Wicksell and William White

This is a comment from Sunni Bakchat dealing with monetary policy.

If the morons in the Reserve Bank had a broad education they’d know about Wicksell rather than just Keynes. Clearly Keynesian economics does not have the answer or it is being interpreted incorrectly. This idiocy from the Reserve Bank will continue until their hand is forced. For there is not an original thinker or courageous person to be found in the institution, or just about any other western reserve bank at present. For those seeking a little inspiration, William White, former chief economist at The Bank of International Settlements is all over the subject.

Alas, I had never heard of White. Now I have gone looking: INTERVIEW WITH DR WILLIAM WHITE, FORMER HEAD OF THE MONETARY AND ECONOMIC DEPARTMENT AT THE BIS. A sample:

I’m working on a piece for the G30 which basically deals with the future of central banking and the future of monetary policy. I sense from talking to many of the members, many of whom are previous central bankers, that they are very concerned about the direction this has taken, in particular the continued over reliance on stimulative monetary policy to get us out of the predicament we are in. It has turned into a kind of Pandora’s box. Swiss Re has recently published a paper called “Financial Repression: Quantifying the Cost” which looks at the cost of these unusually low interest rates for the insurance industry. Clearly, they are really, really worried about it and I don’t blame them.

I’ve written a lot about this stuff, not least of which a paper that was published by the Dallas Fed in 2012 . It was called “Ultra Easy Monetary Policy And The Law Of Unintended Consequences.” It contained page after page of all the things that might go wrong. Moreover, knowing that even my imagination might be inadequate, I treated that paper as a kind of work in progress. So every time I opened up The Financial Times or something else and I saw something unpleasant that wasn’t in my paper, I clipped it out and added it to the pile. Unfortunately, the pile is getting bigger and bigger. There is a possibility at least that this whole exercise could end very badly.

Larry Summers argues that the Wicksellian natural rate is now below zero, and the financial rate can’t go below zero, so therefore we have a real problem. Well, my reaction is to suggest we try through policy to get the natural rate back up again The way that you do that is to raise expected profit rates for viable companies that are being held down by all the zombie companies bring supported by banks or governments in one form or another. It will be painful, absolutely no question. There will be a lot of vested interests, which will be hurt. But the way out of this thing is to get rid of the excess capacity and give people an opportunity to make an honest dollar.

There is hope, as dim and faded as it might be.

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