The Fed Needs Discipline


I couldn’t agree more. From the WSJ:

The Fed Needs to Return to Monetary Rules

The economic outcomes when the central bank plays it by ear have not been good, especially in the last decade.

WSJ, June 26, 2014

As the Federal Reserve’s large-scale bond purchases wind down, financial markets and policy makers now are focused on when the Fed will move to increase interest rates. There is a more fundamental question that needs to be answered: Will the central bank continue its highly interventionist and discretionary monetary policies, or will it move to a more rules-based approach?

A conference last month at Stanford’s Hoover Institution brought top Fed policy makers and staff together with monetary experts and financial journalists to discuss this crucial question.

David Papell of the University of Houston used a statistical analysis to determine objectively when the central bank followed rules-based policies. The periods when it did—such as in much of the 1980s and ’90s—coincided with good economic performance: price stability, steady employment and output growth. Using a different approach based on his research of the Fed’s 100-year history, Carnegie Mellon University’s Allan Meltzer concluded as well that “following a rule or quasi rule in 1923-28 and 1986-2002 produced two of the best periods in Federal Reserve history.”

From 2003 to 2005, however, the Fed kept interest rates lower than such a rules-based approach would imply. This contributed mightily to the housing bubble and the risk-taking search for yield. The Fed’s discretionary policies since the financial crisis—particularly the large-scale purchases of mortgage-based securities—have continued and have also set a dangerous precedent, according to John Cochrane of the University of Chicago. “Once the central bank is in the business of supporting particular sectors, housing—and homeowners at the expense of home buyers—why not others? Cars? Farmers? Exporters?”

Digging deeper into history, Lee Ohanian of UCLA found that the Fed’s deviations from rules that would produce low and stable inflation during periods of large changes in regulatory policies—such as the National Industrial Recovery Act of the 1930s—often harmed the economy. He concluded that “economic growth would have been higher had the Fed stuck to policy rules.”

Michael Bordo of Rutgers noted another central-banking responsibility that the Fed has discharged in an ad hoc and discretionary manner: to act as a lender-of-last-resort. This, he wrote, has led to instability throughout the Fed’s history, most recently in 2008 when it bailed out Bear Stearns and AIG but let Lehman Brothers go under. Mr. Bordo recommends that the central bank adopt a rule to govern when it will make loans of last resort, and make it publicly known. This could mitigate or even prevent future crises of the sort precipitated by the ad-hoc policies of 2008.

Marvin Goodfriend of Carnegie Mellon University also noted that uncertainty about which creditors would be bailed out by the Fed created confusion among policy makers and led to a botched rollout of the Troubled Asset Relief Program in 2008. He recommends a new “Fed-Treasury Credit Accord” which would require “Treasurys only” asset-acquisition policy with exceptions in specific emergency situations.

There were dissenting views. Andrew Levin, a former special adviser to the Federal Reserve now on leave at the International Monetary Fund, emphasized that the parameters of policy rules shift over time making them less reliable. Indeed, the long-run average level of the federal-funds rate—central to any Fed interest-rate policy rule—could change. Mr. Levin did not recommend throwing out rules-based policy altogether, however. Rather, if a key interest-rate rule must change the Fed should communicate the reasons clearly.

The clear implication of the monetary ideas presented at the conference is that the Fed should transition to a more rules-based policy. Richard Clarida of Columbia University showed that these same ideas apply globally and would have beneficial effects for the entire international monetary system. A start, suggested by Charles Plosser, president of the Federal Reserve Bank of Philadelphia, would be for the Fed to report publicly the estimated impacts of the reference policy rules that it uses internally. An open discussion, in press conferences and congressional testimony, would lead to questions and answers about why the Fed deviates from such rules and thereby create more accountability.

In my view more is needed. The big swings between discretion and rules that have characterized Fed history—and the damage this has led to—leads me to favor legislation requiring the Fed to adopt rules for setting policy on the interest rate or the money supply. The Fed, not Congress, would choose the rule. But the rule would be public. If the Fed deviated from it, the Fed chair would be obligated to explain why, in writing and congressional testimony.

Although it is likely to resist such legislation, the Fed could make it work to a good end. The Fed has already adopted a 2% inflation target, which is the value embedded in the rule-like policy advocated by many at the conference at Stanford. In addition, the forecasts for the terminal or equilibrium federal-funds rate by the members of the Federal Open Market Committee now average about 4%, which was also built into the rule-like policies discussed by many at the conference.

Fed Chair Janet Yellen has expressed agreement that the Fed should eventually “adopt such a rule as a guidepost to policy,” though she adds that the time is not yet ripe because the economy is not yet back to normal. So the main debate now is about when, not whether, a rules-based policy should be adopted. Based on recent research, the sooner the better.


One might also question if the economy will ever get back to normal under zero interest rate policies that have distorted nominal prices and real values across the world economy? How does one allocate resources efficiently blindfolded?

Stressed Out: Geithner’s Stress Test

Stress-Test-BookThis is a review of former US Treasury Secretary and Chair of the New York Federal Reserve Bank Timothy Geithner’s explanation of the financial crisis and its subsequent management (also posted at Amazon).

Though full of interesting perspectives, Geithner’s exposition seems more of a desire to preempt the writing of history with a rationalization of his policy choices than provide any insight into the reality of the crisis or how it has reconfigured the financial landscape for the worse. Not surprisingly, fellow liberal Paul Krugman’s critical review is not cited by the publishers.

Geithner’s view of the economy and the role of finance is colored by the myopic banker’s view of the credit system, but I guess we should have expected this from a Treasury Secretary whose only preparation for the job was as head of the NY Federal Reserve Bank.

Geithner believes the financial crisis was a liquidity crisis akin to a bank run. Geithner’s solution was calibrated to the Federal Reserve stepping in as the lender of last resort, a role which it performed admirably. But the payments breakdown was merely the symptom of the problem, not the cause. The cause was (and still is) insolvent balance sheets across the financial sector. And this insolvency can be traced back to bad policies: easy credit by Greenspan, Bernanke and Co. and the lack of banking oversight, by, well, guess who? Timothy Geithner at the head of the NY Fed.

A housing bubble fueled by easy credit and securitized mortgages led to balance sheets with mispriced assets for financial intermediaries the world over. In other words, the AAA-rated MBSs they were holding as capital reserves were only as good as the value of the underlying collateral: all those ridiculously priced houses leveraged on cheap credit. When people began to realize this, the run was on and the repo market froze, cascading across all the credit markets. This was an insolvency crisis reflected in a payments freeze. The Fed needed to stand in as lender of last resort and did so, with Geithner’s full support.

But then Geithner’s solution to the post-liquidity financial de-leveraging has been to make bankers whole and push the mispricing costs onto taxpayers, savers, homeowners, and lenders. AIG went into receivership, but all the counter parties from Goldman Sachs to European banks were paid back at par on their credit default swaps. This not only enriched, but sheltered bad actors like Goldman from accountability. This served Geithner’s Wall Street constituency rather well (not exactly the constituency of the US Treasury Secretary, which is a bit broader). This was “heads we win, tails you lose,” on a grand scale. Now the banking system is more concentrated than ever with systemic risk of another shock even more threatening. Meanwhile, Main Street business struggles to obtain credit to grow the real economy. Hence anemic job creation. I doubt the Stress Test assures an all-clear, except for certain favored banking actors who now have a virtual government guarantee as TooBigToFail.

Instead, the Fed and Treasury should have managed the deleveraging of the historical credit bubble until asset prices again reflected fundamental values rather than false confidence in monetary engineering. Like AIG, failed banks should have been restructured by the government and then sold off to profitable buyers.


Despite the self-congratulatory tone of the author, we are nowhere near writing the end of this story. The Fed has expanded its balance sheet by $3.5 trillion and is holding much of that in overvalued MBSs that it has purchased through Quantitative Easing. The policies have tried to inflate housing values in order to return these mortgages back to nominal face value, but the prices of houses are artificially being pumped up by Fed credits while housing fundamentals (median incomes) remain in the doldrums. The bubbles in financial markets are also a direct manifestation of Fed policy. The Fed knows that it can cover its bad assets by merely creating more credit liabilities. The final reckoning will likely be the depreciation of the US$ and the loss of real value to savers, lenders, and working people.

Krugman is right, Geithner and the Fed saved the world from a Great Depression (of their own making – thank you very much), but have invited even greater economic disaster in lost opportunity for the middle class.

The Times They Are A-Changin’

“Change is inevitable. Change is constant.” – Benjamin Disraeli

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” – Charles Darwin

“Economics is the fine art of managing change through exchange.” – COMMON CENT$: A Citizen’s Survival Guide




The Anti-Political Blues


Back in the 1970s Lowell George of the band Little Feat penned a tune he called “Apolitical Blues,” which inspired the title of this post. If anything has changed politically since the Seventies, it’s that most Americans have become even more jaded with party politics and governing dysfunction. Blame who you will.

I’ll make a case here why our politics has become dysfunctional. First, I’ll argue this is a non-partisan issue (though I do have my ideological biases). If one is intellectually committed to one party or the other, I doubt I can do much to change your mind, but I will caution that partisan explanations are incomplete and largely inaccurate.

Before I begin, let’s get a temperature reading on the mood of the electorate. In a (very) recent Gallup poll, only 29% of those polled expressed any confidence in our current executive branch and only a piddling 7% have confidence in Congress (that would be both Houses of Congress – the House controlled by Republicans and the Senate controlled by Democrats). The Supreme Court only garners confidence from 30%.

As for party identification among voters, only 24% identify as Republicans, 28% as Democrats and 46% as Independents. So roughly half the country is not impressed with either party or their candidates. Ideology is different than partisanship, but are mostly coterminous for this exposition. Frankly, I can identify with the anti-party Independents, but will explain here why I mostly favor the Republican/conservative side.

My general contention is that the Republicans are a bit lost in the more recent past of Ronald Reagan. Reagan was the right man at the right time, but his legacy is probably due as much to Nixon’s and Carter’s failures than to the efficacy of his policies. If government destroys growth incentives long enough, any policy that reverses that is going to yield positive results. In this light, instead of blaming Bush, Obama should probably be thanking him for delivering the presidency to the Left. However, Republicans are not as lost as their opposition.

Democrats are trapped in a postwar world that no longer exists, exemplified by FDR’s New Deal and JFK’s unrealized promise. Not only are they lost, they are convinced they are found and filled with certitude regarding their policy preferences. But they are wrong, and being certain of their follies makes them dangerous.

Now, let’s explain.

Both parties are rooted in the past and are failing because the economic landscape has changed. Republicans (and Reaganomics) are wedded to an economic truth that wealth is created by productive investment and hard work, with resources allocated by accurate market price signals. With these conditions, one can expect positive economic growth. But again, the economic landscape has changed and the most significant changes are technology, globalization, and demographics. These changes have tilted the playing field so that most of the gains to economic growth accrue to those who own productive assets or for some other reason have landed in the winners’ circle in a winner-take-all economy. (Say, like Michael Jordan or Cher – this is not to say they don’t deserve their lucrative fame.)

It also means that those whose incomes are dependent on their labor have lost ground. This is reflected in the unequal distributions of income and wealth. The growth mantra is meant to drown out the politics of inequality, but it never will. In our present policy configuration, we have widened the inequality gaps. For example, in seeking to reignite real growth, Fed policy has greatly enriched the “haves” vs. the “have-nots,” and there is nothing in economic or moral theory that justifies this. It is a matter of power and influence over policy.

The redeeming factor of all this is that we can learn and compensate for these policies without abandoning the principles of free markets and free peoples. In fact, these policies violate these principles. At some point the Republican Party will learn that what matters as much as economic growth is managing creative destruction in a dynamic society.

Things are not so encouraging across the ideological divide. Democrats focus almost exclusively on the politics of inequality and state redistribution. Punished for ignoring the imperatives of economic growth, they have turned to the postwar European model of state corporatism, at a time when this model is failing in Europe. In order to tax and redistribute according to political “fairness” (there is no such thing), there must be something to tax. (Thankfully, it was the Soviets who taught us this – unfortunately for the Russians.) So Democrats have decided they must corral big business, big labor, and big government to support their policy agenda. Thus, Obama’s main partners in policy, besides national labor organizations, have been big healthcare, big insurance, and big financial/banking corporations. With fewer players at the negotiating table (and no messy democracy), the state can manage society and insure “fairness” (again, there is no such thing in politics). The result is a society that grows gradually poorer as regulations, government intervention, tax policy, and political redistribution hampers the real economy and leads to gross distortions in the allocation of resources. The changing landscape of technology, globalization, and demographics will turn this policy strategy into a disaster.

To summarize, Republican policies lead to start and stop growth cycles, while Democratic policies lead to gradual stagnation and arbitrariness of results. The first goes in the right direction, but needs better calibration; the latter goes in the wrong direction and needs to be reversed.

So, anti-political blues, yes. But insanity, please no.














Got Assets?

stock_market_bubbleIt should be obvious to all by now how this policy to save the banking system is playing out.  All the clients of the Federal Reserve are doing just fine, but the continuation of this policy is causing stagnation in the real economy. The Fed will likely continue, hoping to spark inflation that increases the nominal value of assets and decreases the real value of debt. This rewards debtors for their profligacy.

At the same time this policy will impose greater burdens on those who rely on fixed incomes, retirement funds, and savings. Asset prices, along with food, housing, energy and utilities will continue to go up while incomes fail to keep pace. Just think, all these rising prices barely give a nudge to the CPI, which is what all COLAs are calculated from.

All US$ prices are out of whack, artificially propped up by Fed policy. But instead of true price discovery, the Fed has chosen to depreciate the value of the US$. Thus, they have increased uncertainty and cut off long-term investment. Of course, they’re doing this to save an insolvent banking system while enabling an ineffective fiscal policy because the political class in Washington D.C. cannot, or won’t, enact tax reform and spending reductions.

From the WSJ:

The Asset-Rich, Income-Poor Economy

The Fed’s balance-sheet recovery hasn’t stirred business investment, an opportunity killer for workers.

Economist Richard Koo diagnosed Japan’s crash in the early 1990s and subsequent two decades of economic malaise as a “balance-sheet recession.” That conclusion wasn’t lost on the Federal Reserve during the financial crisis of 2008-09. The Fed engineered an emergency response to craft what can best be described as a balance-sheet recovery.

At its policy meeting earlier this week, the Fed made clear that it’s scarred, if no longer scared, by the crisis. Extraordinarily loose monetary policy will continue in force. While the Fed’s monthly asset purchases will decline, short-term interest rates will remain pinned near zero. And long-term rates need not move higher—the Fed assures us—even with improving inflation dynamics, credit markets priced-for-perfection, and stock prices at record levels.

The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That’s more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed’s unrelenting balance-sheet recovery strategy. It’s great news for those households and businesses with large asset holdings, high risk tolerances and easy access to credit.

Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don’t own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns.

The Fed’s extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. The most recent employment report reveals the troubling story for Main Street. While 217,000 jobs were created in May, incomes for most Americans remain under stress, with only modest improvements in hours worked and average hourly earnings.

It’s taken a full 76 months for the number of people working to get back to its previous peak, a discomfiting postwar record. Unfortunately, during the same period the U.S. working-age population increased by more than 15 million people. That’s why the share of the working-age population out of work is now at a 36-year low. There are now more Americans on disability insurance than are working in construction and education, combined.

Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment. Financial markets reward shareholder activism. Institutional investors extend their risk parameters to beat their benchmarks. And retail investors belatedly participate in the rising asset-price environment.

All of this lifts balance-sheet wealth, at least for a while. But real economic growth—averaging just a bit above 2% for the fifth year in a row—remains sorely lacking.

Higher asset prices are not translating into meaningful increases in capital expenditures, and the weak growth in business investment is proving to be an opportunity-killer for workers. Those with jobs have some job security. But they are less willing to run the risk of finding a better opportunity, or negotiating for higher wages.

Those without jobs, especially in the younger cohorts without a post-high school education, do not attach to the workforce, thus never gaining the entry-level skills and discipline to build a career. The malaise in the labor markets—and muted business investment—help explain why productivity measures are a full percentage point below historical norms.

The Fed’s latest forecast has the economy growing above 3% during the balance of this year and next, and the unemployment rate falling to about 5.5% by the end of 2015. If the Fed’s sanguine scenario finally comes to pass, interest rates are likely to move meaningfully higher across the yield curve. The money pouring into the financial markets may be redirected, in part, to the real economy. Stocks, leveraged loans and real estate are likely to re-price in a higher interest-rate environment. If rates move quickly or unexpectedly, the vaunted balance-sheet recovery could suffer a blow.

What if there is an unexpected shock that causes the economy to slow in the next year or two? The Fed would surely be called upon to bolster asset prices and stimulate the real economy. But would a return to $85 billion per month of bond-buying really be effective? We are skeptical that either Wall Street or Main Street would be comforted by quantitative-easing redux.

Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat. Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation.

The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.

What is the difference between 2% growth and 3% growth in the U.S. economy? As the late economist Herb Stein recounted, the answer is 50%. And the real difference is one between a balance-sheet recovery that helps the well-to-do and an income-statement recovery that advances the interests of all Americans.

What the Fed Doesn’t Know…

…won’t hurt it. But, in all likelihood, will hurt the rest of us. The Fed’s failures stem from its inability to foresee the future and how its policies distort that future, being counter-productive to its objectives. From the WSJ: Downgrading … Continue reading

FREE eBook Download! 3 Days Only (6/13-15) Italian Renaissance – Florence

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But a societal crisis was imminent by the century’s last decade. As chaos loomed, an obscure Dominican friar, Girolamo Savonarola, arose to restore order. A charismatic preacher and prophet who advocated religious and political reform, his mission was to transform corrupt Florentine society into St. Augustine’s mythical City of God. At the height of his reign he orchestrated the infamous Bonfire of the Vanities, fomenting a wave of popular discontent to become the most influential religious and political figure of the age. His theocratic republic left its indelible mark on the face of Florence, Italy, and Western history.

The City of Man is the dramatic story of this preacher’s fantastic rise and tragic fall. Young Niccolo Machiavelli provides the counterpoint to Savonarola as he develops his new political philosophy. Their momentous clash illuminates the transition from the Age of Faith to the Age of Reason, heralding the birth of our modern age.

Formatted especially for the Kindle, the digital version incorporates special features to explore the world of Renaissance Florence, including maps, family trees, art images, dozens of internal and external hyperlinks to biographies and historical events, an extensive glossary and selected scene index.

A New World?

helicopter-ben-bernankeMonetary policy is in a serious quagmire and central banker policy discretion hasn’t yielded great results. By hook or by crook, we’re headed for a new world. The question is whether it will be a better or worse one than we have now. Remarks from Paul Volcker below:

Paul Volcker: Back to the Woods?

The world since the rule-based monetary system collapsed in the 1970s is not a pretty picture.

Former Federal Reserve Chairman Paul Volcker called last month in Washington for a new Bretton Woods, the 1944 conference of World War II Allies that set up an international gold-exchange regime. His remarks received little media attention.

This strikes me as an underplayed story, especially as Congress considers taking a serious look at the Federal Reserve. Some legislators in particular are concerned that the value of the dollar, while stronger than last year, is still worth less than a 1200th of an ounce of gold.

Mr. Volcker made his remarks at the annual meeting of the Bretton Woods Committee, a nonpartisan organization that has been getting together since 1983. He did not call for a return to the Bretton Woods gold-exchange regime per se and only mentioned “gold” twice. But the title of the speech was “A New Bretton Woods???” Let’s take those three question marks to mean that Mr. Volcker wants to put this question out there emphatically.

Mr. Volcker reprised the history of the Bretton Woods system, which allowed foreign governments to redeem dollars in gold and established the dollar as the world’s leading currency. The system collapsed under the weight of the Lyndon Johnson-Richard Nixon “guns and butter” strategy—paying for both the Vietnam War and expanded welfare benefits and doing so by deficit spending.

“Inevitable” was the word Mr. Volcker used to describe what has been called the “Nixon shock,” a series of policies implemented in 1971 that included suspending the gold convertibility of the dollar. Mr. Volcker didn’t say so directly, but he in effect vindicated Henry Hazlitt, the most prophetic critic of Bretton Woods when the system was first discussed in the 1940s. Hazlitt, then an editorial writer for the New York Times, believed Bretton Woods and the International Monetary Fund, which the agreements set up, were an inflation trap.

In his speech, Mr. Volcker also reprised the efforts to muddle through after Bretton Woods. The Plaza accord of 1985 devalued the dollar against the yen and the mark. The Louvre accord of 1987 sought to stem the dollar’s slide. Or, as Mr. Volcker put it, “a lot of floating, some fixing, some ‘do as you please.’ ”

“By now,” Mr. Volcker said, “I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.”

He spoke of the 1970s as “an unhappy decade of inflation ending in stagflation.” He touched on the Latin American, Mexican and Asian crises that followed and the crisis of 2008 and the Great Recession in 2009. “Not a pretty picture,” Mr. Volcker said, adding that he wanted to raise “a neglected question”: “Has the absence of a well-functioning international monetary system been an enabling (or instigating) condition?”

Mr. Volcker made “a plea for attention to the need for developing an international monetary and financial system worthy of our time.” He acknowledged what he styled the “forceful fiscal and monetary policies” of recent years, but clearly reckons them inadequate.

“The provision of ample liquidity by the key national central bankers is still taking place as we meet,” he said. “But those measures don’t really count as structural reforms.” He said he could not answer the question of what approach to take, but tinkering with the International Monetary Fund was “not enough” and would mean “little without substantive agreement on the need for monetary reform and practical approaches toward that end.”

Mr. Volcker added that he wanted to find “ways of encouraging—even insisting upon—needed balance of payments equilibrium” so that countries don’t either suddenly run out of foreign exchange reserves or accumulate too many. “Nor,” he said, “would I reject some reassessment of the use of a single national currency as the dominant international reserve and trading vehicle.”

The ex-chairman noted that we are a long way from a new Bretton Woods conference, but said that “surely events have raised, whether we want to admit it or not, some fundamental questions that have been ignored for decades.”

“It’s easy to say what’s wrong,” Mr. Volcker told me over the weekend, “but sensible reforms are a pretty tough thing.”

His remarks will still be music to the ears of many nursing the idea of monetary reform, even if he hasn’t endorsed gold. A rules-based approach is certainly getting new attention, including at an important conference organized by economist John Taylor last month at the Hoover Institution.

Congress is starting to look at monetary reform. In July 2012 a bipartisan majority in the House voted 327 to 98 for a serious audit of the Federal Reserve. If the Republicans gain the Senate, the audit could end up as law. As could a bipartisan measure to mark the first century of the Federal Reserve by establishing a Centennial Monetary Commission to look to the Fed’s second century.

That effort is coming from Congress’s Joint Economic Committee, led by Rep. Kevin Brady (R., Texas). Sens. John Cornyn (R., Texas) and Rand Paul (R., Ky.) are nursing the measure in the upper chamber. It strikes me as a good moment to get Mr. Volcker in and see if he will back a centennial review of the Fed.

The idea, after all, is to see how the Fed could be improved for the next century. The measure has had tough sledding. But if a paragon like Mr. Volcker got behind the idea and supported a new, rules-based system, the effort might be able to get off the base-metal dime.


Crony Capitalism

Bailout City

For those interested in the economics of Piketty’s new book on Capitalism, there is a critical review in Barrons this week (link below). But I believe this addendum to the review by Gene Epstein included here is by far more politically relevant than Piketty’s questionable assumptions and interpretations of historical data. Today it’s all about cronyism and Piketty’s prescriptions just make the cronies that much more powerful and untouchable.

THE CORE PROBLEMS OF Thomas Piketty’s magnum opus, Capital in the Twenty-First Century, are covered in the review in Balancing the Books. One key point should be added. A work that radically indicts our current economic system is well worth writing. Capital in the Twenty-First Century is not that book.

That’s because Piketty makes no mention of crony capitalism—the unholy alliance between government and business—which badly distorts the economy and leads to unjust inequalities of wealth and income, because they are outcomes of an unjust process. While capitalism is a system of profit and loss, businesses under crony capitalism are shielded from losses; the 2008-09 bailouts of Chrysler and GM are notorious examples.

Hunter Lewis, author of the excellent Crony Capitalism in America: 2008-2012, also points out that Piketty’s charting of the ups and downs of income returns to the top 10% correlates with central-bank-induced bubbles. These bubbles, Lewis explains, constituted “an explosion of crony capitalism as some rich people exploited all the new money, both on Wall Street and through connections with the government in Washington.”

Piketty conjures up the naive image of capitalist businesses generating virtually risk-free income to their owners. Under crony capitalism, however, with government flooding the bond markets with low-risk IOUs, while expanding the list of businesses too big to fail, there is indeed greatly enhanced potential to turn capitalist winnings into steady streams of income for the cronies. And to the extent that Piketty is right to say that capitalist riches provide the wealthy with disproportionate power in politics, one obvious solution is to shrink government influence, thus reducing the capitalists to their classically humble role of having to sell us goods and services we choose to buy. But Piketty would march us in the opposite direction, expanding government’s reach.