Summers: Time to end central bank independence

No about Larry Summers. He gets debt deflation, from MarketWatch:

A central tenet of Federal Reserve policy — that a central bank should remain independent from the national government — is outdated, in light of the lack of demand suffocating the economy, said former Treasury Secretary Larry Summers on Thursday.

Central bank independence “comes from an understanding of the macroeconomic policy problem that is not relevant to current times,” Summers said in a speech at the International Monetary Fund.

Central bank insulation was needed in the 1970s and 1980s to combat inflation, Summers said. That’s because the White House and Congress sometimes saw the short-run benefits of unexpected inflation, while the Fed kept its eyes on the long-run costs, he said.

But that was yesterday’s problem, Summers said. The economy now faces secular stagnation, or a chronic lack of demand.

To fight this, the Treasury should be issuing bonds with long maturities taking advantage of current ultra-low interest rates, Summers said. And the Fed should try not get in the way.

“Reaching that conclusion will require somewhat different thinking that we’re accustomed to in terms of the degree of cooperation between governments and central banks,” Summers said.

In the immediate aftermath of the financial crisis, the Treasury and the Fed often worked at cross purposes. he said. While government spending was rising and the Treasury was selling debt, the Fed was moving in the opposite direction, buying bonds though quantitative easing program for the purpose of shortening the maturity structure to provide stimulus.

In the future, Summers said the two agencies should cooperate to make sure the full benefits of the stimulus reach the economy.

Summers said he was aware that market experts would be leery of such cooperation between the fiscal authority and the central bank out of a concern that inflation may jump.

“I regard that as a virtue, rather than a vice, of the suggestion that I am making in our current environment,” the former Treasury secretary said.

One step further towards helicopter money and the “deleveraging stimulus” that will eventually come.

Houses and Holes
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  1. Was Paul Volcker independent?

    Interest rates were raised to cut inflation and unemployment soared. President Regan cheered it on and said “the homeless choose to be homeless”.

    Was Volcker a puppet of Regan?

    • Had only the anti taxers allowed the more rational option…. but no…. taxes are theft breathers [corporatists] had to knee cap the vulnerable so their soverign debt holdings et al were sacrosanct above all else….

      Disheveled Marsupial….. chattel management was just a side of gravy…. and a good dinner show….

    • Ronin8317MEMBER

      The ‘independent Central Bank’ is just a myth to pass around the political blame for raising interest rates.

      • I think you are possibly right Ronin. On the same line it allows the government to 1. Shuffle the blame for appalling economic management on to the RBA 2. To facilitate the selling off the nation to foreigners in order to finance consumption and the population ponzi – the RBA has no responsibility in that area it seems.
        So effectively nobody is responsible for anything anymore!

      • Additionally when Greenspan testified to Congress that central bankers had learned to make fiat behave like gold.

        Disheveled Marsupial…. now why would anyone want to do that…. self defeating in the end….

  2. ” the degree of cooperation between governments and central banks,” Summers said.”
    So Larry reckons they’re not co-operating full bore already?!
    Besides, what will any recipient of helicopter money do with it? The same as the current beneficiaries – save it or pay down debt.. The World is awash with chronic supply problems, not demand, and nothing is going to correct that as a beggar-thy-neighbour policy of protectionism sweeps across every country.

    • Janet,

      “…Besides, what will any recipient of helicopter money do with it? The same as the current beneficiaries – save it or pay down debt…..”

      That is a heroic assumption.

      The current beneficiaries of expanded money creation – largely in the form of ADI credit – are mostly asset owners/speculators who are well established and content to accumulate/save as many of the deposits ‘created’ by ADI credit creation as they possibly can.

      To conclude that EVERYONE else would do likewise if money creation was more equitable transmitted into the economy is bold to say the least.

      The post GFC ‘cash splash’ by the Rudd government demonstrated that a large chunk of the population have no shortage of purposes they could usefully apply some extra income to.

      Rather than a splash – I would prefer either tax cuts and/or some useful and needed additional expenditure by the public sector.

      With the exercise paid for by the issuance by the AOFM of a single bond to the RBA that pays 0% interest.

      And to ensure that the result does not dribble out externally – as Flawse rightly warns – due to an inflated exchange rate making imports artifically cheap, the exercise MUST be accompanied by real restrictions on the unproductive inflows that are making our exchange rate artificially strong.

      • The Traveling Wilbur

        Rather than a splash – I would prefer either tax cuts and/or

        Bonkers. Absolutely, stark-ravingly-mad bonkers. That’s the one thing this country needs… more people paying less tax. *Head meets Desk*.

    • And is aggravated by the beggar thy neighbour mercantilism orthodoxy..Oh shit, who could have thought all this would inevitably lead to protectionism? lol
      BTW, the USA can largely shut itself off from the rest of the world with only a relatively small impact and recover quickly. (This is America’s Trump card. It’s all those “open” or “global” economies that are deep in the shite.

      • Your comment about the USA is spot on. If the US reduced unproductive capital inflows the US dollar would fall and a whole range of outsourcing /offshoring projects would immediately start to be unwound.

        That is how Trump could immediately start delivering on his promise to Make America Great again.

        But accepting unproductive inflows is how it keeps its ‘friends’ nice and close and its ‘enemies’ closer. The price of being the World Police is being paid by Joe Six Pack and they are fed up.

      • You see, I haven’t forgotten my lessons learnt here. My banging on about the (relatively tiny) car support provided by the government would have been unnecessary if we didn’t have those toxic capital inflows that caused the AUD to be overvalued (except during the China commodities bubble- but that would be temporary)
        Fluck the Globalist Empire, it is toxic.

      • pfh
        If the U.S. got rid of unproductive capital flows it must balance its external account. In that case, in our or the U.S.(or U.K. France et al) economy as they now exist, you cannot go printing up money, either by Banks or government, and throwing it around at zero percent.

      • Flawse,

        If you restrict unproductive capital inflows, the external account will take care of itself.

        People will not sell you anything if you have no money they want AND you refuse to accept the credit they are happy to extend you.

        Restricting unproductive inflows is simply refusing offers of credit from offshore. If you refuse the credit you dont get the goods. It is as simply as that.


        Because when you restrict your unproductive capital inflows the currency will fall. As it falls import substitution starts and imports decrease simply because the price of imports start to rise immediately.

        Cutting unproductive inflows is how you fix the trade imbalance because you are forcing a repricing of imports.

        What is more you can control the speed of the process by progressively tightening the restrictions.

        Thus my recommendation that APRA direct the banks to reduce offshore borrowing related to mortgages on existing property to ZERO over a number of years. 5 years would be ambitious 10 years quite relaxed.

    • Janet
      Not sure what economy you are looking at. CAD’s are rising in nearly all Western economies despite falling oil prices. So that indicates some of the funding being spent and ending up in the external account.

  3. Central Bank independence would be much less damaging if the role of the central bank was more limited.

    There is a role for an independent organisation to measure inflation / deflation – using a range of measures – and to advise the government on the stance of fiscal policy required to maintain a stable currency.

    Independant and empirically based advice as to whether a deficit or surplus is required for the year ahead would be of real value. The government would then be free to pursue its mandate within that budgetary constraint.

    However, the current role for a central bank like the RBA is fundamentally misconceived and quite clearly a failure.

    The idea that the RBA and APRA should try to manage the allocation of resources in the economy by controlling the price and access to public money created by private banks is a proven failure on multiple levels.

    The most fundamental problem is that the recipients of ADI created money are generally existing asset owners (as banks require those assets to be pledged as security) and that means that asset prices inevitably get pumped. Which means the asset owners get richer and the asset less become relatively poorer.

    Rising inequality? You can blame the current model of central bank independence for that.

    Not only are asset prices being pumped by the ADI created money but it stagnates in the economy in the bank accounts of the few rather than the many.

    You could not invent a more dysfunctional and ineffective monetary system if you tried to.

    The ideology behind the current system is simple. Money creation should not be in the hands of the government and the way to do that is to DEMAND balanced budgets – if not every year then over the cycle. Instead as much new public money creation as possible is to be restricted to the credit creation activities of the ADIs aka private licensed banks.

    And to make sure this ideological ‘theft’ of the commons (control of public money) cannot be unwound, the ‘regulation’ of this extraordinary privatisation project would be made ‘independent’ and given to the RBA and APRA.

    So if you think the system is rigged to pump up house prices and it has gotten worse since central bank ‘independence’ you are not mistaken. It is baked in.

    Larry is right to be arguing that “We need to talk about Central Bank independence” but it is the role of central banks in our current monetary system we need to talk about rather than independence specifically.

    • +1
      They are incapable of doing their job: measuring inflation and setting appropriate rates. Australia has had at least two decades of hyperinflation in home prices, the most expensive consumption item one can buy, yet structural rate slashing is their decision because a fkn bread loaf price changed by a few cents. FFS.

  4. “To fight this, the Treasury should be issuing bonds with long maturities taking advantage of current ultra-low interest rates, Summers said. And the Fed should try not get in the way.”
    The bloke has no clue. For starters he confuses cause and effect!

  5. I admire Summers for his ability to abandon conventional wisdom and embrace new ideas. He was one of the architects of the roaring 90s, but has since become the leading spokesperson against secular stagnation. We should welcome such open minded in an age where neoliberals cling to dead ideas much like Marxists during the Soviet era.

  6. The concept of helicopter money is very broad and conjures an image of scatter gun spending by the govt – along the lines of rudd’s wasteful cheques. It could potentially capture infrastructure investment, but it is much a broader concept than this, What you are advocating is a program of productive investment in infrastructure as part of fiscal policy. You are misusing the term and potentially confusing your readers. Please clarify this in a post and cease from referring to it as helicopter money.

  7. Throwing around terms like “helicopter money” is not helpful. Do you mean that governments ought run higher deficits to create full employment and increase efficiency and quality of life by investing in new, replacement or additional, infrastructure, or do you mean that pensions and unemployment benefits ought be increased to increase demand from those most likely to spend, or do you mean greater investment in tertiary education with more free places with living allowances, or do you mean a cash splash from the Treasury to each citizen up to date with their tax returns, or do you mean a change to the mandate of central banks, or do you mean that fiscal tightening and loosening ought be the means to control employment and inlfation, not changes to interst rates and the private demand for debt (ie changing the central bank statutory mandate so that it does not try to get the private sector to do what the commonwealth government does not want to do)?

  8. Doug Noland, Credit Bubble Bulletin, certainly no Deplorable

    “For the record, I have already voted for one of the two deeply flawed candidates. I cast my vote for change. As an analyst of Bubbles, I am absolutely convinced that the sooner problems are recognized and addressed the better. There’s never a convenient time to rein in monetary inflation, and it’s extremely unfortunate that this dangerous ideology has gone unchecked for so long. At this point, there will no easy way out of history’s greatest global financial Bubble. The inflationists will continue to claim that they just need additional time – and that the costs of staying the course are low. Nonsense. One can’t overstate the costs associated with more of the same.”

    Read it all

  9. Oh boy – !!!!!!! – another its all the central banks fault and zero diligence about the animals inhabiting it, for how long, why, and whom supported that agenda….. groan…..

    Disheveled Marsupial…. so what we are treated to is absurdly reductive theoclassical and texteconomica…. which tells us exactly what would happen it X occurred – because Y said so….. lmmao people still have not learned from the “Says Law” indoctrination…. wowzers…