Monday, October 25, 2010

The Well-Connected Wackos at Princeton

I'm not sure what is in the water at Princeton University, but they really should ban people from drinking it, especially economists.

Ben Bernanke before becoming a member of the Federal Reserve, where he plays with the economy as though he is a mad scientist, taught at Princeton. Paul Krugman, whose absurdities are so frequent that economist William Anderson has launched a blog to track them all, teaches at Princeton.

Then there is the case of Alan Blinder. Blinder is a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network. He also is a former vice chairman of the Federal Reserve Board.

The Promomtory Interfinancial Network is a method by which Blinder, almost single handily, has introduced huge moral hazard into the financial system.  He has developed a method whereby multi-billionaires can place their money with him and they will get FDIC protection for their billions even though FDIC supposedly only protects deposits up to $250,000 per account. Blinder personally hits up the wealthy at all the conferences that he attends to join his program. For this alone, Princeton should be prevented from giving out four year degrees, and Blinder should be thrown into solitary confinement somewhere (perhaps Guantanamo). But it gets worse.

In today's WSJ, Blinder is out with a complete Keynesian call for huge new spending. In the article, he confuses fact with fiction and seems to be in a race with his former Princeton colleague Bernanke to prove who knows the least about monetary policy.

In the Op-Ed, Blinder tells us that:

In 2008 and 2009, the U.S. government rolled out the heavy fiscal and monetary artillery to stave off Great Depression 2.0. Taxes were cut, spending was increased, and the Fed pushed the federal-funds rate all the way down to virtually zero. It worked.
But that was then and this is now. Today, the economy still needs a boost.
It worked? WTF is this man talking about? The  government did the fiscal and monetary stimulus, according to Blinder through 2009. It worked, but this is 2010 and it isn't working. How long did this "work", an hour? A week? Is Blinder out of his f'ing mind?

Blinder then calls for massive fiscal spending:

How might fiscal policy speed up growth? As Elizabeth Barrett Browning once said, let me count the ways. Actually, let me not, because there are too many. Here are just three of my personal favorites:

Some of what Blinder calls for are tax cuts and I can never argue with tax cuts. But they must be accompanied by spending cuts, which Blinder does not call for. Thus, despite the fact that we are headed for a two trillion dollar deficit over the next 12 months, with no sane way to finance it, Blinder wants to add to the deficit.

Blinder, bizarrely, admits there is a deficit problem:

The point is that the fiscal-policy kitbag is overflowing with ways to spur demand. Yet fiscal policy sits idle, paralyzed by extreme partisanship, tarred by a successful public relations campaign against the 2009 stimulus bill, and consumed by fears of large budget deficits.

But aren't those fears warranted? Not if deficit-increasing measures are temporary. Our real deficit problem—and it's a whopper—lies in the future, not the present. Right now, with so much slack, there is little or no danger that public spending will crowd out private spending. And with Treasury interest rates at or near historic lows, there is little doubt about the Treasury's ability to finance a larger deficit—at least for a while. If you're worried that larger budget deficits will either depreciate the dollar or cause inflation, stop worrying. A lower dollar would be just fine right now, and the present danger is not inflation but deflation.
How are these borrowings temporary? Does Blinder expect to wave a magic wand and make them go away, especially when he even acknowledges that the deficit problem is a "whopper". Further, for how long does Blinder expect interest rates to stay low, especially if we add to the deficit based on Blinder's advice? And where exactly is this deflation? Commodity prices are soaring--all of them. We are at the edge of a huge new climb in consumer prices.

Also, the deficit situation is not about how much "slack" is in the economy but about how the hell is the deficit going to be financed. That is, who is going to buy all this debt?

Blinder then hails Fed money printing, which does nothing but cause inflation:

The Federal Open Market Committee will almost certainly announce another round of quantitative easing at the close of its next meeting on Nov. 3. Specifically, unless the Fed has wrong-footed everyone, it will announce its intention to purchase medium- and long-term Treasury debt. Why? To lower the yields on those securities and, via arbitrage-like linkages, to lower the yields on a wide variety of private-sector securities as well—though probably by smaller amounts.

That's good news.
Just to show you how confused a thinker we have here. For some odd reason, he does not think monetary policy will work (in manipulating the economy):
But many of us worry that this second round of quantitative easing will not be powerful enough to move our $15 trillion economy much...

But then he seems to call for using it anyway, because fiscal policy is not a current option:

In a more rational world,...Fiscal policy, which packs the power, would be doing the heavy lifting—by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don't live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that's the Federal Reserve. The fiscal army is AWOL.

Got that? He doesn't think monetary policy will work, but he recommends using it anyway.

In short, Blinder's two favorite tools to manipulate the economy do just that manipulate and distort the economy. Money printing distorts the structure of the economy by pushing money toward the capital goods sector and by eventually creating price inflation. Fiscal policy is simply a transfer of wealth from the productive class to the politically favored class. Thus, Blinder's solutions do nothing but muck up the economy for the benefit of the well connected and given Blinder's position with the Promomtory Interfinancial Network, Blinder is at the top of the list of the well connected---along with Bernanke and Krugman.

What a plan. It makes you want to close down Princeton. Something is wrong there.

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