As a 65 year old winner of the Nobel Prize in Economics, Joseph Stiglitz is not someone that mainstream economists can dismiss as either a crank or senile–the usual reactions to anyone who opposes conventional thought in economic theory or policy.
So when he comes out and says that inflation targetting is foolish and dangerous, his views are worth taking note of. Here is Stiglitz’s commentary on inflation targetting, published earlier this month.
RBA Assistant Governor Guy Debelle and I spoke at a conference on Subprimes in Adelaide last month. One aspect of my analysis that Guy queried was my emphasis upon the Debt to GDP ratio. He noted that this appeared suspect, because it was comparing a stock (the outstanding level of debt) to a flow (annual GDP).
It’s a valid point to make. The engineer-turned-economist Mickal Kalecki once caustically observed that “economics is the science of confusing stocks with flows”, and I’m a stickler myself for not making that mistake. So making a song and dance about a stock to flow comparison like debt to GDP has to be justified by a sound argument.
Nouriel Roubini is one of the world’s foremost experts on the financial system, and like me, was warning of potential crises while most other commentators could only see roses blooming. He is Professor of Economics at New York University’s Stern School of Business, and founded the RGE Monitor, a highly successful commercial intelligence website. He has recently established a new blog with a focus on Asia, and has kindly asked me to be one of the contributors.
Normally I will simply cross-post my Debtwatch blog, but on occasions I’ll write special purpose entries there. Nouriel has also assembled an interesting team of non-orthodox commentators from the academic and business sectors.
The Reserve Bank Amendment (Enhanced Independence) Bill 2008, which was tabled in Parliament in March, aims to give the RBA Governor and Deputy Governor “the same level of statutory independence as the Commissioner of Taxation and the Australian Statistician” (Wayne Swann, Hansard, Thursday, 20 March 2008, p. 2381).
Under the current Reserve Bank Act, the Governor and Deputy are appointed by the Treasurer, and the Treasurer must remove them from their positions if either of them:
Section One on ” The future of the Australian economy” starts with the following preamble:
“The Australian Government is committed to modernising our economy so that we can compete with the leading nations in a world economy that is being transformed by globalisation, new technologies, and the rise of China and India. While we take full advantage of the mining boom, we must also build long term competitive strengths in the global industries of tomorrow — industries that will provide the high-paying jobs of the future.
The Australia 2020 Summit will examine:
This blog entry first appeared as a feature in the Daily Telegraph on Wednesday April 9th 2008. If you’re a newcomer to it courtesy of that feature, and you want to look at this issue in more depth, there are links below to more detailed analysis.
The Daily Telegraph lived up to its nickname of “The Daily Terror” last week, with a frontpage attack on Reserve Bank of Australia Governor Glenn Stevens entitled “Is he Australia’s most useless?”, and an editorial that was no less provocative: “RBA boss is losing interest”.
I’m giving a talk on subprimes to the “Monty Pelican Society”:
My main topic this month is a comparison of the economic events of today to those of 1973–75, but the most recent Case-Shiller data on US house prices simply has to be “the Chart of the Month”. Last *month* the index dropped by 2.3 percent–implying an annual rate of decline in the realm of 25%! US house prices are down 13% from the peak in mid-2006, and in free-fall now.
Helen Dalley of Sky Business News interviewed me and Tim Mulholland, of Melamed and Associates, a Chicago-based consulting firm, about the Subprime crisis. If you’d like to see the video, click on this link:
http://www.skynews.com.au/video/video.aspx?id=43
Then use the selection panel to choose the third story–with the heading “Sunday Biz”, and the description “Sky News Reporter Helen Dalley talked finance with University of Western Sydney Professor, Steve Keen”.
There has been no shortage of commentators and players willing to vouch that this is the worst financial crisis they have ever seen. Equally, there has been no shortage of bailout moves by the Federal Reserve–remedies that put “the Greenspan Put” to shame in their magnitude.
And yet the market meltdown continues, and the casualties continue to mount, with Bear Stearns the latest–and surely not the last.
In all this, no one yet seems to have posed the question of “why now?”. Why is the crisis clearly more severe this time than ever before, and why are remedies that worked relatively quickly in the past (remember the fast turnaround of the market after October 1987, and the rapid recovery from the rescue of Long Term Capital Management?) failling today?
The answer is, simply, that the world has never in its history carried the level of debt that it is carrying today. The remedies that worked when America’s private debt to GDP ratio was a mere 150 percent (see Figure 1) are inadequate when that ratio is 275 percent.
