[OPE-L] Paul Anthony Samuelson on the bankers...

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Thu Jan 03 2008 - 14:03:32 EST

Interesting clip (Nov 19, 2007) from the doyen of neoclassical economics:

"It used to be enough for a central bank to "lean against the wind." That means lower interest rates when unemployment is too high and when deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year. 

Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low. This is surprising, but true. [in fact, the Fed stopped publishing data on M3 - JB].

The safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory. 

The situation is not hopeless. New, rational regulations that discourage predatory lending and rash borrowing could help a lot. Also, as we learned during the Great Depression, the government's treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves. The best policy is actually the middle way: not too much freedom for market forces, and definitely not too little freedom.


Samuelson said once "In this age of specialization, I sometimes think of myself as the last 'generalist' in economics", but as for myself, thinking about Samuelson's generality, I find myself thinking, "can one actually know and define what the middle way is, anymore than what interest rates should be, if that is the best policy?". 

To the extent that a lot of ideas about how the economy really functions are now being put to the test, we certainly live in exciting times.


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