by Michael Roberts
Today, former head of the US Federal Reserve, Ben Bernanke launched his own economics blog through the Brookings Institution (http://www.brookings.edu/blogs/ben-bernanke). As Ben put it, “Now
that I’m a civilian again, I can once more comment on economic and
financial issues without my words being put under the microscope by Fed
watchers. I look forward to doing that—periodically, when the spirit
moves me—in this blog. I hope to educate, and I hope to learn something
Well, can we learn something from Ben’s blog? After all, this is the
economist who is supposedly an expert on the Great Depression of the
1930s and its causes; and vowed back in 2002, when addressing a
celebration of Milton Friedman, the great exponent of monetarism, that
he and the Fed had learned the lesson that by judicious use of monetary
policy (lowering interest rates and boosting money supply through
‘quantitative easing’ or even through cash handouts to the banks),
depressions could be avoided.
“We won’t let it happen again” said Ben at the time. And
‘helicopter Ben’, as he became known, for advocating monetary largesse
on an industrial scale dropped from helicopters on the countryside if
necessary in times of slump, duly applied Friedman’s monetary injections
during the Global Financial Crash and the Great Recession.
But did such policies of low interest rates and helicopter money
work? Well, you can read my many posts on that for the efficacy of QE
and Bernanke-style monetary policy.
But the outcome is clear: the weakest recovery from a slump in the
post-war period and forecast for future growth have been steadily
downgraded, as this graph shows.
Current US real GDP is some 12% below where it would have been now without the Great Recession and subsequent weak recovery..
It would seem that monetary policy is not anywhere near enough to get
even the US capitalist economy going and ‘return to normal’.
And it seems that Bernanke in his first blog post today agrees. Ben
tells us that low interest rates are here to stay, but not because of
lax monetary policy but because the real rate of return on assets (both
tangible and financial) are staying low
Ben points out that interest rates along with inflation have been in a
downward trend since the early 1980s. Indeed, real rates (after
inflation) are actually negative now.
And this is a “not a short-term aberration, but part of a long-term trend.”
Now this may be a revelation to Ben, the former Fed Chairman, but it
is not to readers of my blog or my book, The Great Recession, where I
point out in some detail that capitalism in its long-term downward phase
in production prices (in what has been called the Kondratiev cycle,
after the Russian economist who first identified this cycle) –
But Bernanke asks the question: “Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?”
Well, they are low not because the Fed and other central banks have
pumped too much money into the economy – although that used to be what
Ben said he wanted to do. No, the reason for low interest rates is the
low rate of return on capital investment. Well, well. “The real
interest rate is most relevant for capital investment decisions, for
example. The Fed’s ability to affect real rates of return, especially
longer-term real rates, is transitory and limited. Except in the short
run, real interest rates are determined by a wide range of economic
factors, including prospects for economic growth—not by the Fed.”
Ben invokes the work of Knut Wicksell, the pre 1914 Swedish economist who introduced the concept of the equilibrium real interest rate.
This equilibrium interest rate is the real interest rate consistent
with full employment of labour and capital resources. And the problem is
that the equilibrium real rate is low because “investment opportunities are limited and relatively unprofitable.” What this tells you is that monetary policy is restricted in its
impact by what is going on in the ‘real’ economy, more specifically, the
dominant capitalist sector. “The bottom line is that the state of
the economy, not the Fed, ultimately determines the real rate of return
attainable by savers and investors.”
So Ben’s argument that it is the underlying real rate of return on
investment that decides things, not Federal Reserve monetary policy, is
really to justify and defend his actions as Fed chair against criticism
from the Austrian school and the neoliberal camp that he kept interest
rates artificially too low; and from Keynesian camp that he did not
intervene enough. You see, the critics are wrong about Fed policy
because the Fed has little say in the underlying growth or otherwise of
the US capitalist economy. That depends on its underlying
profitability, or in Wicksell’s language the ‘equilibrium ‘natural rate
“The state of the economy, not the Fed, is the ultimate
determinant of the sustainable level of real returns. This helps explain
why real interest rates are low throughout the industrialized world,
not just in the United States.” By why is the real rate of return so low? Ben will tell us in future posts.
Don’t hold your breath.
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