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American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

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  • American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

    American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession"


    Photo Credit: Fed Chairman Ben Bernanke,
    Boston, Massachusetts, October 20, 2011, Eric Janszen

    There is not truth, only power, and facts are for little men.

    I attended last week’s small, invitation-only conference "Long-Term Effects of the Great Recession" hosted by the Boston Federal Reserve on Atlantic Avenue to hear what a dozen influential economists like Martin Feldstein, Donald Kohn, and Simon Johnson have to say about the state of the economy two years after the so-called Great Recession, and meet members of the media.

    The format of the two-day conference, a series of presentations and reviews of academic papers. Each presentation by authors was followed by two peer review presentations and a question and answer session.

    Fed Chairman Ben Bernanke gave a 30-minute speech, duly covered by media in attendance. The TheStreet.com called it “The Most Important Ben Bernanke Speech That No One Heard.” His Fedspeak was interpreted by the attentive to mean that the Fed intended to set aside the Taylor Rule that ties interest rate decision rigidly to inflation and adopt a more "flexible" policy that takes unemployment into account. I call it the Burns Rule and investigate the implications in Part II.

    On the other side of the street, Occupy Wall Street protesters quietly displayed their dissent. I asked a dozen Fed employees during the conference what they thought of the protests. All of them were sympathetic with the demonstrators who were protesting “Congress for Sale” but less so to the “Eat the Rich” contingent. After the event I walked across the street in suit and tie, still wearing my conference badge, to talk to the protesters. I’ll fill you in on those conversations later, too.


    Photo Credit: Occupy Wall Street, Boston, Massachusetts, October 20, 2011, Eric Janszen

    Cognitive Dissonance: FIRE Economy economists versus American Kremlinologists

    Conferences like this require disciplined mental preparation.

    Before I walk into a roomful of FIRE Economy credentialed economists and journalists, I have to compartmentalize the knowledge I have gained over 13 years running iTulip.com; pack it in a box and store it in the attic of my consciousness, out of sight. Then I’m on the same wavelength as the presenters and audience, this one comprised of professional investment bank, pension fund, family practice, academic, and Federal Reserve economists, and the journalists from CNBC, Reuters, New York Times, Wall Street Journal there to cover them.

    Those who have been reading along on iTulip.com since 1998 will feel my pain. iTulip.com chronicled two asset bubbles and their aftermath, the existence of which was denied by professional economists at the time.

    To prep for such a conference, forget that you first became aware of the build-up to the financial crisis and Housing Bust Recession with this first warning about the housing bubble in 2002. That was followed in January 2005 by a forecast of a housing market decline lasting 10 to 15 years, depending on government interference in the market – a long and tortuous decline with it, a deep and short decline without. Forget that in April 2006 you learned about the risks facing the global financial system due to mis-rated asset-backed securities that had been sold to funds all over the planet, polluting the global financial system with credit risk. Forget that in 2007 you became aware of the measures that the Fed planned to take to prevent the approaching de-leveraging panic from devolving into a 1930s type deflation spiral. Forget that you knew the long-term impact of economic policy responses of the central bank and Congress in April 2008: persistent high unemployment and inflation initially exhibited as a decline on product and service quality, later as rising nominal all-goods prices. Finally, forget that in 2008 you knew that once the public realized they’ve been had – again – that they’d take to the streets to express their First Amendment rights to try to get through to unaccountable political representatives whose campaigns were financed by the institutions that created the mess.


    Where was the media and the Federal Reserve from 2005 to 2007 when the credit risk was building up?

    To enter the Kafkaesque milieu of a professional economics conference where obvious and predictable events are treated as mysterious and unknowable, and keep your sanity, requires not only that you forget what you knew ahead of events but that you also forget what you know about the events after they occurred.

    An American economist at an economics conference in the Soviet Union in the 1930s would have experienced a similar split between knowledge of the workings of the economy and what he can say without offending the conference sponsors.

    As a government sanctioned economist at a conference in Stalingrad in the early 20th century you couldn’t go wrong penning a paper like Preobrazhensky’s “The Decline of Capitalism.” But if you wandered off the reservation to propose theories that did not align with the ideology and interests of the regime, as Preobrazhensky did when he later published “The Crisis of Soviet Industrialization,” your prospects, both professional and personal, declined precipitously.

    According to History of Economic Thought website:
    “Preobrazhensky was largely responsible for rewriting Marxian theory for an agrarian economy, particularly emphasizing the possibility of ‘socialist accumulation’ to replace the capitalist phase (1926) by expanding industry at the expense of peasantry (via prices, not coercion) a proposition that went against the idea of the New Economic Policy. That work landed Preobrazhensky in Siberia for a period. Later he became a favorite of Joseph Stalin, who brought him back into public life. But he then predicted an economic crisis caused by Stalin's industrialization plans. Stalin had him arrested in 1936, and subsequently shot.”
    Another Soviet economist, Nikolai Ivanovitch Bukharin, got into trouble when he emphasized small-scale peasant farming and the use of market incentives to rescue the economy from the devastation caused by the pursuit of Stalin’s favored economists’ madcap economic theories. For this he was purged by Stalin in the 1938 trials and shot.

    In America today an economist who warns about the long-run economic consequences of FIRE Economy directed economic policies doesn’t face a firing squad, but discretion remains the better part of valor if he wants to get invited to future economics conferences put on by a key promoter of such policies.

    To get through the conference, pretend that the financial crisis was not foreseeable and preventable, that the hosts of the event, the Federal Reserve, did not play a leading role in the build-up to the crisis by failing to execute its responsibility to oversee financial system stability, and that the Fed does not continue to oversee the re-growth of systemic risk by failing to dismantle too-big-to-fail financial institutions that continue to be engaged in inherently conflicted speculative and commercial banking, despite the Volcker Rule.

    Also pretend that the Fourth Estate did its job by exposing mortgage and securities fraud, endemic and apparent throughout the mortgage lending and finance industry from 2002 to 2008, before the resulting credit risk had a chance to accumulate in the system to the point where a credit crisis could wreck the economy.

    In short, you have to pretend that the FIRE Economy doesn’t exist, that economic policy is not geared to preserve and grow it, that these policies did not produce the current conditions of private and public over-indebtedness and are not driving the nation toward insolvency, and so on and so forth. Think: The Fed’s so-called Operation Twist is not a bid to ramp up the price of the collateral on mortgage-backed securities by driving down mortgage rates, instead it’s purpose is to stimulate “the economy.” Think: The Fed’s latest desperate plan to rescue the politically influential real estate industry, to buy mortgage-backed securities, is really about helping homeowners. And on and on.

    Once all of these inoculations against the stresses of cognitive dissonance are completed, you are ready to join the group.

    Here’s what happens if you understand the workings of the FIRE Economy but don’t manage your knowledge effectively.



    If like Dylan Ratigan you mistakenly believe that there is anything to be immediately gained by speaking truth to power, you put your sanity at risk. Dylan's been at it for three years, he says. After 13 years I've learned that it's important to pace yourself.

    American Kremlin Conference – Part II: A Play in Four Acts


    Photo Credit: Federal Reserve Bank of Boston on the left and OWS protesters on the right side of
    Atlantic Avenue, October 19, 2011, Eric Janszen

    What, you ask, can one hope to learn from this game of make-believe?

    The way to approach such as meeting is as an actor in a play. There is knowledge to be gained in observing and participating in the play itself.

    The presenting economists play the role of independent analysts looking for answers to the question of how the economy got into the sorry state that it is in today and what to do about it. The economists in the audience play the role of disciples of the learned economists. The media play the role of unwitting propagandists. I will explain my minor role shortly.

    Act I: The Most Important Ben Bernanke Speech That No One Heard

    By coincidence Bernanke entered the meeting room as I walked out of to make a call. I extended my hand. The diminutive head of America’s central bank, a good six inches shorter than me, looked up, took my hand, and smiled with an expression that asked, Am I supposed to know you? After once having my hand pressed in Paul Volcker’s giant mitt I was momentarily taken aback by the soft, girlish paw that held mine. I said simply, “Nice to meet you,” and moved on to make my call.

    Later that afternoon, as he gave his speech he stood not ten feet from where I sat. I was struck by his lack of presence. Unlike the master politician-for-hire Alan Greenspan or the physically imposing, politically adept albeit morally scrupulous Paul Volcker, Bernanke comes off in person like the bland, politically vacant academic that he is.

    His many academic papers going back to the early 1980s about how to fight the abstract deflation dragon he saw looming were his bid for the Fed head job he got so many years later.

    He has a deep, emotional connection to the events of the Great Depression. I imagine that growing up he heard so many stories of 1930s hardship over Thanksgiving and Christmas dinner with relatives that he internalized their plight and determined to make it his personal mission to see to it that it never happens again.

    The management consultants of the FIRE Economy brain trust, who write the hiring specifications for the next Chairman of the Federal Reserve, read over his papers with delight -- they'd found their boy.

    Bernanke has no apparent interest in the conditions of the political economy that gave rise to the debt deflation threat he foresaw and continues his battle to fight off deflation with every means available to him, except the only one that will work: writing off the credit bubble era debt, which solution is politically unacceptable to the commercial banking system to which the Fed is captive.

    He hides behind the ideologically neutral jargon of neo-classical economics, using it as a shield to deflect criticism where Greenspan used it like a knife to slice and dice his critics or a smokescreen to send them away in confusion.

    The crux of Bernanke’s speech, if it can be said to have one, is that if the Fed learned a lesson from the financial crisis it is that the Fed’s secondary mission to manage risk in the financial system has been elevated in importance to equal its primary mission to maintain the general price level. Simon Johnson later pointed out that the only way to prevent a repeat of the financial crisis is to break up too-big-to-fail financial institutions into small-enough-to-fail institutions that the Fed doesn’t have to bail out at all.

    As everyone full well knows, that has not been done and won't be. There stands Bernanke like a man in charge of a city’s building inspectors after a recent 8.0 Richter scale earthquake that leveled half the city. He promises that his best people will see to it that henceforth building standards will be strictly enforced, as if another once-in-100-years earthquake is imminent, as if crap concrete and rebar are not being poured and stuffed into the foundations of every new structure built as he speaks because the concrete and rebar producers are funding the campaigns of the politicians that keep him in office.

    Buried in his otherwise somnambulist soliloquy was a momentous phrase, seemingly innocuous: “With respect to monetary policy, the basic principles of flexible inflation targeting -- the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency -- seem destined to survive.”

    Several interpretations of this statement shortly appeared, but the interpretation in off-the-record conversations I had with a dozen economists at the conference converged on one. I keep all off-the-record conversations in confidence, but I can tell you in summary what they really think about the state of the U.S. economy, the prospects for a resolution of the euro crisis, and the future of China’s finance-based economy. (more... $ubscription)


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    Last edited by FRED; 10-26-11, 03:30 AM.

  • #2
    Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen



    I wonder: Does the Fed actually have any tools to address full employment?

    Sure they could switch to NGDP as a primary target, but what would that do other than stoke inflation and raise nominal equity values as people flee treasuries? It will vindicate Bill Gross, but I don't think that it matters for Main Street.

    Ultimately, this is not done in a vacuum. Labor has no teeth. Wages will not rise. Extending ZIRP for a decade or more will destroy what was left of savings and pensions.

    They are missing this fact: GDP can increase and employment can drop. I don't think that they have internalized that macroeconomic truth yet.

    Someone with no income or savings will never pay you back, no matter how cheap you make previous debts.

    Comment


    • #3
      Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

      EJ, more yet to read so this is an opening comment; putting up the Dylan Ratigan video as an example of what not to do is a masterstroke; losing your cool will not take the debate forward as they will only shun you and thus your opening remarks are right on the button.

      Comment


      • #4
        Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

        Originally posted by Chris Coles View Post
        EJ, more yet to read so this is an opening comment; putting up the Dylan Ratigan video as an example of what not to do is a masterstroke; losing your cool will not take the debate forward as they will only shun you and thus your opening remarks are right on the button.
        I doubt very much that Dylan Ratigan lost his cool in the video. He has been in front of the camera long enough to know what will play well for the audience he's trying to reach. The "performance" in the video went viral, and set up his image as the wall street reporter who gets it, which is precisely the image he wants to portray.

        The Media isn't interested in calm, thoughtful, fact based discussions. They want emotionally charged statements that will wake up the audience.

        Comment


        • #5
          Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

          Originally posted by we_are_toast View Post
          I doubt very much that Dylan Ratigan lost his cool in the video. He has been in front of the camera long enough to know what will play well for the audience he's trying to reach. The "performance" in the video went viral, and set up his image as the wall street reporter who gets it, which is precisely the image he wants to portray.

          The Media isn't interested in calm, thoughtful, fact based discussions. They want emotionally charged statements that will wake up the audience.
          dylan 2008 before he lost his shit...

          Dylan Ratigan on Oprah from estebe 99 on Vimeo.


          yeh, the media turn the good guys into raving loons... attracts viewers... boosts ratings... kills rational debate.

          what a system

          Comment


          • #6
            Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

            Originally posted by EJ View Post
            ...
            Conferences like this require disciplined mental preparation.

            Before I walk into a roomful of FIRE Economy credentialed economists and journalists, I have to compartmentalize the knowledge I have gained over 13 years running iTulip.com; pack it in a box and store it in the attic of my consciousness, out of sight. Then I’m on the same wavelength as the presenters and audience, this one comprised of professional investment bank, pension fund, family practice, academic, and Federal Reserve economists, and the journalists from CNBC, Reuters, New York Times, Wall Street Journal there to cover them.
            ...
            Love the "mental preparation" label, such an understatement.

            I imagine it was a performance worthy of an Oscar.
            http://www.NowAndTheFuture.com

            Comment


            • #7
              Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

              There is not truth, only power, and facts are for little men.
              I like this statement...
              Is it from somebody ?

              Who is in position so that his expression will be regarded by the majority as the truth... all others battles depend on this one... and indeed that has little to do with facts...

              Comment


              • #8
                Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                Originally posted by chene View Post
                I like this statement...
                Is it from somebody ?

                Who is in position so that his expression will be regarded by the majority as the truth... all others battles depend on this one... and indeed that has little to do with facts...
                EJ came up with that one as a short, modern version of Friedrich Nietzsche's phrase: "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth."
                Ed.

                Comment


                • #9
                  Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                  Originally posted by FRED View Post
                  EJ came up with that one as a short, modern version of Friedrich Nietzsche's phrase: "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth."
                  In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

                  Of course, you know this.

                  EDIT: "The victor will always be the judge and the vanquished the accused." (Goering) and "History is written by the victor." could be considered siblings to this phrase.
                  Last edited by *T*; 10-28-11, 05:14 AM.
                  It's Economics vs Thermodynamics. Thermodynamics wins.

                  Comment


                  • #10
                    Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                    Originally posted by *T* View Post
                    In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

                    Of course, you know this.
                    No, I don't ...

                    The important part is at a given time ... as long as someone is in position of power he sets the truth ...
                    It does not mean that because he sets the truth that give him some kind of invincibility or the ability to stay in power for ever...

                    The next in power will set the truth as well... and his interpretation will prevail.

                    ...in the longer term Nietzsche is right

                    Comment


                    • #11
                      Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                      Originally posted by *T* View Post
                      In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

                      Of course, you know this.
                      Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests. The minority-majority interests gap is created by the changing conditions of the present as compared to the past. The majority's needs change, but the minority is not equipped to meet them. A new minority is needed. The greater the differences between the old minority's interests and the majority's interests, the more force is required to maintain the illusion to discount the new realities that increasingly define the experience of the majority. The protests we see today are the leading edge of the process of dissipation of the illusion. A disruptive social process occurs when the minority-majority interests gap closes and a new era of growth led by a new minority begins.

                      One of the secrets of the success of the United States is relatively rapid self-correction of the minority-majority interests gap through the electoral and informational processes, via an honest election process and a free press. The danger that I see today is that this self-correction mechanism is partially, although not completely, broken. Confidence in the election process has been undermined by our system of campaign finance and the communication channels that access the public mind nationally is concentrated and directed by minority interests. It is in the areas where the self-correction mechanism still operates that we will continue to focus our attention here.
                      Last edited by FRED; 10-27-11, 10:07 PM.

                      Comment


                      • #12
                        Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                        Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests.
                        i love this statement.

                        Comment


                        • #13
                          Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                          Originally posted by EJ View Post
                          Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests. The minority-majority interests gap is created by the changing conditions of the present as compared to the past. The majority's needs change, but the minority is not equipped to meet them. A new minority is needed. The greater the differences between the old minority's interests and the majority's interests, the more force is required to maintain the illusion to discount the new realities that increasingly define the experience of the majority. The protests we see today are the leading edge of the process of dissipation of the illusion. A disruptive social process occurs when the minority-majority interests gap closes and a new era of growth led by a new minority begins.

                          One of the secrets of the success of the United States is relatively rapid self-correction of the minority-majority interests gap through the electoral and informational processes, via an honest election process and a free press. The danger that I see today is that this self-correction mechanism is partially, although not completely, broken. Confidence in the election process has been undermined by our system of campaign finance and the communication channels that access the public mind nationally is concentrated and directed by minority interests. It is in the areas where the self-correction mechanism still operates that we will continue to focus our attention here.
                          With this I quite agree.

                          There was a popular 90's comedian called Ben Elton who called this the reality gap, with reference particularly to the false reality created by advertising, and the creation of false needs which are offered to explain the reality gap. My King Knut point was merely that at some point, the force required to maintain the reality gap is too large to sustain, and the illusion collapses. I had in mind the process of doing the physical sciences, where reality intrudes a little more forcefully, via carefully designed, repeatable experiments. In his book, 'the structure of scientific revolutions,' Kuhn called this catastrophic process a paradigm shift (this was the original meaning of the term). I suppose might compare free elections, markets etc to well-designed scientific experiments. This is why openness and transparency is always a good thing.

                          In addition to the free press etc I would add academic freedom, which particularly in the case of economics has been badly eroded with the obvious consequences. Academia should be the free conscience of a nation, questioning everything, not the bastion of dogma. Indeed, this aspect is written into New Zealand's constitution.

                          I am surprised you call for a new minority. Would you not prefer a self-directed majority? Interestingly, if you substitute ruling/working class for minority/majority, your line of argument above looks rather like something Marx would say.

                          Typical iTulip. A throwaway sentence, once unpacked, reveals a long and interesting line of reasoning.
                          Last edited by *T*; 10-28-11, 05:16 AM.
                          It's Economics vs Thermodynamics. Thermodynamics wins.

                          Comment


                          • #14
                            Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                            Originally posted by *T* View Post
                            In addition to the free press etc I would add academic freedom, which particularly in the case of economics has been badly eroded with the obvious consequences. Academia should be the free conscience of a nation, questioning everything, not the bastion of dogma. Indeed, this aspect is written into New Zealand's constitution.

                            I am surprised you call for a new minority. Would you not prefer a self-directed majority? Interestingly, if you substitute ruling/working class for minority/majority, your line of argument above looks rather like something Marx would say.

                            Typical iTulip. A throwaway sentence, once unpacked, reveals a long and interesting line of reasoning.
                            Wonderful!

                            For a long time now I have held the impression that EJ is caught between his past experience of working and friendships with venture capital, (what I describe as the core of the feudal mercantile economy), and his constant contact with the iTulip community that expresses a much wider viewpoint of the overall problems we face. Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

                            That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.

                            Something not possible with a feudal mercantile economic model.

                            Comment


                            • #15
                              Re: American Kremlin Conference Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

                              Originally posted by Chris Coles View Post
                              Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.
                              I've come to the conclusion that you're correct. The nearest realisation of it I see, is in the co-operative company structure, or in Islamic finance.

                              The central problem is the distribution of the surplus value or value added. Both Marx and the classical capitalists agreed on this, and the idea of a society with wide ownership of equity was just one proposed solution. The problem we have faced, is that productive capital (and now, most heinously, debt) tends to accrue more capital, so we end up with an unsustainable concentration of ownership and peonage. Unfortunately, Marx's solution (at least as implemented) proved rather less useful than his analysis.

                              The horrible lie is the confusion in terms of what you call the "feudal mercantile economic model" or what is popularly called corporatism, and the capitalist model. The mirroring lie is the confusion between what is commonly called socialism and what is actually a statement about public good and the commons, which has nothing to do with centralisation. Once we see this usurping of language, we can ask who is perpetrating it.
                              It's Economics vs Thermodynamics. Thermodynamics wins.

                              Comment

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