Time for a great reset of the financial system

A 30-year debt supercycle that has fuelled inequality illustrates the need for a new regime writes CHRIS WATLING in The FT 

On average international monetary systems last about 35 to 40 years before the tensions they create becomes too great and a new system is required. 

Prior to the first world war, major economies existed on a hard gold standard. Intra-wars, most economies returned to a “semi-hard” gold standard. At the end of the second world war, a new international system was designed — the Bretton Woods order — with the dollar tied to gold, and other key currencies tied to the dollar. 

When that broke down at the start of the 1970s, the world moved on to a fiat system where the dollar was not backed by a commodity, and was therefore not anchored. This system has now reached the end of its usefulness. 

An understanding of the drivers of the 30-year debt supercycle illustrates the system’s tiredness. These include the unending liquidity that has been created by the commercial and central banks under this anchorless international monetary system. That process has been aided and abetted by global regulators and central banks that have largely ignored monetary targets and money supply growth. 

The massive growth of mortgage debt across most of the world’s major economies is one key example of this. Rather than a shortage of housing supply, as is often postulated as the key reason for high house prices, it’s the abundant and rapid growth in mortgage debt that has been the key driver in recent decades. 

This is also, of course, one of the factors sitting at the heart of today’s inequality and generational divide. Solving it should contribute significantly to healing divisions in western societies. 

With a new US administration, and the end of the Covid battle in sight with the vaccination rollout under way, now is a good time for the major economies of the west (and ideally the world) to sit down and devise a new international monetary order. 

As part of that there should be widespread debt cancellation, especially the government debt held by central banks. We estimate that amounts to approximately $25tn of government debt in the major regions of the global economy. 

Whether debt cancellation extends beyond that should be central to the negotiations between policymakers as to the construct of the new system — ideally it should, a form of debt jubilee. 

The implications for bond yields, post-debt cancellation, need to be fully thought through and debated. A normalisation in yields, as liquidity levels normalise, is likely. 

High ownership of government debt in that environment by parts of the financial system such as banks and insurers could inflict significant losses. In that case, recapitalisation of parts of the financial system should be included as part of the establishment of the new international monetary order. Equally, the impact on pension assets also needs to be considered and prepared for. 

Secondly, policymakers should negotiate some form of anchor — whether it’s tying each other’s currencies together, tying them to a central electronic currency or maybe electronic special drawing rights, the international reserve asset created by the IMF. 

As highlighted above, one of the key drivers of inequality in recent decades has been the ability of central and commercial banks to create unending amounts of liquidity and new debt.

This has created somewhat speculative economies, overly reliant on cheap money (whether mortgage debt or otherwise) that has then funded serial asset price bubbles. Whilst asset price bubbles are an ever-present feature throughout history, their size and frequency has picked up in recent decades. 

As the Fed reported in its 2018 survey, every major asset class over the 20 years from 1997 through to 2018 grew on average at an annual pace faster than nominal GDP. In the long term, this is neither healthy nor sustainable. 

With a liquidity anchor in place, the world economy will then move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation based on perceived fundamentals (rather than liquidity levels). 

Growth should then become less reliant on debt creation and more reliant on gains from productivity, global trade and innovation. In that environment, income inequality should recede as the gains from productivity growth become more widely shared. 

The key reason that many western economies are now overly reliant on consumption, debt and house prices is because of the set-up of the domestic and international monetary and financial architecture. A Great Reset offers therefore opportunity to restore (some semblance of) economic fairness in western, and other, economies.

The cult of the expert – and how it collapsed

Led by a class of omnipotent central bankers, experts have gained extraordinary political power. Will a populist backlash shatter their technocratic dream?

Sebastian Mallaby in The Guardian

On Tuesday 16 September 2008, early in the afternoon, a self-effacing professor with a neatly clipped beard sat with the president in the Roosevelt Room of the White House. Flanked by a square-shouldered banker who had recently run Goldman Sachs, the professor was there to tell the elected leader of the world’s most powerful country how to rescue its economy. Following the bankruptcy of one of the nation’s storied investment banks, a global insurance company was now on the brink, but drawing on a lifetime of scholarly research, the professor had resolved to commit $85bn of public funds to stabilising it.

The sum involved was extraordinary: $85bn was more than the US Congress spent annually on transportation, and nearly three times as much as it spent on fighting Aids, a particular priority of the president’s. But the professor encountered no resistance. “Sometimes you have to make the tough decisions,”the president reflected. “If you think this has to be done, you have my blessing.”

Later that same afternoon, Federal Reserve chairman Ben Bernanke, the bearded hero of this tale, showed up on Capitol Hill, at the other end of Pennsylvania Avenue. At the White House, he had at least been on familiar ground: he had spent eight months working there. But now Bernanke appeared in the Senate majority leader’s conference room, where he and his ex-Wall Street comrade, Treasury secretary Hank Paulson, would meet the senior leaders of both chambers of Congress. A quiet, balding, unassuming technocrat confronted the lions of the legislative branch, armed with nothing but his expertise in monetary plumbing.

Bernanke repeated his plan to commit $85bn of public money to the takeover of an insurance company.

“Do you have 85bn?” one sceptical lawmaker demanded.

“I have 800bn,” Bernanke replied evenly – a central bank could conjure as much money as it deemed necessary.

But did the Federal Reserve have the legal right to take this sort of action unilaterally, another lawmaker inquired?

Yes, Bernanke answered: as Fed chairman, he wielded the largest chequebook in the world – and the only counter-signatures required would come from other Fed experts, who were no more elected or accountable than he was. Somehow America’s famous apparatus of democratic checks and balances did not apply to the monetary priesthood. Their authority derived from technocratic virtuosity.

When the history is written of the revolt against experts, September 2008 will be seen as a milestone. The $85bn rescue of the American International Group (AIG) dramatised the power of monetary gurus in all its anti-democratic majesty. The president and Congress could decide to borrow money, or raise it from taxpayers; the Fed could simply create it. And once the AIG rescue had legitimised the broadest possible use of this privilege, the Fed exploited it unflinchingly. Over the course of 2009, it injected a trillion dollars into the economy – a sum equivalent to nearly 30% of the federal budget – via its newly improvised policy of “quantitative easing”. Time magazine anointed Bernanke its person of the year. “The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world,” the magazine declared admiringly.

The Fed’s swashbuckling example galvanized central bankers in all the big economies. Soon Europe saw the rise of its own path-shaping monetary chieftain, when Mario Draghi, president of the European Central Bank, defused panic in the eurozone in July 2012 with two magical sentences. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he vowed, adding, with a twist of Clint Eastwood menace, “And believe me, it will be enough.” For months, Europe’s elected leaders had waffled ineffectually, inviting hedge-fund speculators to test the cohesion of the eurozone. But now Draghi was announcing that he was badder than the baddest hedge-fund goon. Whatever it takes. Believe me.

In the summer of 2013, when Hollywood rolled out its latest Superman film, cartoonists quickly seized upon a gag that would soon become obvious. Caricatures depicted central-bank chieftains decked out in Superman outfits. One showed Bernanke ripping off his banker’s shirt and tie, exposing that thrilling S emblazoned on his vest. Another showed the bearded hero hurtling through space, red cape fluttering, right arm stretched forward, a powerful fist punching at the void in front of him. “Superman and Federal Reserve chairman Ben Bernanke are both mild-mannered,” a financial columnist deadpanned. “They are both calm, even in the face of global disasters. They are both sometimes said to be from other planets.”

At some point towards the middle of the decade, shortly before the cult of the expert smashed into the populist backlash, the shocking power of central banks came to feel normal. Nobody blinked an eye when Haruhiko Kuroda, the head of Japan’s central bank, created money at a rate that made his western counterparts seem timid. Nobody thought it strange when Britain’s government, perhaps emulating the style of the national football team, conducted a worldwide talent search for the new Bank of England chief. Nobody was surprised when the winner of that contest, the telegenic Canadian Mark Carney, quickly appeared in newspaper cartoons in his own superman outfit. And nobody missed a beat when India’s breathless journalists described Raghuram Rajan, the new head of the Reserve Bank of India, as a “rock star”, or when he was pictured as James Bond in the country’s biggest business newspaper. “Clearly I am not a superman,” Rajan modestly responded.


No senator would have his child’s surgery performed by an amateur. So why would he not entrust experts with the economy?

If Bernanke’s laconic “I have 800bn” moment signalled a new era of central-banking power, Rajan’s “I am not a superman” wisecrack marked its apotheosis. And it was a high watermark for a wider phenomenon as well, for the cult of the central banker was only the most pronounced example of a broader cult that had taken shape over the previous quarter of a century: the cult of the expert. Even before Bernanke rescued the global economy, technocrats of all stripes – business leaders, scientists, foreign and domestic policy wonks – were enthralled by the notion that politicians might defer to the authority of experts armed with facts and rational analysis. Those moments when Bernanke faced down Congress, or when Draghi succeeded where bickering politicians had failed, made it seem possible that this technocratic vision, with its apolitical ideal of government, might actually be realised.

The key to the power of the central bankers – and the envy of all the other experts – lay precisely in their ability to escape political interference. Democratically elected leaders had given them a mission – to vanquish inflation – and then let them get on with it. To public-health experts, climate scientists and other members of the knowledge elite, this was the model of how things should be done. Experts had built Microsoft. Experts were sequencing the genome. Experts were laying fibre-optic cable beneath the great oceans. No senator would have his child’s surgery performed by an amateur. So why would he not entrust experts with the economy?

In 1997, the economist Alan Blinder published an essay in Foreign Affairs, the house journal of the American foreign policy establishment. His title posed a curious question: “Is government too political?”

Four years earlier, Blinder had left Princeton University, his academic home for two decades, to do battle in the public square as a member of President Bill Clinton’s Council of Economic Advisors. The way Blinder saw things, this was a responsibility more than a pleasure: experts had a duty to engage in public debates – otherwise, “the quacks would continue to dominate the pond”, as he had once written. Earnest, idealistic, but with a self-deprecating wit, Blinder was out to save the world from returning to that dark period in the Reagan era when supply-side ideologues ruled the roost and “nonsense was worshipped as gospel”. After two years at the White House and another two as vice chairman of the Fed, Blinder’s essay was a reflection on his years of service.

His argument reflected the contrast between his two jobs in Washington. At the White House, he had advised a brainy president on budget policy and much else, but turning policy wisdom into law had often proved impossible. Even when experts from both parties agreed what should be done, vested interests in Congress conspired to frustrate enlightened progress. At the Fed, by contrast, experts were gloriously empowered. They could debate the minutiae of the economy among themselves, then manoeuvre the growth rate this way or that, without deferring to anyone.

To Blinder, it was self-evident that the Fed model was superior – not only for the experts, but also in the eyes of the public. The voters did not want their members of Congress micromanaging technical affairs – polls showed declining trust in politicians, and it was only a small stretch to suggest that citizens wanted their political leaders to delegate as much as possible to experts. “Americans increasingly believe that their elected officials are playing games rather than solving problems,” Blinder wrote. “Political debate has too much ‘spin’ and too little straight talk.” In sum, too much meddling by elected politicians was a turn-off for the voters who elected them. It was a paradoxical contention.

Disaffection with the political mainstream in the America of the 1990s had created a yearning for white-hatted outsiders as potential presidential candidates: the billionaire businessman Ross Perot, who ran in 1992 and 1996; the anti-politician, Steve Forbes, whose signature proposal was to radically simplify America’s byzantine tax code. But rather than replace politicians with populist outsiders, whose grasp of public policy was suspect, Blinder advanced an alternative idea: the central-bank model of expert empowerment should be extended to other spheres of governance.

Blinder’s proposal was most clearly illustrated by tax policy. Experts from both political parties agreed that the tax system should be stripped of perverse incentives and loopholes. There was no compelling reason, for example, to encourage companies to finance themselves with debt rather than equity, yet the tax code allowed companies to make interest payments to their creditors tax-free, whereas dividend payments to shareholders were taxed twice over. The nation would be better off if Congress left the experts to fix such glitches rather than allowing politics to frustrate progress. Likewise, environmental targets, which balanced economic growth on the one hand and planetary preservation on the other, were surely best left to the scholars who understood how best to reconcile these duelling imperatives. Politicians who spent more of their time dialing for dollars than thinking carefully about policy were not up to these tasks. Better to hand them off to the technicians in white coats who knew what they were doing.


A dark question lurked in educated minds. If all the isms were wasms, if history was over, what good were politicians?

The call to empower experts, and to keep politics to a minimum, failed to trigger a clear shift in how Washington did business. But it did crystallise the assumptions of the late 1990s and early 2000s – a time when sharp criticisms of gridlock and lobbying were broadly accepted, and technocratic work-arounds to political paralysis were frequently proposed, even if seldom adopted. President Barack Obama’s (unsuccessful) attempt to remove the task of tackling long-term budget challenges from Congress by handing them off to the bipartisan Simpson-Bowles commission was emblematic of this same mood. Equally, elected leaders at least paid lip service to the authority of experts in the government’s various regulatory agencies – the Food and Drug Administration, the Securities and Exchange Commission, and so on. If they nonetheless overruled them for political reasons, it was in the dead of night and with a guilty conscience.

And so, by the turn of the 21st century, a new elite consensus had emerged: democracy had to be managed. The will of the people had its place, but that place had to be defined, and not in an expansive fashion. After all, Bill Clinton and Tony Blair, the two most successful political leaders of the time, had proclaimed their allegiance to a “third way”, which proposed that the grand ideological disputes of the cold war had come to an end. If the clashes of abstractions – communism, socialism, capitalism and so on –were finished, all that remained were practical questions, which were less subjects of political choice and more objects of expert analysis. Indeed, at some tacit, unarticulated level, a dark question lurked in educated minds. If all the isms were wasms, if history was over, what good were politicians?

 

Federal Reserve chairman Ben Bernanke testifies before Congress in October 2011. Photograph: Jim Lo Scalzo/EPA

For Blinder and many of his contemporaries, the ultimate embodiment of empowered gurudom was Alan Greenspan, the lugubrious figure with a meandering syntax who presided over the Federal Reserve for almost two decades. Greenspan was a technocrat’s technocrat, a walking, talking cauldron of statistics and factoids, and even though his ideological roots were in the libertarian right, his happy collaboration with Democratic experts in the Clinton administration fitted the end-of-history template perfectly. At Greenspan’s retirement in 2006, Blinder and a co-author summed up his extraordinary standing. They proclaimed him “a living legend”. On Wall Street, “financial markets now view Chairman Greenspan’s infallibility more or less as the Chinese once viewed Chairman Mao’s”.

Greenspan was raised during the Great Depression, and for much of his career, such adulation would have been inconceivable – for him or any central banker. Through most of the 20th century, the men who acted as bankers to the bankers were deliberately low-key. They spurned public attention and doubted their own influence. They fully expected that politicians would bully them into trying to stimulate the economy, even at the risk of inflation. In 1964, in a successful effort to get the central bank to cut interest rates, Lyndon Johnson summoned the Fed chairman William McChesney Martin to his Texas ranch and pushed him around the living room, yelling in his face, “Boys are dying in Vietnam, and Bill Martin doesn’t care!” In democracies, evidently, technocratic power had limits.

Through the 1970s and into the 1980s, central-bank experts continued to be tormented. Richard Nixon and his henchmen once smeared Arthur Burns, the Fed chairman, by planting a fictitious story in the press, insinuating that Burns was simultaneously demanding a huge pay rise for himself and a pay freeze for other Americans. Following in this tradition, the Reagan administration frequently denounced the Fed chief, Paul Volcker, and packed the Fed’s board with pro-Reagan loyalists, who ganged up against their chairman.


There were Alan Greenspan postcards, Alan Greenspan cartoons, Alan Greenspan T-shirts, even an Alan Greenspan doll

When Greenspan replaced Volcker in 1987, the same pattern continued at first. The George HW Bush administration tried everything it could to force Greenspan to cut interest rates, to the point that a White House official put it about that the unmarried, 65-year-old Fed chairman reminded him of Norman Bates, the mother-fixated loner in Hitchcock’s Psycho.

And yet, starting with the advent of the Clinton administration, Greenspan effected a magical shift in the prestige of monetary experts. For the last 13 years of his tenure, running from 1993 to 2006, he attained the legendary status that Blinder recognised and celebrated. There were Alan Greenspan postcards, Alan Greenspan cartoons, Alan Greenspan T-shirts, even an Alan Greenspan doll. “How many central bankers does it take to screw in a lightbulb?” asked a joke of the time. “One,” the answer went: “Greenspan holds the bulb and the world revolves around him.” Through quiet force of intellect, Greenspan seemed to control the American economy with the finesse of a master conductor. He was the “Maestro”, one biographer suggested. The New Yorker’s John Cassidy wrote that Greenspan’s oracular pronouncements became “as familiar and as comforting to ordinary Americans as Prozac and The Simpsons, both of which debuted in 1987, the same year President Reagan appointed him to office”.

Greenspan’s sway in Washington stretched far beyond the Fed’s core responsibility, which was to set interest rates. When the Clinton administration wanted to know how much deficit reduction was necessary, it asked Greenspan for a number, at which point that number assumed a talismanic importance, for no other reason than that Greenspan had endorsed it. When Congress wanted to understand how far deficit reduction would bring bond yields down, it demanded an answer from Greenspan, and his answer duly became a key plank of the case for moving towards budget balance. The Clinton adviser Dick Morris summed up economic policy in this period: “You figure out what Greenspan wants, and then you get it to him.”

Greenspan loomed equally large in the US government’s management of a series of emerging market meltdowns in the 1990s. Formally, the responsibility for responding to foreign crises fell mainly to the Treasury, but the Clinton team relied on Greenspan – for ideas and for political backing. With the Republicans controlling Congress, a Democratic president needed a Republican economist to vouch for his plans – to the press, Congress, and even the conservative talk radio host Rush Limbaugh. “Officials at the notoriously reticent Federal Reserve say they have seldom seen anything like it,” the New York Times reported in January 1995, remarking on the Fed chairman’s metamorphosis from monetary technocrat into rescue salesman. In 1999, anticipating the moment when it anointed Ben Bernanke its man of the year, Time put Greenspan on its cover, with smaller images of the Treasury secretary and deputy Treasury secretary flanking him. Greenspan and his sidemen were “economist heroes”, Time lectured its readers. They had “outgrown ideology”.

By the last years of his tenure, Greenspan’s reputation had risen so high that even fellow experts were afraid of him. When he held forth at the regular gatherings of central bank chiefs in Basel, the distinguished figures at the table, titans in their own fields, took notes with the eagerness of undergraduates. So great was Greenspan’s status that he started to seem irreplaceable. As vice-president Al Gore prepared his run for the White House, he pronounced himself Greenspan’s “biggest fan” and rated the chairman’s performance as “outstanding A-plus-plus”. Not to be outdone, the Republican senator John McCain wished the chairman could stay at his post into the afterlife. “I would do like we did in the movie Weekend at Bernie’s,” McCain joked during a Republican presidential primary debate. “I’d prop him up and put a pair of dark glasses on him and keep him as long as we could.”

How did Greenspan achieve this legendary status, creating the template for expert empowerment on which a generation of technocrats sought to build a new philosophy of anti-politics? The question is not merely of historical interest. With experts now in retreat, in the United States, Britain and elsewhere, the story of their rise may hold lessons for the future.

Part of the answer lies in the circumstances that Greenspan inherited. In the United States and elsewhere, central bankers were given space to determine interest rates without political meddling because the existing model had failed. The bullying of central banks by Johnson and Nixon produced the disastrous inflation of the 1970s, with the result that later politicians wanted to be saved from themselves – they stopped harassing central banks, understanding that doing so damaged economic performance and therefore their own reputations. Paul Volcker was a partial beneficiary of this switch: even though some Reagan officials attacked him, others recognised that he must be given the space to drive down inflation. Following Volcker’s tenure, a series of countries, starting with New Zealand, granted formal independence to their central banks. Britain crossed this Rubicon in 1997. In the United States, the Fed’s independence has never been formal. But the climate of opinion on monetary issues offered a measure of protection.

Healthy economic growth was another factor underpinning Greenspan’s exalted status. Globalisation, coupled with the surge of productivity that followed the personal computer revolution, made the 1990s a boom time. The pro-market policies that Greenspan and his fellow experts had long advocated seemed to be delivering the goods, not only in terms of growth but also in falling inequality, lower rates of crime, and lower unemployment for disadvantaged minorities. The legitimacy of experts relies on their presumed ability to deliver progress. In Greenspan’s heyday, experts over-delivered.

Yet these fortunate circumstances are not the whole story. Greenspan amassed more influence and reputation than anyone else because there was something special about him. He was not the sort of expert who wanted to confine politics to its box. To the contrary, he embraced politics, and loved the game. He understood power, and was not afraid to wield it.


Greenspan’s genius was to combine high-calibre expert analysis with raw political methods

Greenspan is regarded as the ultimate geek: obsessed with obscure numbers, convoluted in his speech, awkward in social settings. Yet he was far more worldly than his technocratic manner suggested. He entered public life when he worked for Nixon’s 1968 campaign – not just as an economic adviser, but as a polling analyst. In Nixon’s war room, he allied himself with the future populist presidential candidate Patrick Buchanan, and his memos to Nixon were peppered with ideas on campaign spin and messaging. In 1971, when Nixon went after the Fed chairman, Arthur Burns, Greenspan was recruited to coax Burns into supporting the president. In the mid-1970s, when Greenspan worked in the Gerald Ford administration, he once sneaked into the White House on a weekend to help rewrite a presidential speech, burying an earlier draft penned by a bureaucratic opponent. At the Republican convention in 1980, Greenspan tried to manoeuvre Ford on to Ronald Reagan’s ticket – an outlandish project to get an ex-president to serve as vice president.

Greenspan’s genius was to combine high-calibre expert analysis with raw political methods. He had more muscle than a mere expert and more influence than a mere politician. The combination was especially potent because the first could be a cover for the second: his political influence depended on the perception that he was an expert, and therefore above the fray, and therefore not really political. Unlike politician-politicians, Greenspan’s advice had the ring of objectivity: he was the man who knew the details of the federal budget, the outlook for Wall Street, the political tides as they revealed themselves through polling data. The more complex the problems confronting the president, the more indispensable Greenspan’s expertise became. “He has the best bedside manner I’ve ever seen,” a jealous Ford administration colleague recalled, remarking on Greenspan’s hypnotic effect on his boss. “Extraordinary. That was his favourite word. He’d go in to see Ford and say, ‘Mr President, this is an extraordinarily complex problem.’ And Ford’s eyes would get big and round and start to go around in circles.”

By the time Greenspan became Fed chairman, he was a master of the dark arts of Washington. He went to extraordinary lengths to cultivate allies, fighting through his natural shyness to attend A-list parties, playing tennis with potentially troublesome financial lobbyists, maintaining his contacts on Wall Street, building up his capital by giving valuable counsel to anyone who mattered. Drawing on the advantage of his dual persona, Greenspan offered economic advice to politicians and political advice to economists. When Laura Tyson, an exuberant Berkeley economist, was appointed to chair Bill Clinton’s Council of Economic Advisers, she was flattered to find that the Fed chairman had tips on her speaking style. Too many hand gestures and facial expressions could undermine her credibility, Greenspan observed. The CEA chairwoman should simply present facts, with as little visual commentary as possible.

Greenspan’s critics frequently complained that he was undermining the independence of the Fed by cosying up to politicians. But the critics were 180 degrees wrong: only by building political capital could Greenspan protect the Fed’s prerogatives. Clinton had no natural love for Greenspan: he would sometimes entertain his advisers with a cruel imitation of him – a cheerless old man droning on about inflation. But after a landmark 1993 budget deal and a 1995 bailout of Mexico, Clinton became a firm supporter of the Fed. Greenspan had proved that he had clout. Clinton wanted to be on the right side of him.

The contrast with Greenspan’s predecessor, the rumpled, egg-headed Paul Volcker, is revealing. Volcker lacked Greenspan’s political skills, which is why the Reagan administration succeeded in packing his board with governors who were ready to outvote him. When Greenspan faced a similar prospect, he had the muscle to fight back: in at least one instance, he let his allies in the Senate know that they should block the president’s candidate. Volcker also lacked Greenspan’s facility in dealing with the press – he refused to court public approval and sometimes pretended not to notice a journalist who had been shown into his office to interview him. Greenspan inhabited the opposite extreme: he courted journalists assiduously, opening presents each Christmas at the home of the Wall Street Journal’s Washington bureau chief, Al Hunt, flattering reporters with private interviews even as he berated other Fed governors for leaking to them. It was only fitting that, halfway through his tenure, Greenspan married a journalist whose source he had once been.

The upshot was that Greenspan maximised a form of power that is invaluable to experts. Because journalists admired him, it was dangerous for politicians to pick a fight with the Fed: in any public dispute, the newspaper columnists and talking heads would take Greenspan’s side of the argument. As a result, the long tradition of Fed-bashing ceased almost completely. Every Washington insider understood that Greenspan was too powerful to touch. People who got on the wrong side of him would find their career prospects dim. They would see their intellectual shortcomings exposed. They would find themselves diminished.

 

Mark Carney, the governor of the Bank of England, in 2015. Photograph: Jonathan Brady/AFP/Getty Images

Of course, the triumph of the expert was bound to be fragile. In democracies, the will of the people can be sidelined only for so long, and 2016 has brought the whirlwind. The Brexit referendum featured Michael Gove’s infamous assertion that “the British people have had enough of experts”. Since the vote, Mark Carney, the Bank of England governor once pictured as superman, has been accused by the government of running dubious monetary experiments that exacerbate inequality – an attack picked up by William Hague, who this week threatened the central bank with the loss of its independence unless it raised interest rates. In the United States, Donald Trump has ripped into intellectuals of all stripes, charging Fed chair Janet Yellen with maintaining a dangerously loose monetary policy in order to help Obama’s poll ratings.

Inside the Bank of England



Both Gove and Trump sensed, correctly, that experts were primed for a fall. The inflationary catastrophe sparked by 1970s populism has faded from the public memory, and no longer serves as a cautionary tale. Economies have recovered disappointingly from the 2008 crash – a crash, incidentally, for which Greenspan must share the blame, since he presided over the inflation of the subprime mortgage bubble. What little growth there has been has also passed most people by, since the spoils have been so unequally distributed. If the experts’ legitimacy depends on delivering results, it is hardly surprising that they are on the defensive.

And yet the history of the rise of the experts should remind us of three things. First, the pendulum will swing back, just as it did after the 1970s. The saving grace of anti-expert populists is that they do discredit themselves, simply because policies originating from the gut tend to be lousy. If Donald Trump were to be elected, he would almost certainly cure voters of populism for decades, though the price in the meantime could be frightening. In Britain, which is sliding towards a wreck of a divorce with its most important trading partners, the delusions and confusions of the Brexit camp will probably exact an economic price that will be remembered for a generation.

Second, Alan Blinder had a point: democratic politics is prone to errors and gridlock, and there is much to be said for empowering technocrats. The right balance between democratic accountability and expert input is not impossible to strike: the model of an independent central bank does provide a template. Popularly elected politicians have a mandate to determine the priorities and ambitions of the state, which in turn determine the goals for expert bodies – whether these are central banks, environmental agencies, or the armed forces. But then it behooves the politicians to step back. Democracy is strengthened, not weakened, when it harnesses experts.

Thirdly, however, if the experts want to hasten their comeback, they must study the example of Greenspan’s politicking. It is no use thinking that, in a democracy, facts and analysis are enough to win the day. As the advertising entrepreneur John Kearon has argued, the public has to feel you are correct; the truth has to be sold as well as told; you have to capture the high ground with a brand that is more emotionally compelling than that of your opponents. In this process, as Greenspan’s career demonstrates, the media must be wooed. Enemies must be undermined. And, if you succeed, your face might just appear on a T-shirt.

Two decades ago, in his final and posthumous book, the American cultural critic Christopher Lasch went after contemporary experts. “Elites, who define the issues, have lost touch with the people,” he wrote. “There has always been a privileged class, even in America, but it has never been so dangerously isolated from its surroundings.” These criticisms presciently anticipated the rise of Davos Man – the rootless cosmopolitan elite, unburdened by any sense of obligation to a place of origin, its arrogance enhanced by the conviction that its privilege reflects brains and accomplishment, not luck and inheritance. To survive these inevitable resentments, elites will have to understand that they are not beyond politics – and they will have to demonstrate the skill to earn the public trust, and preserve it by deserving it. Given the alternative, we had better hope that they are up to it.

You can print money, so long as it’s not for the people

Zoe Williams in The Guardian

In its broadest sense, the phrase “there’s no magic money tree” is just a variation on “money doesn’t grow on trees”, a thing you say to children to indicate that wealth comes not from the beneficence of a magical universe, but from hard graft in a corporeal reality. The pedantic child might point to the discrepant amounts of work required to yield a given amount of money, and say that its value is a social construction.

Over time, that loose, rather weak-minded meaning has ceded to a specific economic critique; Jeremy Corbyn – along with anyone who challenges the prevailing fiscal narrative – is dangerous and wrong, since he wants to print money. Money cannot be created from nowhere, because there’s no magic money tree. End of.

The flaw in that argument is that all money is created from nowhere. In normal circumstances, it is created from nowhere as credit, by private banks, and lent to us, usually (85% of the time) in the form of a mortgage on an existing residential property. Decades of credit extension have perverted the housing market to turn a mortgage into a lifetime’s bonded servitude. The economists Jordá, Schularick and Taylor argued convincingly last year that the causes of this economic crisis, the next and the one before are all, fundamentally, the extension of credit and its impact on house prices. So the magic money tree isn’t gushing cash in a socially responsible fashion (if it were used responsibly, it wouldn’t be magic) but the idea that we have a centrally planned, carefully stewarded monetary policy, with finite creation and demonstrable long-term aims, which some loonie leftie wants to come along and unravel, is simply wrong.

In abnormal circumstances, such as the ones we’ve lived through since the financial crisis, central banks are also magic money trees. In the bizarre construction of current economic orthodoxy, you’re not allowed to say so, even though the Bank of England has created £375bn in quantitative easing (QE); theFederal Reserve bought $1.25tn worth of mortgage-backed securities in its first round of QE; the European Central Bank had as a core principle that it couldn’t create money until, suddenly, in awesome amounts, it could; the Bank of Korea has a stimulus package, as does the People’s Bank of China; and Japan started it. Central banks typically justify money creation on the basis that it’s temporary, it’s unfortunate, it’s driven by the crisis and it will ultimately get back to normal.

None of that alters the fact that no bank had that money in savings. I recently said out loud, “we do have a magic money tree, it’s called the Bank of England” in a Newsnight debate with a former adviser to Blair, John McTernan. He made a face like a politician accidentally talking to a member of the public but what the camera didn’t catch was Evan Davis, who stuck his tongue out, like a cat taking a pill. It was days ago, and people are still tweeting me pictures of the Zimbabwean dollar and the Weimar Republic, saying “is this what you want? IS IT?”

Quantitative easing is bizarrely unapproachable, even though it’s happening right across the world and its unwinding will dominate the economic picture for years to come; one is allowed to reference QE, so long as one maintains at all times a technocratic tone, to indicate that one understands and approves of it as nothing more than a lever to create stability. It was the best idea ever, until you suggest something similar could be done for a social purpose, and then it’s the most perilous idea ever. To interrogate why the benefit must always go to the existing asset-holding class, why human ingenuity can’t devise anything more productive and equitable, is to reveal the shaming depth of your incomprehension. It’s not that you don’t understand money; it’s that you don’t understand the exigencies of the debate, which are that you sign up to a number of false principles before you start.

It turned out that the “no money tree” brigade meant: “If you create money infinitely, that will cause inflation” That is a really curious argument against Corbyn’s people’s QE, like going up to someone eating a banana and saying: “If you eat limitless bananas, you will give yourself potassium poisoning.” There’s a secondary argument about the independence of central banks from governments, which is actually rather an elegant example of our dishevelled politics: if the government issues no directive to the Bank of England, and all the gains of QE go to the wealthiest, that’s “independent”. If the government had said, invest this in, say, the green economy, that would have been independence lost. It has become normal to see upwards redistribution as a law of the physical universe, and anything else as the interference of a heavy-handed state.

None of this is to say that people’s QE is straightforward and unproblematic; Corbyn is talking about spending on infrastructure (housing, broadband), whereas that phrase as it was coined described helicopter money, or overt money financing, literally getting money into the economy by randomly giving it to people. They’re two discrete propositions – overt money financing and green and social investment – and rolling them into one doesn’t do much to promote understanding on this terrain.

However, the real barrier to debate is, as with so much in the realm of debt and austerity, that it’s conducted in bad faith, with infantilising aphorisms, aimed not at deepening understanding but at shooing away public interest with unavoidable economic realities. As a tactic, this has reached the end of its plausibility.

An economy is not like a household budget

Repeat after me: the Australian economy is not like a household budget

Our political and economic thinking has been warped by bad analogies to the point where we can’t see the real economy. The Abbott government is happy to play along

• 
• • Warwick Smith
  • theguardian.com, Thursday 8 January 2015 23.57 GMT

‘National governments with their own currency bear absolutely no resemblance to a household or a business.’ Photograph: Scott Lewis/flickr

To prosecute its economic agenda, the Abbott government has relied on the constant repetition of economic myths. I’ve previously dealt with the myths of the budget emergency, the debt crisis and the endlessly repeated lie that the carbon tax was wrecking the economy – but these are only the most obvious myths and not necessarily the most important.

This week, Mathias Cormann repeated one of the other great myths of modern government financing, saying that it was “unfair to rob our children and grandchildren of their opportunities [in order] to pay for today’s lifestyle”.

The suggestion that future generations will have a reduced standard of living because of our government debt needs some unpacking.

What is it that limits the standard of living of people in 2030? It’s the goods and services that those people can produce. Goods and services cannot be sent back in time in order to pay for past spending. The standard of living of people in 2030 will be a factor of the number of workers and their productivity, not how much debt their government carries from the past. So where does government debt fit in?

As I’ve explained elsewhere, the finances of a sovereign government with its own fiat currency bear absolutely no resemblance to the finances of a household or a business. The federal government can create money. They don’t create all of the money that they need for all their expenses because that would cause out-of-control inflation.

The obvious conclusion to be drawn from these two uncontroversial facts is that taxation and borrowing are not the limiting factors on government expenditure, inflation is. Acknowledging this completely turns the mainstream commentary on government financing on its head.

The federal government does not need anybody else’s money in the form of taxation or borrowing in order to spend. They can create money. The reason they tax and borrow is to take money out of the economy so that their spending does not cause inflation or affect official interest rates. In other words, taxation and government debt are tools for economic management, not for revenue raising.

You may have to sit with all this for a moment and calm the voice in your head that is telling you it can’t possibly be true. Our political and economic thinking has been so thoroughly colonised by the finance industry that we often find it difficult to see the real economy. The real economy is the labour of workers combined with capital and land to produce goods and services.

How did the massive postwar government debts impact on the lives of people living in the 1950s and 60s? It didn’t. These are often referred to as the “golden years” where inequality fell and the standard of living rose at a dramatic pace. Could the workers in the postwar years send their goods and services back in time to support or pay for the war effort? Of course not, it’s a ludicrous proposition. Abbott and Hockey’s suggestion that future generations will suffer because of today’s government spending is just as ludicrous.

The only way in the real economy that future generations can suffer because of today’s government debt is if the government raises taxes or cuts spending in order to repay the debt and this causes higher unemployment. This is never necessary and governments who advocate this (like the Abbott government) have fallen prey to household finance analogies.

While there is spare capacity in the economy, inflation risk is low and there is room for greater government expenditure. One simplistic measure of spare capacity is unemployment. While there is excess unemployment there is room for more (targeted) government expenditure. In other words, sovereign governments have the capacity toalways maintain low levels of unemployment if they use inflation as their expenditure cap rather than taxes and borrowing.

If unemployment is the only price future generations pay for today’s government debt and the government can always lower unemployment by more spending, what’s the impact on future generations of government debt? None. Why then don’t we just go on a massive spending spree and have huge debts? Because spending beyond the productive capacity of the real economy would cause inflation.

The costs of too much government expenditure are felt immediately afterwards in the form of inflation and are not borne by future generations.

Hopefully now you can see the full picture. Government expenditure today is not limited by taxation or borrowing but by inflation risk. Government expenditure in 2030 will not be limited by taxation, borrowing or previous debt but by inflation risk. When you’re first presented with these facts it can seem like a magic pudding or a perpetual motion machine but that’s just because we’re used to thinking about finances from a household or business perspective.

National governments with their own currency bear absolutely no resemblance to a household or a business. All of the frequently used analogies give a distorted picture of the reality of government finances. To get a clear picture you need to peel back all the layers of finance speak and look at the real economy.

There are many important conversations and debates we should be having about government finances, the role of government, productivity, consumption and leisure. We cannot have them while the government and media commentators perpetuate myths about how our economy actually functions. Ultimately the material standard of living of future generations is going to depend on the productivity of workers and on a safe environment and climate. Now there’s a policy conversation worth having.