Monthly Archives: May 2009

How the business cycle is browning America

In politics, the urgent but not necessarily terribly important always trumps the important but not palpably urgent.  In the US today, getting out of the economic downturn is urgent, but not a matter of life and death.  Moving towards sustainable energy use and cutting back on man-made contributions to global warming is a matter of life and death, but not immediately so in the US.  When there is a conflict between a speedy exit from the recession and saving the environment, the environment therefore loses.

Since the crisis hit, it has been clear that the only pro-environment policies that have a chance, in the US and possibly elsewhere too, are those that involve increased public spending.  In this case environmental and Keynesian demand-boosting imperatives point in the same direction.  Examples are grants for home insulation, support for R&D and environmentally friendly infrastructure expenditure such as public transport improvements.  When environmental logic demands policy measures that increase costs to the private sector, however, the fact that such measures impose a financial burden on an already groaning private sector means that such measures will at best be watered down, at worst not implemented at all.

We have just seen two examples of this – the strange and deeply uninformed debate about a cap & trade scheme for CO2E emissions recently introduced in the House of Representatives, and the admission by the US Secretary of Energy, Dr. Steven Chu that bringing US fuel taxes (especially taxes on gasoline/petrol) is politically out of the question for the time being.

Old papers never die, they just get recycled.  The Den Uyl lecture I gave in Amsterdam on 15 December 2008 has been under continuous redevelopment since then.  Its latest outing was as background paper for a lecture I gave at the 25th anniversary Workshop ” The Global Financial Crisis: Lessons and Outlook”, of the Advanced Studies Program of the IFW, Kiel, Germany, on May 8/9, 2009. The whole current enchilada can be found here.  For those with lives, I reproduce below the Introduction, Section 1, the Conclusion and the 16 recommendations in between.


“Never waste a crisis. It can be turned to joyful transformation”. This statement is attributed to Rahm Emanuel, US President Barack Obama’s White House Chief of Staff.  Other versions are in circulation also, including “Never waste a good crisis”, attributed to US Secretary of State Hilary Clinton.  The statement actually goes back at least to that fount of cynical wisdom, fifteenth century Florentine writer and statesman Niccolo Machiavelli “Never waste the opportunities offered by a good crisis.” Crises offer unrivalled opportunities for accelerated learning.

I believe that the current crisis teaches us two key lessons.  The first concerns the role of the state in the financial intermediation process and in the maintenance of financial stability.  The second concerns the role of private and public sector incentives in the design of regulation.  Unless these lessons are learnt, not only will the current crisis last longer than necessary, but the next big crisis, following the current spectacular example of market failure, will be a crisis of state ‘overreach’ and of government failure.  Central planning failed and collapsed spectacularly in Central and Eastern Europe and the former Soviet Union.  The next socio-economic system to fail, after the Thatcher-Reagan model of self-regulating market capitalism with finance in the driver’s seat – finance as the master of the real economy rather than its servant – may well be a stultifying form of state capitalism, with initiative-numbing over-regulation and overambitious social engineering.

The spinelessness and moral cowardice of the Obama administration know no bounds.  The Bush-Cheney  team ordered the torture and abuse of prisoners in Guantánamo Bay Naval Base and assorted other locations abroad – offshore detention without trial as well as torture by US officials or persons acting under their instructions being permitted by Article VIII of the United States Constitution, as confirmed in the XXVIIIth Amendment to the US Constitution.

Candidate Obama declares he abhors torture and deplores what went on in Gitmo and in secret detention centres around the world, but President Obama decides that the Camp may have to remain open for another year, as he doesn’t seem to know what to do with the prisoners.  The right thing to do would have been to send a plane to Guantánamo Bay Naval Base on the day of his inauguration, to move all the prisoners to the US.

President Obama then also decides not to prosecute those who committed the crimes of torture or abuse of prisoners or were responsible for these crimes. The president’s excuse was was that he sought to turn the page on “a dark and painful chapter”.  It was a “time for reflection, not for retribution”, he said.

He is quite wrong.  Reflection complements the law.  It is not a substitute for it.  Those who can be charged with these offences should be tried and, if found guilty, punished according to the law.  If among the guilty parties are CIA agents and former vice-president Dick Cheney, then so be it.  If you cannot do the time, you should not do the crime.  This is not vengeance, it is justice – and it is the law.  Justice must be done and must be seen to be done before healing and reconciliation can start.


I know of ethical systems that hold all interest to be sinful.  Riba, interest on money, is forbidden by the Quran.  I don’t know what Sharia scholars would have to say about negative nominal interest rates.  If if were viewed as a gift from the lender to the borrower it might even be condoned.  Perhaps an extra-credit question on the next Islamic finance examination?  Medieval Christianity also banned ‘usury’,  which meant any ‘interest’ rather than outrageous interest rates – its modern meaning.

Interest is viewed by some as immoral because it represents an increase in capital without any services being provided.  I don’t share the sense of moral outrage at interest per se, but I can understand where it comes from – something for nothing ain’t right.  However, I know of no ethical system that attaches opprobrium to an intertemporal relative price that is greater than unity but not to an intertemporal relative price that is less than unity – or vice versa.

I spent yesterday in Frankfurt at the European Central Bank to meet people and give a presentation on negative nominal interest rates (the ‘zero lower bound problem’).  For reasons I don’t understand, this topic generates almost as much heat and emotion as a critical piece on Obama.  Some of the reactions to my previous post on the issue made me consider starting further posts on this issue with a health warning. Because the heat and emotion are based on heart-stopping ignorance and lack of elementary logic, I will have another go at explaining the basics.

I was surprised, when visiting Dublin, to discover just how short some of the locals must be. The consequences of the potato famine still appear to be with us.

‘Enough capital for what?’ should be the question prompted by the title of this post. The short answer, amplified below, is “enough capital to be able to engage in effective monetary policy, liquidity policy and credit-enhancing policy (including quantitative easing or QE), without endangering its price stability mandate.”

The President of the European Central Bank, Jean-Claude Trichet, did not say that the recession was bottoming out. He said that it had reached an ‘inflection point’: “As far as growth is concerned, we’re around the inflection point in the cycle, that’s the sentiment,…” . Unlike the gormless arts students, limp-minded lawyers and woolly social scientists that dominate British and American economic policy making, President Trichet actually knows and understands mathematics. An inflection point is not a turning point.

The story may be apocryphal but, si non e vero, e ben trovato. A World Bank official addresses the head of state of some emerging market country on the finer points of the World Bank’s new drive for improved governance at all levels of government and on the harm done by corruption. The Emerging grandee listens for a while and then reflects: “you call it corruption, we call it family values”. Has the UK become an emerging market or developing country as regards its tolerance for corrupt behaviour by public officials?

The problem

I agree with Greg Mankiw[1] that it is time for central banks to stop pretending that zero is the floor for nominal interest rates.  There is no theoretical or practical reason for not having the Federal Funds target rate and market rates at, say, minus five percent, if that is what your Taylor rule, or whatever heuristic guides your official policy rate, suggests.

Economics as a science and economic reality have never had problems with negative real (inflation-adjusted) interest rates.  So what is the problem with nominal rates?  In a word, it’s currency.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website