* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought. For more info on the difference in views please see here. For more on MR’s views please see here.
…and we continue to talk ourselves off the edge of the cliff. For the second week in a row Meet The Press trotted out the most financially incompetent of the financially incompetent and placed them on their undeserving pedestal. Last week it was Tim Geithner, the veritable fox in the hen house of the financial crisis. This week it was Alan Greenspan, one of the grand orchestrator’s of our financial industry’s deregulation and the most vocal advocate of the virus that is neoliberalism. This man has poisoned our economy for almost 5 decades (and he has admitted that his models were “flawed”) yet we continue to worship at the altar of Greenspan….It’s worse than the John Meriwether’s of the world who continually reopen hedge funds after driving the last one into the ground. What in the world is wrong with Wall Street and our financial system? Are we really so incompetent as a whole that we find it is okay to consistently reward and rely on those who have consistently failed us? Pardon my frustration, but this is beyond madness. Why do these people command such obedience?
This week, Mr. Greenspan was once again out discussing monetary policy despite the fact that he has already admitted his models were flawed. 20 years of mistakes and yet we still hang on his every word. Mr. Greenspan is still latching onto this insane idea that bond yields are going to spike as soon as the bond vigilantes awake from their slumber:
MR. GREENSPAN: Well, the problem there implies that the government has control over those rates, meaning the Federal Reserve and the Treasury Department, in a sense. There is no doubt that the federal funds rate, that is the rate produced by the Federal Reserve, can be fixed at whatever the Fed wants it to be, but which the government has no control over is long-term interest rates, and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment, there is no sign of that, basically because the financial system is broke and you cannot have inflation if financial system is not working.
First of all, as the issuer of bonds denominated in their own currency, the US government can offer interest bearing debt instruments at whatever maturity and interest rate it pleases. As I’ve explained before, the bond market serves no fiscal purpose – it funds nothing. It is purely a monetary tool for the Fed to drain reserves and maintain control of interest rates. This actually renders the issuance of long-term bonds fairly meaningless. The reserve drain could be done with a CD, however, the government chooses to issue longer dated notes as well as short duration notes. If the government wanted to stop issuing 10 year notes they easily could (they did so with the 30 year and nothing happened to the bond market). Mr. Greenspan clearly thinks the bond market funds our spending and that this raises a solvency issue in the USA. His model is “”flawed” (not my words!).
He continued the interview by discussing the need for fiscal prudence and the expiration of the Bush tax cuts (an effective tax hike):
MR. GREENSPAN: Look, I’m very much in favor of tax cuts, but not with borrowed money. And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous. And my view is I don’t think we can play subtle policy here on it.
This is more madness from a man who has been terribly wrong about everything for the majority of his career. The bond market is not “borrowed money”. Will China really stop buying our bonds? Will Japan stop buying our bonds? And if they do, who cares? It’s their loss. They can leave pieces of paper with old dead white men on them sitting in their bank vaults earning 0%. The Fed will continue to find buyers of government bonds in the USA (because the reserves created via government spending are ALWAYS there to be drained because the government effectively put them there!).
How many more times does Mr. Greenspan have to be wrong before we stop listening to this fear mongering? Mr. Greenspan wants to raise taxes and cut the deficit because he incorrectly believes the bond vigilantes are taking a nap. I am all for fiscal prudence (via efficient and effective government spending), but tax hikes serve very little purpose in this time of private sector de-leveraging. It will only exacerbate our debt problems at the private sector level and certainly will not make us more solvent at the government level. Greenspan has the gold standard on his mind and it has resulted in a massively flawed model for most of his career. The gold standard is dead, it is not coming back and we need to stop allowing these archaic thought processes to influence government policy.