It takes a lot to change the ideological / religious beliefs of neo-classical economists. But there are some signs that an intractable (by their tools) economic and financial crisis may do it. Bill Mitchell’s latest blog gives a very good outline of the evidence of the painful changing of minds. Of course, the language is careful, cautious and full of caveats. Will Bernanke and Bean give credit to the MMT school for predicting much of what has happened or for offering a better set of solutions? Unlikely. These guys have too big egos to take advice. They are going to have to learn it the hard way. Lets hope our economies can survive their learning curves.
Monetary policy under challenge … finally
The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.
This afternoon (August 30, 2010), Bloomberg is reporting that – Bernanke Faces Skepticism on Policy Tools, May Need Fiscal Aid.
The news report is updating coverage of the Economic Symposium organised by the Federal Reserve Bank of Kansas City. You can access the papers for the Symposium – HERE – but at the time of writing they were not yet available for the 2010 event.
Over the weekend, the Economic Symposium at Jackson Hole, Wyoming heard two strong presentations from central bankers – Ben Bernanke and Bank of England deputy Charles Bean.
Modern Monetary Theory (MMT) posits that fiscal policy is the most effective counter-stabilisation tool available to national governments if they are sovereign (that is, run a currency-issuing monopoly and float the currency on international foreign exchange markets).
MMT downplays the effectiveness of monetary policy claiming it is a blunt instrument which cannot be targetted (by demographic cohorts, region etc) and has uncertain aggregate impacts on overall spending because it creates winners and losers each time the interest rate is changed.
At the Economic Symposium this theme has begun to emerge among the mainstream speeches of Bernanke and Bean. I guess they cannot go on ignoring the empirical evidence forever even if the mainstream academic economists seem unable to poke their heads out the window to see what actually happens in the real world and why…(link to full article)
