Re: [PEN-L] central bank credibility v. transparency
I apologize. I have trouble keeping up on Tues Thurs. The phrasing sounded a bit like the style of the WSJ editorial page. On Wed, Nov 14, 2007 at 10:39:48AM -0500, Paul Zarembka wrote: Doug, What is the meaning of writing Ron Paul Zarembka below? I have never ever supported a right-wing politician. I have never ever supported a return to the gold standard as a solution to anything. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
Doug, What is the meaning of writing Ron Paul Zarembka below? I have never ever supported a right-wing politician. I have never ever supported a return to the gold standard as a solution to anything. I drive past Ron Paul lawn signs and I have only been trying to know the best manner to MEET his arguments concerning the Fed. I believe I even said that I am concerned the Nazism focused their attacks on banking. What do you take me for? Paul Zarembka From:Doug Henwood [EMAIL PROTECTED] Subject: Re: central bank credibility v. transparency And central banks can throw scores of billions at troubled markets under the present system; try that with a gold standard. Isn't that a strong argument against the gold standard? Yeah. Who was arguing for it, except maybe Ron Paul Zarembka? Paul Z. (Vol.23) THE HIDDEN HISTORY OF 9-11-2001 a benchmark in 9/11 research video summary from Snowshoe Films at http://snowshoefilms.com (Vol.24) TRANSITIONS IN LATIN AMERICA AND IN POLAND AND SYRIA * http://ourworld.compuserve.com/homepages/PZarembka
Re: [PEN-L] central bank credibility v. transparency
Yea, but there is a big problem here. We can't have the financial big bourgeoisie shielded from frequent and thoroughgoing investigation and criticism by somebody jumping and claiming anti-Semitism all the time. That's absurd. The financial bourgeoisie are the leading sector of capital. That's like letting wolves hide in sheep's clothing. Let the critique of banks go forward. Cram that anti-Semitism stuff from the 18 and 1900's. Charles Michael Perelman [EMAIL PROTECTED] 11/14/2007 10:47 AM I apologize. I have trouble keeping up on Tues Thurs. The phrasing sounded a bit like the style of the WSJ editorial page. On Wed, Nov 14, 2007 at 10:39:48AM -0500, Paul Zarembka wrote: Doug, What is the meaning of writing Ron Paul Zarembka below? I have never ever supported a right-wing politician. I have never ever supported a return to the gold standard as a solution to anything. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
Jim, It's only on the macroeconomic level that the objective centers of gravity of prices are the values. Clearly, that was the context. Clearly, these values are the social aggregate (average) of private expectations about the amounts of social labor required to reproduce the MP and LP in normal conditions -- expectations conditional on existing information available to whoever is doing the valuation. I disagree or maybe I misunderstand. In any event, values don't reflect subjective expectations. Instead, they reflect objective facts (which are often unknown or poorly known). The value of labor-power, for example, is the cost of reproducing labor-power over time, stated in labor-value terms. Workers' subjectivity -- their class consciousness or lack thereof -- can raise or lower that cost, but it has to be expressed in practice, not simply in thoughts or words. I mean value in the Marxist sense. In Marxese, the value of a given commodity is the social labor time *required* or *necessary* to reproduce it under normal or average (i.e. expected!) conditions. Not necessarily the actual social labor it took to produce it. The normal (or average or expected) conditions of production are changing continuously. Ongoing changes in the productive force of labor cause continuous value revolutions (Marx). The value of existing or in-process commodities is continuously altered as the expected conditions of production shift. Before actually undertaking production, how can the amount of *social* labor that it'll take to reproduce a given commodity be determined *with certainty*? It can't. So, there's uncertainty. Even about the amount of your own *private* labor required. You may only know with certainty what it took in the past, but that's just information to determine values. The content of value can only be forward-looking. Otherwise it's meaningless. If the amount of social labor required to reproduce a commodity is uncertain, then it's an expectation. As simple as that. Value is the (social or market) average or *expectation* of a bunch of private expectations. An average of averages is an average. By the way, in statistics, aggregate, average, and expectation are essentially interchangeable terms. Finally, my previous post has a long paragraph, which I wrote to preempt the idea that social expectations are necessarily subjective. The whole point of that paragraph is that social expectations are a hardened social object. (Above, I obviously ignore the layer of complexity added by the deviations -- systematic or not -- between relative values and market prices.)
Re: [PEN-L] central bank credibility v. transparency
I had misunderstood Julio before. He is correct that value may exert a graviational force. Price, of course, is something else. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
Jayson Funke wrote: are we not essentially in a situation in which global currencies are valued around the US dollar, and the value of the US dollar, de-linked from gold, is valued on financial market perceptions of the ability of the US to meet its debt obligations (ie. the ability of the state to tax its productive asset base)? This sounds right to me. In the last analysis. A major component of the coming financial meltdown seems to stem from the fact that the value-basis of the global economy (currencies - especially the US dollar) has shifted to an even more precarious value-basis. I'm not sure that the USD has necessarily been more precarious as world money than gold would have been. It's hard to tell. The value of gold is subject to demand and supply vagaries, including out of the blue technological shocks. Where once currency values hinged around market perceptions of gold, they now appear to hinge around market perceptions of the market itself. I don't think this is because currently world money is predominantly U.S. fiat money. Again, in the big picture, the value of gold is just as endogenous (chicken-and-egg) as the financial standing of the U.S. Treasury. Every injection of liquidity or increase in the supply of money through monetary manipulations appears to put more distance between the underlying value of assets produced in the real economy and the exponentially increasing amount of money in circulation. If we think of the injection of liquidity only in terms of the first order effect, that's a mere quantitative change. IMO, what separates the real economy from the financial superstructure qualitatively has to do with further-order effects or even phenomena that do not necessarily require more liquidity (these phenomena may arise from innovation). Among the further effects one can think of credit expansion, added layers of leverage. Among innovations one can think of the buildup of new and more complex layers of contingent claims (derivatives), the discovery, invention, or utilization of increasingly abstract underlying notions, etc. IMO, there's a rational kernel in the qualitative development of the financial superstructure of modern capitalism. I can see how those forms (with a completely different content) are of tremendous potential use in communist planning. To get that, we need to theorize the concept of ownership, which among Marxists has been taken as a mere descriptor. I'm not familiar with what Marxists may have written lately about this, but to my knowledge the only Marxist work that made a bit of an effort to open the conceptual black box of ownership was Gerald Cohen's _Marx's Theory of History_. To avoid misunderstanding, the notion of ownership has probably a richer content in the mind of Marxists than it ever had in Marx's mind. That's because we have the benefit of hindsight: the experience of post-Marx capitalism. But this is only a descriptive advance. IMO, the inside mechanism (so to speak) of the concept of ownership is closely tied to uncertainty. And, obviously, there are today much better conceptual tools to grapple with uncertainty than during Marx's times. Some of these conceptual tools have been developed by mathematicians and some by the economists, especially those who've worked in the modern theory of finance. These tools need critical appropriation to make them useful to us. That's the easy way. The hard way is to reinvent them from scratch. In any case, we need to build up our capacities as cooperative producers. I'll say more. It's naive to suppose that communist planning will make social uncertainty go away or tame it by decree. I'm not talking about uncertainty in our interaction with nature. I'm talking about the uncertainty that results from our mutual interdependence. After all, communist production is going to be more socialized than under capitalism. To place socialized production under social control doesn't mean to dismantle the interdependence, which -- with richer, more universally developed people -- can only grow. It means to manage it differently, for our own individual and collective self-development. And here I stop.
Re: [PEN-L] central bank credibility v. transparency
On Nov 13, 2007, at 12:15 PM, Julio Huato wrote: Again, in the big picture, the value of gold is just as endogenous (chicken-and-egg) as the financial standing of the U.S. Treasury. Well not exactly. As every goldbug can tell you, gold is the only major asset class that is not someone else's liability. Its supply is strictly limited. Hayek liked that part of it, and thought that a generally falling price level would be a good thing. Doug
Re: [PEN-L] central bank credibility v. transparency
Doug wrote: Its supply [gold's] is strictly limited. The argument for gold has too many holes to poke them all at once. What does strictly mean here? Does it mean peak gold cum zero elasticity of demand? On the other hand, is the indebtedness of the U.S. Treasury unbounded? Apparently, judging by the latest events, it is not. It's not strict as in fixed, but neither is gold supply fixed. And, as Jim and you mention, (assuming that, indeed, the supply of gold always lags behind demand, something that is not warranted) how about the distributional effects of price deflation? Isn't price deflation disruptive? Moreover, under the gold *standard*, money was somebody's liability. It just had a contractual fixed parity with gold, which didn't keep goldsmiths, monarchs, etc. from issuing too much paper or debased coins. Fractional reserve banking is entirely compatible with the gold standard, as history shows. So, only if gold were to be used directly as universal means of exchange and means of payment would capitalism be able to circumvent these disadvantages, but then it'd invite other, bigger ones. The transaction costs of introducing and using gold as money in modern capitalism would be stratospheric. That's why it's not likely to happen, unless there's a global catastrophe.
Re: [PEN-L] central bank credibility v. transparency
On Nov 13, 2007, at 2:29 PM, Julio Huato wrote: Doug wrote: Its supply [gold's] is strictly limited. The argument for gold has too many holes to poke them all at once. What does strictly mean here? Does it mean peak gold cum zero elasticity of demand? No, but it's pretty damn limited, which is why it's part of the apparatus of conservatism. Last I looked, the world gold supply grew at roughly a 2% annual rate, which isn't enough to support real GDP growth, much less some inflationary lubricant. Of course the U.S. Treasury's borrowing capacity isn't limitless, but it's a lot more flexible. And central banks can throw scores of billions at troubled markets under the present system; try that with a gold standard. Doug
Re: [PEN-L] central bank credibility v. transparency
Doug wrote: And central banks can throw scores of billions at troubled markets under the present system; try that with a gold standard. Isn't that a strong argument against the gold standard? At least that's how Keynesians have viewed it. Can moral hazard be dealt with within the present system? Keynesians would think so. They'd say that the issue could be addressed with better regulation. In any case, the issue here is, Who's more in tune with the needs of modern capitalism: Keynes or Hayek?
Re: [PEN-L] central bank credibility v. transparency
On Nov 13, 2007, at 3:55 PM, Julio Huato wrote: Doug wrote: And central banks can throw scores of billions at troubled markets under the present system; try that with a gold standard. Isn't that a strong argument against the gold standard? Yeah. Who was arguing for it, except maybe Ron Paul Zarembka?
Re: [PEN-L] central bank credibility v. transparency
Doug wrote: Its supply [gold's] is strictly limited. Julio: The argument for gold has too many holes to poke them all at once. What does strictly mean here? Does it mean peak gold cum zero elasticity of demand? do you mean zero elasticity of supply? the supply of gold isn't totally inelastic, but it's close. It's the existing stock of gold that dominates the supply side. On the other hand, is the indebtedness of the U.S. Treasury unbounded? Apparently, judging by the latest events, it is not. It's not strict as in fixed, but neither is gold supply fixed. the US treasury's debt can increase much more than it is doing now. Currently, the deficit is not really that large by historical standards and so can grow. More importantly, it can change reflecting government policy goals rather than being determined by the private sector (as with gold). So expansionary fiscal policy can occur. And, as Jim and you mention, (assuming that, indeed, the supply of gold always lags behind demand, something that is not warranted) how about the distributional effects of price deflation? yes, those exist. The gold standard almost always hurts debtors. This is especially true for what Bob Pollin calls neccesitous borrowers, like small farmers or workers who have to borrow to survive (and thus cannot take expected deflation into account). Isn't price deflation disruptive? exactly so. Moreover, under the gold *standard*, money was somebody's liability. It just had a contractual fixed parity with gold, which didn't keep goldsmiths, monarchs, etc. from issuing too much paper or debased coins. Fractional reserve banking is entirely compatible with the gold standard, as history shows. So, only if gold were to be used directly as universal means of exchange and means of payment would capitalism be able to circumvent these disadvantages, but then it'd invite other, bigger ones. good point: it's only the monetary base of the gold standard that was no-one's liability. The transaction costs of introducing and using gold as money in modern capitalism would be stratospheric. That's why it's not likely to happen, unless there's a global catastrophe. the late Paul Erdman's novel _THE CRASH OF 79_ has a pretty good scenario for the reintroduction of gold. Not a happy story. -- Jim Devine / Segui il tuo corso, e lascia dir le genti. (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
Re: [PEN-L] central bank credibility v. transparency
Julio: If people in the financial markets do this, how come they get the fundamentals so wrong? Maybe their perspective is not that of the working class. Maybe they don't care about human survival, let alone building communism. Maybe they only care about profits in the short run. Their fundamentals are not our fundamentals. They calibrate their models according to their interest and horizon of interest. Garbage in, garbage out. == Actually, many accepted that prices were way out of whack, and were terrified of the systemic implications and the possibilty of their being caught in the inevitable downdraft. So in that sense their own survival and that of the economy has been a real concern. But, as you point out and as is always the case, this larger class interest was subsumed by the multitude of particular ones competing to turn a quick profit and to make the most timely exit, and there has not yet been a model developed to resolve the contradiction. As for the complex new structured and re-structured products which are at the heart of the crisis, they didn't have a clue how to value these; they were marked to make-believe. Doug: There's a curious asymmetry here. When the markets are zooming upwards, it's meaningless speculation. When they're collapsing, it's fraught with meaning. This could be something serious, but then again it could just be a problem that's getting amplified by extreme emotions. Who knows? === My view also. But the prospect of imminent doom, warranted or not, always evokes the strongest human emotions, even trumping greed. :) Moreover, there seems to be a lot more fear of the unknown in the present crisis, because calculating the potential damage is so elusive. They have no idea whether dumping the stuff on the market will lput a sharp end to the crisis in asset-backed paper or futher depress the other credit markets. One wag recently called it a cockroach crisis; a few have come out, and have provoked deep dread about how many more are inside the walls. No doubt the alarm is mostly genuine, but you also have to wonder how much of it is being manufactured. The banks don't like redirecting their earnings and slashing their dividends to reserve against their mounting losses, so they want the Fed to keep supplying them with liquidity. Exaggerating the potential impact is a means of neutralizing the strong dollar conservatives who would rather see the financial system purged at the expense of the more exposed banks and at whatever economic cost.
Re: [PEN-L] central bank credibility v. transparency
Shane Mage wrote: What meaning can the true probability distribution have here? Probability distribution (objective) can apply to the outcome of a series of random events like throws of dice or spins of a roulette wheel, or to (subjective) *an* estimate of the likelihood of various (mutually incompatible) future possibilities. The way I look at it, ultimately, all financial assets are contingent claims on physical productive assets: means of production (MP) and labor power (LP). This is a plain accounting fact. The price of MP and LP (in social settings where they're commodities) have objective centers of gravity: values. That's my view at least. Some respectable PEN-L members believe that valuing MP and LP is inherently impossible or self-contradictory. Not me. I've looked into the argument a few times and remain unconvinced. I'm with Marx on this. Clearly, these values are the social aggregate (average) of private expectations about the amounts of social labor required to reproduce the MP and LP in normal conditions -- expectations conditional on existing information available to whoever is doing the valuation. Ultimately, as Marx also believed, the valuation of MP and LP is social, that is, the computation or aggregation of expectations is conducted by trial and error in/through market exchange. Those values are what I call the fundamentals. They're social objects. They're objective: independent of the subjectivity of individuals. That said, we need to keep in mind that the objectivity of values is social. When people do things (e.g. produce in given social settings), their actions crystallize into new or transformed social objects (not necessarily tangible, but material or physical in the most general sense of these terms): products, social structures and their emerging properties, institutions, broader social conditions, culture, history. The degree of social objectivity of a given social object depends on its particular nature. Ultimately, these social objects are all historically contingent. Some are contingent upon a change in people's minds or habits or customs. Others are contingent on a change in laws or political conditions. Others are contingent on changes in more hardened economic structures. Etc. Keeping track of this, probability theory and statistical inference can be used productively. But (first case) variables in the social sciences are essentially unique (100% probable), like the present value of an asset as determined ex post. I really don't understand this. What is the PV of an asset as determined ex post? Are you talking about an actual asset price? Are you talking about the results of backtesting some asset pricing model? In those cases, indeed, you can think of those prices (actual or predicted) as unique realizations of the true random price under some probability distribution. But neither of these is a PV. PV is your best estimate of the price of the asset as of now. The one that dictates your next move (or lack thereof) regarding the asset. And that's an expectation, conditional on the information available to you (e.g. history of prices of the asset, etc.). And (second case) nobody ever even tries to estimate a true probability distribution comprising all possible values of such a variable. Well, it depends on your practical needs and resources. I don't think the all possible values is a big deal. There's nothing that stops you from assuming that the price of an asset can vary along the entire set of real numbers. I don't see why that'd be more costly than restricting the variation to a narrower range. The costly thing is the estimation of the parameters of interest of your distribution. There are trade-offs involved here, but simply put, how good is your data? The better your data, the more costly. Which parameters do you need to estimate? The higher the moments (center, dispersion, skewness, kurtosis, etc.), the more costly. Which assumptions about probabilistic behavior are you willing to make? The weaker your assumptions, the more costly. Etc. It boils down to a cost-benefit calculation. My impression is that, usually, most people in finance play the game at a level that only requires estimating the first 2-4 moments (center, dispersion, skewness, kurtosis). And, given their goals, they are willing to make strong assumptions. Still, that's a lot of compressed information about the true (unknown) behavior of the rv. More than most people use in their practice. So how can the people who make up the markets get it all wrong? The reason is that all is very long term, and their only interest is very short term because that is where the loot is. And in *every* short term they (collectively) make out like the bandits they are. The huge costs are borne by other people, including classsical shareholders, not only workers and their pension funds. Again, I don't think the issue is all. The rest, I think, is well
Re: [PEN-L] central bank credibility v. transparency
Julio Huato Writes: The way I look at it, ultimately, all financial assets are contingent claims on physical productive assets: means of production (MP) and labor power (LP). This is a plain accounting fact. The price of MP and LP (in social settings where they're commodities) have objective centers of gravity: values. That's my view at least. Some respectable PEN-L members believe that valuing MP and LP is inherently impossible or self-contradictory. Not me. I've looked into the argument a few times and remain unconvinced. I'm with Marx on this. I agree. And are we not essentially in a situation in which global currencies are valued around the US dollar, and the value of the US dollar, de-linked from gold, is valued on financial market perceptions of the ability of the US to meet its debt obligations (ie. the ability of the state to tax its productive asset base)? A major component of the coming financial meltdown seems to stem from the fact that the value-basis of the global economy (currencies - especially the US dollar) has shifted to an even more precarious value-basis. Where once currency values hinged around market perceptions of gold, they now appear to hinge around market perceptions of the market itself. Every injection of liquidity or increase in the supply of money through monetary manipulations appears to put more distance between the underlying value of assets produced in the real economy and the exponentially increasing amount of money in circulation. Am I way off? Jayson Funke Graduate School of Geography Clark University 950 Main Street Worcester, MA 01610 -Original Message- From: PEN-L list [mailto:[EMAIL PROTECTED] On Behalf Of Julio Huato Sent: Monday, November 12, 2007 12:35 PM To: PEN-L@SUS.CSUCHICO.EDU Subject: Re: [PEN-L] central bank credibility v. transparency Shane Mage wrote: What meaning can the true probability distribution have here? Probability distribution (objective) can apply to the outcome of a series of random events like throws of dice or spins of a roulette wheel, or to (subjective) *an* estimate of the likelihood of various (mutually incompatible) future possibilities. The way I look at it, ultimately, all financial assets are contingent claims on physical productive assets: means of production (MP) and labor power (LP). This is a plain accounting fact. The price of MP and LP (in social settings where they're commodities) have objective centers of gravity: values. That's my view at least. Some respectable PEN-L members believe that valuing MP and LP is inherently impossible or self-contradictory. Not me. I've looked into the argument a few times and remain unconvinced. I'm with Marx on this. Clearly, these values are the social aggregate (average) of private expectations about the amounts of social labor required to reproduce the MP and LP in normal conditions -- expectations conditional on existing information available to whoever is doing the valuation. Ultimately, as Marx also believed, the valuation of MP and LP is social, that is, the computation or aggregation of expectations is conducted by trial and error in/through market exchange. Those values are what I call the fundamentals. They're social objects. They're objective: independent of the subjectivity of individuals. That said, we need to keep in mind that the objectivity of values is social. When people do things (e.g. produce in given social settings), their actions crystallize into new or transformed social objects (not necessarily tangible, but material or physical in the most general sense of these terms): products, social structures and their emerging properties, institutions, broader social conditions, culture, history. The degree of social objectivity of a given social object depends on its particular nature. Ultimately, these social objects are all historically contingent. Some are contingent upon a change in people's minds or habits or customs. Others are contingent on a change in laws or political conditions. Others are contingent on changes in more hardened economic structures. Etc. Keeping track of this, probability theory and statistical inference can be used productively. But (first case) variables in the social sciences are essentially unique (100% probable), like the present value of an asset as determined ex post. I really don't understand this. What is the PV of an asset as determined ex post? Are you talking about an actual asset price? Are you talking about the results of backtesting some asset pricing model? In those cases, indeed, you can think of those prices (actual or predicted) as unique realizations of the true random price under some probability distribution. But neither of these is a PV. PV is your best estimate of the price of the asset as of now. The one that dictates your next move (or lack thereof) regarding the asset. And that's an expectation, conditional on the information available to you (e.g. history
Re: [PEN-L] central bank credibility v. transparency
On Nov 12, 2007 5:54 AM, Marvin Gandall [EMAIL PROTECTED] wrote: Actually, many accepted that prices were way out of whack, and were terrified of the systemic implications and the possibilty of their being caught in the inevitable downdraft. So in that sense their own survival and that of the economy has been a real concern. But, as you point out and as is always the case, this larger class interest was subsumed by the multitude of particular ones competing to turn a quick profit and to make the most timely exit, and there has not yet been a model developed to resolve the contradiction. Chuck Prince, formerly of Citigroup described the bubble nicely earlier in the year: When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing. -raghu.
Re: [PEN-L] central bank credibility v. transparency
Julio Huato wrote: The way I look at it, ultimately, all financial assets are contingent claims on physical productive assets: means of production (MP) and labor power (LP). This is a plain accounting fact. The price of MP and LP (in social settings where they're commodities) have objective centers of gravity: values. That's my view at least. Some respectable PEN-L members believe that valuing MP and LP is inherently impossible or self-contradictory. Not me. I've looked into the argument a few times and remain unconvinced. I'm with Marx on this. At the microeconomic level, there can be systematic deviations between price and values: relative prices of production (long-term equilibrium prices) often deviate from relative values, as Marx recognized. Differences in industrial organization (monopoly vs. freer competition, etc.) also encourage price/value deviations (though, in theory, they could also counteract the deviations due to technical reasons). It's only on the macroeconomic level that the objective centers of gravity of prices are the values. On the aggregate level, all revenues from newly-produced commodities are produced by labor and all property income arises from the extra labor (surplus-value) that's extracted from labor-power. (The aggregate level here is the world capitalist system.) Clearly, these values are the social aggregate (average) of private expectations about the amounts of social labor required to reproduce the MP and LP in normal conditions -- expectations conditional on existing information available to whoever is doing the valuation. I disagree or maybe I misunderstand. In any event, values don't reflect subjective expectations. Instead, they reflect objective facts (which are often unknown or poorly known). The value of labor-power, for example, is the cost of reproducing labor-power over time, stated in labor-value terms. Workers' subjectivity -- their class consciousness or lack thereof -- can raise or lower that cost, but it has to be expressed in practice, not simply in thoughts or words. Expectations do affect objective facts (the power of prophecy), but in the end, the facts adjust slowly and are hard to change, while subjective views adjust quickly and are easier to change (within the limits set by the facts). Ultimately, as Marx also believed, the valuation of MP and LP is social, that is, the computation or aggregation of expectations is conducted by trial and error in/through market exchange. Those values are what I call the fundamentals. They're social objects. They're objective: independent of the subjectivity of individuals. this is confusing. I'd say instead that expectations are shaped and limited by objective facts (which are often not known very well). Expectations -- say of profit streams over time -- can be quite far from the objective facts (the production of surplus-value).[*] In the Marxian tradition, this is a source of financial crises, as expectations adjust forcibly to reality. Typically, however, they overshoot going downward, so that reality is never achieved. That said, we need to keep in mind that the objectivity of values is social. When people do things (e.g. produce in given social settings), their actions crystallize into new or transformed social objects (not necessarily tangible, but material or physical in the most general sense of these terms): products, social structures and their emerging properties, institutions, broader social conditions, culture, history. The degree of social objectivity of a given social object depends on its particular nature. Ultimately, these social objects are all historically contingent. Some are contingent upon a change in people's minds or habits or customs. Others are contingent on a change in laws or political conditions. Others are contingent on changes in more hardened economic structures. Etc. that sounds reasonable to me. [*] for example, the profit rate in the US seems to have peaked in 1997, while financial markets continued to soar until 2000-2001. -- Jim Devine / Segui il tuo corso, e lascia dir le genti. (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
Re: [PEN-L] central bank credibility v. transparency
On Nov 10, 2007, at 10:12 PM, Julio Huato wrote: In his testimony, Bernanke emphasized the possibility of both a contraction *and* inflation. Why is he doing this? Isn't he being reckless or stupid? Because it's true? It's not a wage-led inflation, but there are substantial price pressures coming from oil, food, and other commodities. It could add up to one of the central bankers' worst nightmares, stagflation. I suspect what they want, though they can't say it outright, is to reduce US consumption, raise saving/reduce borrowing, and shift the economy towards exports. It's something of a structural adjustment program, and it makes perfect orthodox capitalist sense. The financial crisis is making them be easier than they want to be. Five years from now, it'll be interesting to read the FOMC transcripts. Doug
Re: [PEN-L] central bank credibility v. transparency
Julio Huato wrote: In his testimony, Bernanke emphasized the possibility of both a contraction *and* inflation. Why is he doing this? Isn't he being reckless or stupid? Doug Henwood wrote: Because it's true? It's not a wage-led inflation, but there are substantial price pressures coming from oil, food, and other commodities. It could add up to one of the central bankers' worst nightmares, stagflation. Because the stagflation does not include the wage-led component -- or rather, the price-wage spiral of the sort that prevailed in the late 1960s and 1970s -- the stagflation is much less of a nightmare for the bankers, central and otherwise. With the wage-price spiral in place, a severe recession such as the back-to-back ones of the early 1980s is needed (by bankers) to bust labor's back and end the spiral. Without the price-wage spiral, most or even all of the stagflation may be due to transitory commodity-price inflation (temporarily high oil prices). These respond to recessionary medicine relatively quickly. That is, food and oil prices often _fall_. Of course, there may be another kind of spiral going on (one that I think contributed to the stagflation of the 1970s). Every time the exchange rate of the dollar goes down, that decreases the real purchasing power of oil producers who are paid in US dollars (which is almost all of them, I believe). That encourages them to raise the price of oil, to protect the real value of their winnings. In turn (and making it a spiral), raising oil prices hurts the US economy (by raising US price levels) and encourages the dollar to fall more. So instead of wages chasing prices and prices chasing wages (as in the classic spiral), we see oil prices chasing the exchange rate and the exchange rate chasing oil prices. If we see this kind of spiral going on, the conclusion of my first paragraph above must be moderated. A severe recession may be needed to break the back of the oil producers (or rather, their ability to adjust oil prices upward). Something like this happened in the early 1980s, when the US recession and its global ramifications decreased the demand for oil, eventually leading to a oil-price collapse in 1986. There are also other reasons to predict a recession, i.e., the housing collapse and excessive consumer indebtedness (in the face of tepid private non-residential investment). On the other hand, the war and the government's deficit might prop up the economy and prevent a recession... I suspect what they want, though they can't say it outright, is to reduce US consumption, raise saving/reduce borrowing, and shift the economy towards exports. It's something of a structural adjustment program, and it makes perfect orthodox capitalist sense. The financial crisis is making them be easier than they want to be. Five years from now, it'll be interesting to read the FOMC transcripts. one problem with this program is that it's easier to smash exports (as in the early 1980s and during the last 12 years or so) than it is to revive them. (In the early 1980s, the old industrial heartland of the US was converted into the rust belt. Once the factories were shut down or even dismantled, it was hard to get them going again.) It is possible, of course. But the new exporting sectors are likely to be in different industries and in different places than before. Anyone have any ideas about what these export growth sectors will be? -- Jim Devine / Segui il tuo corso, e lascia dir le genti. (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
Re: [PEN-L] central bank credibility v. transparency
On Nov 9, 2007 8:17 PM, Marvin Gandall [EMAIL PROTECTED] wrote: Raghu wrote: On Nov 9, 2007 2:32 PM, Doug Henwood [EMAIL PROTECTED] wrote: The Fed's slowness to ease runs counter to the more apocalyptic reading of the U.S. economy's prospects. According to the atimes.com article I linked to, the Fed's slowness to ease may be related to Bernanke's discomfort about the perception that the Fed is a prisoner of the financial markets. = Or it may be due to the dollar's sharp fall since the August credit crisis. Since 2002, the Fed - with the tacit agreement of the other central banks - has been trying to engineer an orderly decline in the USD, and had been largely succeeding, but the the chaos in the credit market has brought concerns about a run to the surface. Maybe. Bernanke's ideal scenario may be one in which he can pursue a loose monetary policy while the market believes he is very tight. So he talks a tough game but may not necessarily follow it up in his policy actions. That way he gets to maintain an orderly adjustment of the dollar and avoid inflation while still providing ample liquidity to the markets. But it is also very risky because if the markets are not so easily fooled, he may end up being forced into a tight policy while the markets still think he is too loose. In other words the worst of both worlds. -raghu.
Re: [PEN-L] central bank credibility v. transparency
Raghu writes: On Nov 9, 2007 8:17 PM, Marvin Gandall [EMAIL PROTECTED] wrote: Or it may be due to the dollar's sharp fall since the August credit crisis. Since 2002, the Fed - with the tacit agreement of the other central banks - has been trying to engineer an orderly decline in the USD, and had been largely succeeding, but the the chaos in the credit market has brought concerns about a run to the surface. Maybe. Bernanke's ideal scenario may be one in which he can pursue a loose monetary policy while the market believes he is very tight. So he talks a tough game but may not necessarily follow it up in his policy actions. That way he gets to maintain an orderly adjustment of the dollar and avoid inflation while still providing ample liquidity to the markets. But it is also very risky because if the markets are not so easily fooled, he may end up being forced into a tight policy while the markets still think he is too loose. In other words the worst of both worlds. === Wolfgang Munchau in today's Financial Times agrees this is an environment in which it is easy for policymakers to make mistakes and that there is a strong possibility of stagflation. There's been a sharp uptick in anxiety bordering on panic in the past two weeks that the crisis will be unmanageable. It's one thing to hear Mike Whitney in Counterpunch predict economic and financial carnage, but financial writers like Munchau move among the bankers and politicians and pick up their mood. Aftershocks make the credit crisis rumble on By Wolfgang Munchau Financial Times November 11 2007 After the housing crisis and the credit crisis, now comes the US consumer confidence crisis. It is time to admit that the US economy is headed for a serious economic downturn - much bigger than suggested by the central bankers' euphemism when they talk about downside risks to growth. The world economy can now look forward to confronting four ugly and partly interrelated shocks at the same time: a US economy heading for the rocks, a rise in global inflation, a collapse in the dollar's exchange rate and a credit market crisis. I was a pessimist on the severity of the credit crisis from the outset, but events turned out even worse. I would now expect the time horizon of this financial crisis to be measured in years rather than in weeks or months. My own guess is that we are about 10 per cent through this, in terms of timing, less than 10 per cent in terms of costs to the financial sector, and much less in terms of the macroeconomic impact. The reason why this crisis is so nasty has to do with the deep inter-linkages within the credit market, and between the credit market and the real economy. Take, for example, a synthetic collateralised debt obligation, one of the most complicated financial instruments ever invented. It consists of a couple of credit default swaps, credit linked notes, total return swaps, all jointly connected in a wiring diagram that looks as though the structure was about to explode. And, as many people with credit cards and housing debt in the US know, the linkages between the credit market and the real economy are only too real. The credit crisis affects the world economy asymmetrically. The Anglosphere is harder hit than the rest of the world. The eurozone and Asia are much less dependent on consumer credit for economic growth. And, despite some spectacular early examples to the contrary, the eurozone banking system is holding up surprisingly well. For example, Deutsche Bank said last week that there would be no further subprime-related write-offs. The French banks are also in relatively good shape. So one should expect the credit-related economic downturn to be much harder in the US than in the eurozone, where it probably follows on eventually, but with some delay. One of the most important adjustment mechanisms is the dollar's exchange rate. The euro is now closing in on $1.50. No matter whether you are looking at global monetary policy or at US growth forecasts, inflation or other technical factors, there is not much left to support the dollar. Avinash Persaud, a well-known foreign-exchange expert, believes that the euro will go up to $1.70. I am not sure about the exact magnitude, but would certainly agree about the direction. The only factor that could mitigate, or even prevent, an outright recession in the US is a very sharp further fall in the dollar. What turns a spanner into this adjustment mechanism is the rise in global inflation. The big question is not whether the economic downturn or the rise in inflation currently poses the bigger threat. The really troubling question is whether both can happen at the same time. Unless there is a steep fall in oil and food prices soon, there is a strong possibility of stagflation in the US next year. In such a situation, there are no easy policy choices. Monetary policy will probably
Re: [PEN-L] central bank credibility v. transparency
On Nov 11, 2007, at 8:24 PM, Marvin Gandall wrote: t's one thing to hear Mike Whitney in Counterpunch predict economic and financial carnage, but financial writers like Munchau move among the bankers and politicians and pick up their mood. This is true, and the risks are high, but bankers are more or less human too, and subject to the same extremes of euphoria despair as the rest of us. People in the financial markets are subject to extremes of volatility. They were euphoric not all that long ago - how seriously did PEN-L take that? There's a curious asymmetry here. When the markets are zooming upwards, it's meaningless speculation. When they're collapsing, it's fraught with meaning. This could be something serious, but then again it could just be a problem that's getting amplified by extreme emotions. Who knows? Doug
Re: [PEN-L] central bank credibility v. transparency
I am not sure what you mean. Did nobody here recognize euphoria? On Sun, Nov 11, 2007 at 08:42:48PM -0500, Doug Henwood wrote: People in the financial markets are subject to extremes of volatility. They were euphoric not all that long ago - how seriously did PEN-L take that? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
On Nov 11, 2007, at 8:55 PM, Michael Perelman wrote: I am not sure what you mean. Did nobody here recognize euphoria? You yourself just said the other day that the Chinese billionaires were the beneficiaries of inflated stock values. In any case, I've been on PEN-L for more than 10 years. There was far less discussion of the bull markets of the late 1990s and of 2002-7 than the turmoil of the last few months. There's not much discussion of what the stock market means in general - unless it's going down and it allegedly presages crisis. Doug
Re: [PEN-L] central bank credibility v. transparency
On Nov 11, 2007 5:42 PM, Doug Henwood [EMAIL PROTECTED] wrote: People in the financial markets are subject to extremes of volatility. They were euphoric not all that long ago - how seriously did PEN-L take that? There's a curious asymmetry here. When the markets are zooming upwards, it's meaningless speculation. But it *was* meaningless speculation. Far from being ignored, I believe the housing bubble was actively monitored with interest on PEN-L. I'd say it was taken quite seriously. When they're collapsing, it's fraught with meaning. This could be something serious, but then again it could just be a problem that's getting amplified by extreme emotions. Who knows? I don't know about meaning, but perhaps it is reasonable to think that it is fraught with opportunity. Maybe it will cause people to stop celebrating the rapacious greed that found its purest form in the recent financial excesses. Maybe Stephen Schwarzman will not be regarded as a hero anymore but rather exposed as the fraud that he is. Maybe Goldman Sachs will not be admired for their innovation and brilliance but recognized as the gamblers that they are. Maybe corporations will start investing more in their future and less in stock buybacks. ... -raghu.
Re: [PEN-L] central bank credibility v. transparency
Doug wrote: There's a curious asymmetry here. When the markets are zooming upwards, it's meaningless speculation. When they're collapsing, it's fraught with meaning. I don't see the inconsistency in saying that speculation disconnects asset prices from long-run fundamentals and that their collapse bring them down to earth. In that sense, the up is like moving to a fantasy world (meaningless speculation) while the down is like coming back to reality (fraught with meaning). We may not know with certainty what the fundamentals are at a given time, but if there were no fundamentals, how would we explain the system's permanence? This could be something serious, but then again it could just be a problem that's getting amplified by extreme emotions. Who knows? Just like extreme emotions unglued asset prices from their fundamentals, extreme emotions may be snapping them back in place -- somewhat and temporarily. Doug is right in emphasizing the uncertainty surrounding all these events. But we need to update our priors as evidence piles up.
Re: [PEN-L] central bank credibility v. transparency
On Nov 11, 2007 5:24 PM, Marvin Gandall [EMAIL PROTECTED] wrote: The world economy can now look forward to confronting four ugly and partly interrelated shocks at the same time: a US economy heading for the rocks, a rise in global inflation, a collapse in the dollar's exchange rate and a credit market crisis. I don't understand how the global inflation relates to the other three. First of all where is this global inflation? From what I understand it is confined to the emerging markets. Is there any evidence of US inflation? (Bernanke keeps referring to inflation risk but that's because he has to.) Japan? Europe? So what is the significance of this inflation? Does the market really expect emerging economies to continue growing while the G7 slows down? Or is it a temporary phenomenon caused by movements in hot money away from US assets? -raghu.
Re: [PEN-L] central bank credibility v. transparency
But, we never really know what the fundamentals are, other than they are not too euphoric or not too pessimistic. Julio Huato wrote: I don't see the inconsistency in saying that speculation disconnects asset prices from long-run fundamentals and that their collapse bring them down to earth. In that sense, the up is like moving to a fantasy world (meaningless speculation) while the down is like coming back to reality (fraught with meaning). We may not know with certainty what the fundamentals are at a given time, but if there were no fundamentals, how would we explain the system's permanence? Just like extreme emotions unglued asset prices from their fundamentals, extreme emotions may be snapping them back in place -- somewhat and temporarily. -- Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901 www.michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
You are probably correct. During the bubble, you can point to silliness and wait for the ultimate day of reckoning. With the unravelling, the underlying connections become easier to see. We have mentioned the carry trade from time to time, but if the yen shoots up, we might get a clearer view of how it affected financial markets. While it is working satisfactorily, it is less transparent. Doug Henwood wrote: In any case, I've been on PEN-L for more than 10 years. There was far less discussion of the bull markets of the late 1990s and of 2002-7 than the turmoil of the last few months. There's not much discussion of what the stock market means in general - unless it's going down and it allegedly presages crisis. Doug -- Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901 www.michaelperelman.wordpress.com
Re: [PEN-L] central bank credibility v. transparency
Michael Perelman wrote: But, we never really know what the fundamentals are, other than they are not too euphoric or not too pessimistic. We never know the true probability distribution of *any* interesting variable in the social sciences. That includes the ever shifting fundamental price of assets. So, what do human beings tend to do in a case like this? Apparently, they tend to form expectations about the main characteristics (average, dispersion, etc.) of that distribution conditional upon the information they have. With just a bit of technical sophistication, some humans will even use samples of observations to draw inferences about the characteristics of the unknown distribution. For that, if some conditions hold approximately, they can use laws of averages, convergence in probability, central limit theorems, etc. -- mathematical facts predicated on the very weak assumptions of probability theory (a Russian product refined by Soviet mathematicians). The procedures thus developed tend to work in practice, somewhat. It seems that randomness is not (completely) random. Marx's concept of value is an expectation: social labor required on average to reproduce a commodity. Marx didn't have a chance to study Markov, Lyapunov, or Chebyshev, but if he had, he'd have adopted the framework. I mean, probably. If people in the financial markets do this, how come they get the fundamentals so wrong? Maybe their perspective is not that of the working class. Maybe they don't care about human survival, let alone building communism. Maybe they only care about profits in the short run. Their fundamentals are not our fundamentals. They calibrate their models according to their interest and horizon of interest. Garbage in, garbage out.
Re: [PEN-L] central bank credibility v. transparency
Julio Huato wrote: Michael Perelman wrote: But, we never really know what the fundamentals are, other than they are not too euphoric or not too pessimistic. We never know the true probability distribution of *any* interesting variable in the social sciences. That includes the ever shifting fundamental price of assets. What meaning can the true probability distribution have here? Probability distribution (objective) can apply to the outcome of a series of random events like throws of dice or spins of a roulette wheel, or to (subjective) *an* estimate of the likelihood of various (mutually incompatible) future possibilities. But (first case) variables in the social sciences are essentially unique (100% probable), like the present value of an asset as determined ex post. And (second case) nobody ever even tries to estimate a true probability distribution comprising all possible values of such a variable. So how can the people who make up the markets get it all wrong? The reason is that all is very long term, and their only interest is very short term because that is where the loot is. And in *every* short term they (collectively) make out like the bandits they are. The huge costs are borne by other people, including classsical shareholders, not only workers and their pension funds. Shane Mage When we read on a printed page the doctrine of Pythagoras that all things are made of numbers, it seems mystical, mystifying, even downright silly. When we read on a computer screen the doctrine of Pythagoras that all things are made of numbers, it seems self-evidently true. (N. Weiner)
Re: [PEN-L] central bank credibility v. transparency
Munchau's words, not mine. I think the allusion is to the presumed inflationary effects of a dollar collapse and high import prices on the US economy. Opinion is divided about the extent to which the capital-rich Asian markets have decoupled from the G7 and can serve as autonomous engines of growth to rescue the older ones from crisis. - Original Message - From: raghu To: PEN-L@SUS.CSUCHICO.EDU Sent: Sunday, November 11, 2007 9:15 PM Subject: Re: [PEN-L] central bank credibility v. transparency On Nov 11, 2007 5:24 PM, Marvin Gandall [EMAIL PROTECTED] wrote: The world economy can now look forward to confronting four ugly and partly interrelated shocks at the same time: a US economy heading for the rocks, a rise in global inflation, a collapse in the dollar's exchange rate and a credit market crisis. I don't understand how the global inflation relates to the other three. First of all where is this global inflation? From what I understand it is confined to the emerging markets. Is there any evidence of US inflation? (Bernanke keeps referring to inflation risk but that's because he has to.) Japan? Europe? So what is the significance of this inflation? Does the market really expect emerging economies to continue growing while the G7 slows down? Or is it a temporary phenomenon caused by movements in hot money away from US assets? -raghu. -- No virus found in this incoming message. Checked by AVG Free Edition. Version: 7.5.503 / Virus Database: 269.15.29/1124 - Release Date: 11/11/2007 10:12 AM
Re: [PEN-L] central bank credibility v. transparency
Doug wrote: Not exactly. The markets were very disappointed with Bernanke's testimony yesterday because he made it sound as if another rate cut is not imminent. Should things really unwind, they'll undoubtedly change their mind, but the message they're sending now is no rate cuts unless the econ data look really bad. In his testimony, Bernanke emphasized the possibility of both a contraction *and* inflation. Why is he doing this? Isn't he being reckless or stupid? Wouldn't it have helped him better to issue an obscure statement a la Greenspan? I don't know. In my opinion, Bernanke is trying to accomplish two things. One, he's trying to show the big players that he means it when he speaks of transparency. He's willing to show the Fed's hand, to the best of his current (but evolving) understanding of the situation. And, two (as a case in point), he's saying, Look, we need a quick but comprehensive repricing of risk and a resetting of expectations so that credit can flow and the economy can resume a more normal course. It's going to hurt anyway, but it'll hurt the least if we do it quickly but thoroughly. Then and only then will I be free to move rapidly, tackle inflation, and slow down the USD decline. It's up to you how quickly we can proceed and leave the episode behind. It's not a terrible policy. Politically, that'd be ideal for them. But, of course, it's full of risks, since panic -- within the country and abroad -- could set in and force his hand under political pressure. The insulation (independence) of the central bank from popular pressure would be tested at a point when the discontent against both major parties is very high and as the country heads to a presidential and congressional election. Even if the central bank remains insulated, fiscal monkey wrenches can be thrown into the mechanism of monetary policy by the legislative branch. With all the international shocks feeding into it (Pakistan, Iran, etc.), the whole dynamics of the presidential election can become less predictable than it now appears. In any case, the fact that Bernanke decided that he cannot downplay either scenario, contraction or inflation, indicates how narrow his wiggle room is. (Sabri will speak for himself, but it seems to me that his remark on the CP article was not meant to criticize it for emphasizing the direst scenarios, but rather to defend the posing of those scenarios as sensible -- i.e. as *probable*. The certainty the author of the article displays may make the piece a bit too strident to our stylistic tastes, but the fact that things are in flux doesn't mean that all scenarios are equally likely. Not at this point.)
Re: [PEN-L] central bank credibility v. transparency
On Nov 9, 2007, at 5:05 PM, raghu wrote: After the Fed's 50 bp rate cut in Sept, BusinessWeek ran an article with the memorable title Fed: Wall Street's bitch. That perception has only strengthened since then and now the markets are pricing in a near 100% probability of another cut before year-end. Not exactly. The markets were very disappointed with Bernanke's testimony yesterday because he made it sound as if another rate cut is not imminent. Should things really unwind, they'll undoubtedly change their mind, but the message they're sending now is no rate cuts unless the econ data look really bad. Maybe that headline had something to do with the hard line. The Fed's slowness to ease runs counter to the more apocalyptic reading of the U.S. economy's prospects. Doug
Re: [PEN-L] central bank credibility v. transparency
On Nov 9, 2007, at 5:05 PM, raghu wrote: After the Fed's 50 bp rate cut in Sept, BusinessWeek ran an article with the memorable title Fed: Wall Street's bitch. That perception has only strengthened since then and now the markets are pricing in a near 100% probability of another cut before year-end. Not exactly. The markets were very disappointed with Bernanke's testimony yesterday because he made it sound as if another rate cut is not imminent. Should things really unwind, they'll undoubtedly change their mind, but the message they're sending now is no rate cuts unless the econ data look really bad. Doug
Re: [PEN-L] central bank credibility v. transparency
On Nov 9, 2007 2:32 PM, Doug Henwood [EMAIL PROTECTED] wrote: After the Fed's 50 bp rate cut in Sept, BusinessWeek ran an article with the memorable title Fed: Wall Street's bitch. That perception has only strengthened since then and now the markets are pricing in a near 100% probability of another cut before year-end. Not exactly. The markets were very disappointed with Bernanke's testimony yesterday because he made it sound as if another rate cut is not imminent. Should things really unwind, they'll undoubtedly change their mind, but the message they're sending now is no rate cuts unless the econ data look really bad. Maybe that headline had something to do with the hard line. The Fed's slowness to ease runs counter to the more apocalyptic reading of the U.S. economy's prospects. According to the atimes.com article I linked to, the Fed's slowness to ease may be related to Bernanke's discomfort about the perception that the Fed is a prisoner of the financial markets. Their tough words in recent days may just be an attempt to change this perception, and not related to any specific interpretations of econ data. I find it to be an interesting theory. From what I understand Bernanke's monetary philosophy is based on managing expectations: if the market believes the Fed has inflation under control, it will stay under control in a self-fulfilling prophesy. And he wants to achieve this by setting a numerical CPI target and making everything transparent. The trouble with this self-fulfilling prophesy is the same as with any other virtuous cycle: it can just as easily run in the other direction and turn into a vicious cycle of runaway inflation. Bernanke clearly does not have the required credibility on inflation yet. So can he then afford the transparency? The SF-Fed's conference on monetary policy, transparency and credibility indicates there is a lot of disagreement within the Fed itself on this question:* *http://www.frbsf.org/publications/economics/letter/2007/el2007-12.html ---snip It is increasingly common for central banks to be transparent about their long-run inflation goals. In addition to democratic accountability, underlying this transparency is the hope that by publicly announcing a target for inflation the central bank will establish more quickly a reputation for price stability and that this reputation will provide a firmer anchor for inflation expectations. By being more open about its goals, procedures, and forecasts, the central bank hopes to convince households and firms that it is committed to price stability, making inflation stabilization less costly. However, even central banks admired for their transparency are not necessarily all that transparent, invariably withholding key information about their policy objectives and their assessment of the economy and its future prospects. Although transparency is generally thought to be a good thing, Cukierman examines the limits of monetary policy transparency, focusing on two main dimensions: feasibility and desirability. With respect to feasibility, Cukierman argues that uncertainty about the economy, about the effects monetary policy has on the economy, and about the measurement of key variables like potential output, the output gap, and the natural rate of unemployment make it extremely difficult for even well-intentioned central banks to be fully transparent. In Cukierman's words, the 'science of monetary policy' is not yet in a stage at which it can replace the 'art of monetary policy' (p. 32). With respect to desirability, Cukierman argues that a compelling case for secrecy can be made when the central bank has private information about threats to financial stability, such as about the health of banks. There, too much disclosure may lead to contagion, jeopardizing the wider banking system. -raghu.
Re: [PEN-L] central bank credibility v. transparency
Raghu wrote: On Nov 9, 2007 2:32 PM, Doug Henwood [EMAIL PROTECTED] wrote: The Fed's slowness to ease runs counter to the more apocalyptic reading of the U.S. economy's prospects. According to the atimes.com article I linked to, the Fed's slowness to ease may be related to Bernanke's discomfort about the perception that the Fed is a prisoner of the financial markets. = Or it may be due to the dollar's sharp fall since the August credit crisis. Since 2002, the Fed - with the tacit agreement of the other central banks - has been trying to engineer an orderly decline in the USD, and had been largely succeeding, but the the chaos in the credit market has brought concerns about a run to the surface. The temporary respite brought about by the central banks' injection of liquidity came to an end last week on further news of the potential extent of the damage to Citigroup, Merrill Lynch, Wachovia, Barclay's and other big banks. The stock market dropped, credit spreads widened, a Chinese official spoke of further diversification out of the dollar, Sarkozy hinted at competitive devaluation, and there was increased speculation about whether the USD was losing its status as the world's reserve currency. So Bernanke was probably trying to talk down the pressure on the currency and soothe investors' nerves by suggesting the Fed would protect the dollar by holding the line on rate cuts. There was, it is true, some some hopeful economic news amid the gloom about exports, GDP, and productivity, but the markets are still betting the Fed will have to keep easing as the economy weakens.
