about the aftermath of debt default in a non-commodity economy.
Um yeah. Central Europe, 1946. Let's see, what has just happened? What's just happened in Germany (or Austria, as the case may be)? Oh yes: They've suspended payment on their bonds.

As through this world I've wandered, I've seen lots of funny men. Some of them seem to think that they are financial instruments. It gives them a funny point of view.


  1. don't mention the war!

  2. Yes, the war might be considered an important clue: the dog that barked, or didn't bark, or something.

    In some weird way, I saw this post as related to Simon Wren-Lewis' piece on "Microfounded and other useful models", which has been taken up by Mark Thoma and Paul Krugman, in an echo of earlier contretemps, over ideology, elementary mistakes by Nobelists and other Worthies, and Old and New Keynesian models.

    Conflict and mechanism and context (and genuine critical thought) seem to get ground to dust, and all that is left is the arrogance and the pose of seriousness. Moral certainty informs the pose; the rest is self-serving nonsense. And, behind the curtain . . . nothing -- and not even much embarrassment.

  3. In some weird way, I saw this post as related to Simon Wren-Lewis' piece on "Microfounded and other useful models"

    Interesting. I'd like to respond to those posts. What's your take (besides that all is vanity)?

    1. I hope my view is not that "all is vanity". I'd make a lousy Ecclesiastes.

      The common link I saw, does have to do with the emptiness of Reinhardt's and Davies' takes. They offer nothing more, really, than drama, untethered to functional analysis. Davies actually cites a novella as evidence. But, they also make a claim to expert authority.

      Simon Wren-Lewis, Oxford don, doesn't use dramatic language, but he offers emptiness and makes his claim to authority.
      . . . it looks as if microfounded models must be the superior tool – we get more information in the form of the model’s microfoundations. In particular, we establish that at least one microfounded support exists for the aggregate model we use in the second stage. If we start with an aggregate model, it is possible that no such microfounded support exists for that model. If that could be proved, the usefulness of that aggregate model is completely diminished from a microfoundations perspective. A more realistic case is if we cannot for the moment find any potential microfoundation for such an aggregate model (this is what some people mean by ad hoc), or the only microfoundation we can find is a little odd. In that case the usefulness of the aggregate model is highly questionable.
      This mode of reasoning strikes me as somewhat odd. If microfoundations have some dominating merit, surely it makes sense to illustrate by compelling example? Why be coy?

      He makes it sound as if Keynesian aggregates are just hanging there in the air, but then switches to suggesting the possibility that multiple microfoundations might support a single aggregate analysis -- now he's taken microfoundations from necessity to supererogatory, but he still hasn't explained what they add to our knowledge. What he claims for microfoundations is purely authority.

      I don't think it is accidental that the two Simon Wren-Lewis blogposts on microfoundations sandwich a paean to the heroism of that pious technocrat, Alice Rivlin.

      Krugman, and Thoma, champion variations on Keynesians-in-foxholes -- the idea that the emergency of financial crisis justifies reaching back to Keynes. What troubles me about that is that it implicitly denies all responsibility for creating the Global Financial Crisis. Really? Microfoundations had nothing to do with it? with the casual ignorance of a giant housing bubble? with a macroeconomics that has no use for the central bank's traditional role in banking regulation?

      I think Brad DeLong had the best comment, and Robert Waldmann went a long way toward challenging the madness behind the method, so to speak.

      I hope you do write something.

    2. Bruce,

      I was just teasing you a little. I agree with everything you say here, and that Waldmann has been right on target.

      I think the problem with Krugman in particular that his method is (1) to present a reasonable but simplistic basically Kensesian story of e.g. the liquidity trap, but (2) when he wants to go beyond the simple story, does NOT look for a more rigorous Keyensian account (including some plausible/empirically supported story about the behavior of individual economic actors), but instead simply repackages the story in the general-equilibrium language of mainstream New Keynesianism. He has more or less admitted that the paper with Eggertsson adds nothing to the story he tells on the blog, it just legitimates it with people who want "rigor". For someone like Krugman, I can see the reasoning that says it's more important to promote the argument within the profession than to criticize/refine it. But if we want to make any genuine progress, it seems to me, rejecting the mainstream "microfounded" theory (in quotes b/c of course there is nothing micro about a representative household) should lead us to look for a better theory, not to treat theory as just after-the-fact packaging for more or less ad hoc macro reasoning.

      i absolutely agree with you that today's foxhole Keynesians are really a big part of the problem because they have spent the last N years implicitly or explicitly promoting the approach they now criticize. This has been the subject of several posts here (note the tag).

    3. Also, yes, that Wren-Lewis post was really disappointing.

  4. Dear JW,

    1. These are upsetting times. Where I live social (well, formerly social) housing corporations own a couple of million of houses. When these corporations were more or less privatized, predatory managers took hold - and started to hedge the loans of these corporations. Long story short - at this moment they are getting into financial difficulties because interest rates are low... and they have to pay hundreds of millions to the banks. Interest rates are not what they used to be.

    But about these pension funds: these are literally raided. See the links below. And pensions are cut everywhere, in my country not because the funds don't have enough cash (most of them do have enough) but because the Central Bank of the Netherlands forces them to use a very low long term interest rate to estimate their future fund. As I see it, the Bank wants them to hoard money in case Dutch banks might brake down (not entirely impossible).

    Merijn Knibbe

    1. Merijn,

      Thanks for the comment. And I still owe you a response to your very interesting thoughts on my paper with Arjun. Will rectify that today!

      You are absolutely right that the looting of pension funds (and "worker capital" in general) is a very real phenomenon. But I really object to the idea that because modern capitalism (not without some forethought by the elites, I am sure) has been structured to give all (or at leaqt the upper half or quarter) some indirect ownership of financial assets, that there is no conflict between rentiers and the rest of us, that what is good for bondholders is good for the US/Europe/etc. This is what Daniel Davies is pushing.

      Do you think Dutch pension funds -- or rather, their beneficiaries -- would be better off if the ECB raised rates?

    2. This is what Daniel Davies is pushing.

      No, he is not. What he is pointing out, correctly in my opinion, is that assertions - whether implicit or explicit - that a unilateral Greek default (for example) would magically solve the problems of imposed austerity (and/or negative current account) are rubbish. His other point - again, in my opinion correct - is that expecting every geographic - economic entity within a monetary union to achieve a balanced current account is equally as absurd.

  5. Replies
    1. Thanks. I had seen it.

      Robert Waldmann's comment's on Brad's blog are better than Brad's blog and better than own his own blog. In fact, last year I needled him on twitter to post more own his own blog (or at least copy his comments from other blogs) because it's too much work to skim comments for people you like. Same goes for you, Josh.

    2. Thanks, I think?

      Anyway, that's why I'm tweeting my blog comments now.

  6. The 1% act like the debt is a huge burden to them but really it's just another submerged state program for their benefit. They should be grateful for their risk-free returns and be happy that they're just not taxed instead.

    I'm sympathetic to the MMT gang but they don't consider the benefits of simply taking money from the rich to reduce their political power. Before the global financial crisis Denmark's public debt was 11% and it's a terrible place to be rich.