Mercury Rising 鳯女

Politics, life, and other things that matter

The kabuki of government

Posted by Charles II on April 7, 2010

Via Barry Ritholtz, a very interesting article with lessons on how governments really work by Paul Jackson titled, “Who Controls the Bank of Japan?” He asks:

When Japan’s finance minister says jump and the Bank of Japan responds, does that mean its independence is a sham? Or is the real show being directed by the bank itself?

According to economist Richard Koo, moves by the Bank of Japan may be part of a larger game. He said it was:

the US Federal Reserve that was panicking over the future of its independence, and suggests that Fed Chairman Ben Bernanke may have adjusted his views to fit in with Koo’s during recent congressional testimony to avoid a confrontation that might have further threatened the bank’s status

He also says that the people running the finance system have forgotten the basic lesson of the Great Depression: if no one is willing to borrow, because of fear or because of debt, economic growth can only be re-started by giving people work. Monetary policy, in which the Fed provides money to banks at low interest rates, only works in business cycle recessions, in which one area has grown too fast and there has to be a correction. In balance sheet recessions, in which money has simply vanished, only end through fiscal policy– spending real money to give people work. For some reason, Jackson and Koo this is a new idea… but it’s the basic gospel of any New Dealer. What are income security programs from a public policy perspective except a way to minimize hoarding in the present by guaranteeing income in the future?

This interesting bit of history:

It might not look as if fiscal policy helped Japan much after the bursting of its economic bubble, but the alternative would have been catastrophic, Koo says. He calculates that 1.5 quadrillion yen was wiped off Japanese assets in the wake of the bubble—that’s 3 times the size of the nation’s economy. Without fiscal stimulus, Japan’s GDP should have shrunk to between a half and a third of its size, he claims. But in fact, GDP did not fall below its bubble peak, something he describes in the book as ‘nothing less than a miracle.’

The important take-home message is that Koo believes that if the US starts deficit reduction too soon, it will lapse back into recession, just as Japan did. This, of course, is not news to people who read Paul Krugman. Unfortunately, the right does not read Paul Krugman– which is why they must be prevented from gaining power in Congress in 2012.

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