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Thursday, September 19, 2013

Transcript: Larry Summers edition of Idiot of the Week

Today on the podcast, a No Comment report from the Washington Post on the withdrawal of Larry Summers from the race for Fed Chair, a return of our sometime feature, Idiot of the Week, featuring Mario Draghi, and to cleanse your palate, the keynote speech by Joe Stiglitz to the AFL-CIO convention.

Larry Summers edition of Idiots of the Week
Listen to this episode
Larry Summers withdraws

excerpted from the Washington Post
Summers helped Obama navigate the depths of the financial crisis and recession, providing a degree of support that Obama has told aides he deeply valued. No official, with the possible exception of former Treasury secretary Timothy F. Geithner, did more to influence the president’s response to the traumatic events he faced at the beginning of his term, which Obama plans to highlight this week as he marks the fifth anniversary of the financial crisis.

“Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today,” Obama said. “I will always be grateful to Larry for his tireless work and service on behalf of his country.”

It's been awhile since we visited this feature. We like to think of ourselves as serious economists, but economics science is to science what FoxNews is to news. Not to say there are not pretensions. There is a lot of math. There are serious people. Maybe its more like astrology. That said, let's get to it. Here with the chief European court astrologer, and Idiot of the Week, chief of the European Central Bank, Mario Draghi



Beginning with inflation. Inflation is a general phenomenon. When there is no wage growth, there is no inflation. Rises in commodity prices in the face of slack demand is not inflation, it is rises in commodity prices. When large chunks of the economy are excluded, such as financial markets, the inflation number is not useful. Yet controlling inflation as they define it is the sole mandate of ECB. To say that inflation is under control is like saying your hair hasn't turned gray, even if you are in a casket. Not reflective of your state of health.

Credit growth. The disconnect between M1 and M2 illustrates the fact that base money does not make credit money, credit growth makes credit money. Credit expanding is not good unless the other side of the balance sheet is expanding -- assets, productive assets. Private and public investment in infrastructure -- social and physical -- is nil. With depreciation, it is contracting. So any increase in credit growth means further debt overhang. This may be masked by increases in the prices of financial securities, but this is just an inflation that is not in the calculation. That is, bidding up asset prices -- here we are talking about liquid, financial assets -- is a trading phenomenon.

The note on the business cycle is bull. Without investment, there is no business cycle.

Weak banks are not lending, they are trading. The psychology of an insolvent bank -- and thanks here to Anat Admati and Martin Hellwig and their excellent and accessible book The Bankers' New Clothes -- the psychology of an insolvent bank, particularly one with a government guarantee, is to withdraw from useful lending, even to potential profitable enterprises, to cover up the bad loans it has already lent by pretending they are not bad and/or rolling over additional loans to the bad borrowers, and to gamble on resurrection in the financial casino. All these are enabled by a regulatory regime that is captured by the banks it serves -- the Fed in the US, the ECB in Europe. A banking union is a chimera floated by Draghi, a chimera primarily because the banks themselves will not allow it.

Focus on banks as a first condition. Banks first. It didn't work in the US, and it's not working in Europe. These institutions were the cause of the crisis and recession, yet the wholesale restructuring needs to be, according to Draghi, in the labor markets -- the so-called structural adjustments, and in the government sector. Driving down demand, imposing austerity, and no doubt continuing the stagnation and increasing the suffering on those with no power.

Draghi's reform agenda? Reduce deficits without taxing the rich.

The problem never was in the real economy. "Reducing rigidities and increasing flexibility" as well as "increasing competitiveness" is code for reducing wages. No matter that a growing body of evidence shows no connection between wages and employment. Demand Side says this is because wages support employment. Cheap money to banks does not.

And to confirm who was one of the authors and enforcers of austerity. Here from 2011, in the name of the confidence fairy and the nonsense of competitiveness in a stagnant economy.


Mario Draghi. Idiot of the Week!

Now, to cleanse your palate, or get the taste out of your mouth, at least, here is Joseph Stiglitz addressing the AFL-CIO.

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