Martin Wolf | The Daily Capitalist

Another Conversation Between Econophile and Martin Wolf

Here is the complete conversation I, the not-famous Econophile, had with the famous Martin Wolf, much lauded and awarded dean of economics writers and chief economics correspondent for the Financial Times. This is our second exchange and I have to admit I enjoy them. He drives me nuts, but I very much respect the guy even though he is neo-Keynesian in his world view.

He recently wrote what I thought was a nonsensical article whereby he thought the cure to the southern eurozone’s problems was for the Germans to spend more. You can read the article at the Financial Times. You need to register, but they give you 9 articles per month free.

Here’s the conversation. I think you will enjoy it.

Dear Mr. Wolf:

I just read your article on “Europe Needs German Consumers.” You say, among other things:

So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output. …

What would happen if governments also slashed their spending? In an economy without monetary or exchange-rate offsets to austerity, any reduction in spending is likely to lead to at least an equivalent short-run reduction in output (a “multiplier” of one). …

Germany needs to return the favour. …

If the aim is to avoid disaster, the answer is temporary fiscal support for the struggling countries, robust aggregate demand in the eurozone as a whole and a substantial rebalancing of that demand, led by Germany. The fiscal support would be designed to prevent a short-term confidence collapse from triggering a default. In return, weak countries would need to commit themselves to falling nominal wages and a programme of fiscal retrenchment. …

So, punish Germany for doing well and reward Greece for fiscal insanity?

I cannot make sense of what you are getting at here, Mr. Wolf. We all know that Greece will be bailed out by Germany and France and that Greece won’t structurally change as will be demanded. Why would they if they know their getting bailed out?

In what way does the ECB “tolerate” weak demand? Or, to put it another way: how can they increase demand? I suppose by some Keynesian magic.

According to your Keynesian theory, AD=C+I+G — [Aggregate Demand (GDP) = consumption + gross investment + government spending]. Are you suggesting that all we have to do is “increase” C? How? By increasing G? Can you tell me how that works or has ever worked?

If government (G) takes money from the consumer (C) and spends it, how has that helped the economy? Yes I know it increases AD (GDP) but no wealth has been created, no organic growth. You should understand that GDP measures only spending, not the creation of wealth in an economy. Otherwise have G spend everything and see how fine things would be.

Are you suggesting that the good Germans go out and buy stuff from Greece to be patriotic? And what “favor” are they returning? Germany produces goods the rest of the world wants and Greece doesn’t, not to mention that 25% of Greece’s working population works for the government. There’s a formula for success. What favor have the PIIGs done for the Germans other than having nice beaches?

How about letting them fail? Moral hazard and all that. Why drag down the rest of the eurozone so they can suffer along with the PIGS?

With all due respect, you don’t make any sense here at all.

Econophile

This wasn’t about Greece. It was about all of southern Europe. Germans wanted these people in the eurozone. I don’t see the sense of using it as a machine for serially bankrupting all their partners.

What is it with this US desire to rerun the Great Depression. Wasn’t destroying civilisation once enough for you?

Martin Wolf … Continue reading Another Conversation Between Econophile and Martin Wolf

Why Does Martin Wolf Want to Punish the Germans for Helping Greece?

Martin Wolf, dean of economic writers and chief economics correspondent for the Financial Times, is a confirmed Keynesian. He’s also a very bright guy so I like to read his stuff. Occasionally I correspond with him and that is fun. I think he takes me for being a conservative.

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Conversation Interruptus: Martin Wolf vs. The Daily Capitalist

By Jeff Harding

I am an avid reader of Martin Wolf’s columns in the Financial Times. I disagree with him quite a bit, but I find him to be perceptive, bright, and one who can think on his own. As you may know, Wolf is the Chief Economics writer for the FT, and is rather famous and renowned in the world of financial reporting and commentary.

I first corresponded with him on an article he wrote that claimed rising bond rates showed that inflation was here and that indicated we were in recovery. My message about that starts with No. 1 and our discussion goes on until No. 7.

Starting with No. 8, I had read his column on how to fix the banks, “The cautious approach to fixing banks will not work,” published online on June 30, 2009. The article’s blurb states:

The financial system had to be rescued from its own mismanagement of risk. This is not going to be changed by external supervision, which would be like moving the regulatory deckchairs on the deck of the Titanic. It is going to be changed only by fixing incentives.

He had some great ideas, but I was disappointed in that he didn’t address some of the more fundamental issues, including the government’s role in ruining the banks. We continue from there.

I think you will enjoy this discussion. Consider it to be the antidote to my conversations in “The State of Economics Education in America.”

He has promised a response to my rejoinder, No. 12, but it hasn’t arrived yet, although I have reminded him of it.

I am flattered that he would be willing to talk economics with me. I would guess he likes disputation to hone his thinking, as do I.

These conversations all took place in July, 2009.

1

Dear Mr. Wolf:

I finally got a chance to read your column on how rising bond rates show that govt policies are working. I am rather surprised by your and Krugman’s conclusions and couldn’t agree more with Taylor and Ferguson. Could it be possible that inflation expectations are driving demand for Tips vs unprotected Treasuries?

Jeff Harding

2

Dear Mr. Harding:

It’s possible – it was the thesis of my piece after all that inflation expectations are normalising. But I don’t think there is any credible account of the impact of excessive deficits now that would not include rising real interest rates.

Since you don’t cite any evidence for your views, I can’t really comment.

Martin Wolf

3

Dear Mr. Wolf:

I’ve re-read your article as well as Paul Krugman’s article on “The Big Inflation Scare.” I’ve been reading both of you for a while and I enjoy your commentary, but I don’t think Krugman is very credible. I should say that I am definitely not Keynesian, but Austrian (yes, that crackpot, but very accurate, branch of economics).

I think your comment on TIPs is entirely correct at present and that my assumption is wrong. While volume in TIPs has been increasing, I can’t say that its enough to reduce the spread. My take is that the bond market is wrong at this point and we are still facing deflation. Like most people, traders believe in the government’s ability to cure the markets.

Looking back at Niall Ferguson’s comments in the latest debate, I will say that good theoreticians are often wrong on market predictions, so I won’t hold that against him. On the other hand George Soros knows how to make money but I don’t he think he has a good grasp of any theory. But …

1. The bond market is normalizing, but I think this is wrong because I see more deflation ahead: housing, commercial real estate, liquidation of the big subprime trusts, securitized credit card and auto debt, declining wages, and so on and on. I think you are jumping the gun.

2. Crowding out hasn’t occurred yet, but it will. While corporate bonds spreads have narrowed, its a fake move. Ferguson is absolutely correct: when the $2 trillion is financed between now and September it will impact interest rates.

3. I understand you believe in Keynesian fiscal stimulus, but you have no basis to conclude it works. In fact, please tell me when it has ever worked? Never? The problem with the economy is not reduced consumption, as Krugman puts it, but too much debt, which is why we continue to deleverage (and consumer credit continues to contract). I’m not going to argue theory here, but everything Krugman recommended to the Japanese was tried in some fashion and never worked. Please don’t use his excuse that they didn’t do enough, soon enough. Krugman also has no basis to state that the rising level of savings will sop up treasuries.

4. When the deflationary period bottoms out, loan demand will revive and then there will be no way out of inflation as the money expansion hits the economy. Since Bernanke-Geithner-Summers all believe that rising interest rates will destroy the economy, how can they withdraw the massive credit expansion? They can’t.

Lets wait until about September to see who’s right.

I write an economics blog, and one of my recent posts was specifically on Krugman’s inflation nonsense. I write from an Austrian perspective and its quite a different look at the world: The Daily Capitalist.

I look forward to reading your columns in the future.

Jeff Harding … Continue reading Conversation Interruptus: Martin Wolf vs. The Daily Capitalist

How To (Really) Fix Our Banks

By Jeff Harding

If you picked up a book on the Crash of ‘08 and started reading it in the middle and then based your ideas of how to solve future crises on that information, you would come up with ideas like the ones proposed by Martin Wolf, the chief economics reporter for the Financial Times. Mr. Wolf, whom I think is an astute observer of current economic events despite his Keynesian leanings, wrote an article on how to “fix” banks.

We all recognize that we have a problem with our existing banking system. As he correctly puts it, “without radical changes, another crisis is certain.” Mr. Wolf argues that, “[W]hat has emerged after the crisis is … an even worse financial system than the one with which we began. The survivors are an oligopoly of “too-big-and-interconnected-to-fail” financial behemoths.” He wants to go after the financial incentives driving banks.

Now, there isn’t such a thing as “too big to fail.” But within the context of current banking regulations and a regulated economy, the government has allowed banks to take far too many risks. Because of the connectedness of the world’s banking system their flaws are magnified into an international economic threat. When these “financial behemoths” fail, they jeopardize the entire world economy. But then they are the children of government regulation.

Before I get into Mr. Wolf’s suggestions I would like to give you the free market view of banking and how our banks contributed to the crisis.

We all understand that our banks create money by lending out more than they have in deposits. If your bank has $100 million of deposits, they could lend out $1 billion. This is called fractional reserve banking and it is the main flaw in our banking system.

Let’s assume that you suspect that the bank where you deposit your cash might be in jeopardy. Let’s then assume all their loans went to residential real estate developers and the loans went bad. You would have a problem and, like me, you would run to your bank to get your money out. Of course that just makes the situation worse and your bank fails. You lose. … Continue reading How To (Really) Fix Our Banks