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April 7, 2014

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Latest Posts from Economist's View


Paul Krugman: Oligarchs and Money

Posted: 07 Apr 2014 12:24 AM PDT

Class interests stand in the way of raising the inflation target:

Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund's World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let's talk about the case for higher inflation. ... It's good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there's strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don't involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as "financial repression," which sounds bad. But who wouldn't prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don't think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what's going on, and realize that in monetary policy as in so much else, what's good for oligarchs isn't good for America.

Links for 4-07-14

Posted: 07 Apr 2014 12:06 AM PDT

'Superfluous Financial Intermediation'

Posted: 06 Apr 2014 04:24 PM PDT

Rajiv Sethi:

Superfluous Financial Intermediation: I'm only about halfway through Flash Boys but have already come across a couple of striking examples of what might charitably be called superfluous financial intermediation. This is the practice of inserting oneself between a buyer and a seller of an asset, when both parties have already communicated to the market a willingness to trade at a mutually acceptable price. If the intermediary were simply absent from the marketplace, a trade would occur between the parties virtually instantaneously at a single price that is acceptable to both. Instead, both parties trade against the intermediary, at different prices. The intermediary captures the spread at the expense of the parties who wish to transact, adds nothing to liquidity in the market for the asset, and doubles the notional volume of trade. ... [gives two examples] ....

Michael Lewis has focused on practices such as these because their social wastefulness and fundamental unfairness is so transparent. But it's important to recognize that most of the strategies implemented by high frequency trading firms may not be quite so easy to classify or condemn. For instance, how is one to evaluate trading based on short term price forecasts based on genuinely public information? I have tried to argue in earlier posts that the proliferation of such information extracting strategies can give rise to greater price volatility. Furthermore, an arms race among intermediaries willing to sink significant resources into securing the slightest of speed advantages must ultimately be paid for by investors. ...

I hope that the minor factual errors in Flash Boys won't detract from the book's main message, or derail the important and overdue debate that it has predictably stirred. By focusing on the most egregious practices Lewis has already picked the low-hanging fruit. What remains to be figured out is how typical such practices really are. Taking full account of the range of strategies used by high frequency traders, to what extent are our asset markets characterized by superfluous financial intermediation?

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