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Palin’ around with "liquidate, liquidate, liquidate"
In his famous (or infamous) advice to Herbert Hoover, Secretary of Treasury Andrew Mellon provided the following policy advice to Herbert Hoover as to how to deal with the Great Depression:

"liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

This policy advice is now implicitly what Sarah Palin is urging in her most recent criticism of Fed Chair’s Ben Bernanke’s strategy of quantitative easing which we might dub "liquidity, liquidity, liquidity".  Below the fold I attempt to explain what has to be so if there is any rational way at all to understand Palin’s decision to issue a cease and desist order to Fed Chair Ben Bernanke. Whether or not Palin understands that her argument undermines itself, or whether she wrote her facebook tweet herself or had someone write it for her, are separate questions.

The first argument that Palin makes, I have to admit frankly, almost, potentially makes sense. Palin begins, not by channeling Keynes per se, but by almost channeling the so called Keynesian textbooks of the 1970’s and 1980’s.

In her facebook tweet Palin begins with an almost, coherent, rational argument:

..."the reason banks aren’t lending and businesses aren’t investing isn’t because of insufficient access to credit. There’s plenty of money around, it’s just that no one’s willing to spend it. Big businesses especially have been hoarding cash."

So far, not so bad-and I might add, actually and quite surprisingly almost captures my own uneasiness about quantitative easing. But first, a brief primer on what "quantitative easing" means (at the risk of being simplistic I’ll put this in the terms of a basic, mainstream, macro textbook). In a fractional reserve system such as ours, the amount of money in the system is cash and bank deposits. But let’s not complicate our discussion about money with cash-let’s focus instead just on bank deposits. These bank deposits are a multiple of reserves. Historically, a $1 change in reserves leads to almost a $2 change in bank deposits-or in other words, the quantity of money. By buying bonds from banks, the FED will give banks reserves (base money to put it simplistically), thus allowing them to make more loans, which create more deposits, which allows more loans, which creates more deposits, etc. Is the FED "printing money"? Maybe.

Here is where the discussion gets tricky. What happens if banks actually have lots of reserves and could be making more loans? Then giving them more reserves won’t actually translate into more lending. And this lack of lending obviously won't translate into more borrowing and more investment spending, and therefore, does not result in inflation. We are already in the language of the principles textbooks of the 70’s and 80’s in a liquidity trap. As the old adage goes-you can pull on a string but you can’t push on it.

No sooner does Palin **almost** make a rational argument, that she then undermines it. The problem, according to Palin, is not that consumers don’t want to buy products because they lack jobs. The problem, according to Palin, is that Obama’s "big spending" (which is actually non-existent) has created "uncertainty" for business, and therefore, businesses won’t borrow and banks won’t lend. This ignores of course the obvious counter-argument: the financial crisis and the resultant collapse in aggregate demand and housing prices have created an environment in which future sales are uncertain. Of course, for Palin to acknowledge that means that she must recognize that the Great Recession started as a financial crisis which occurred while Obama was a candidate. Hence Palin can avoid facing the responsibility of Republican policies (and democratic support for those policies) as the explanation for the current malaise.

The second part of Palin’s argument-that Obama’s policies will cause inflation-but not create growth-can only be true under two circumstances. Those circumstances are what we economists call the quantity theory of money is true (any increase in the quantity of money results in a predictable increase in output, unadjusted for inflation). But in order for this to be remotely true, the economy must be at or near, something we can reasonably call full employment. Even Milton Friedman argued that the correct response to a collapse in aggregate demand is quantitative easing. In contrast, the Keynesians argued that the correct response is quantitative easing **and** expansionary fiscal policy. To sum up-if quantitative easing is effective, it will indeed raise the current rate of inflation from its current very low rate of about 1%, to a higher rate-perhaps 3-4%.

Here we get to what it is I doubt Palin understands, but what the defunct economists she is parroting no doubt do. In essence, Palin is arguing that 9.5% unemployment and 1% inflation is just fine with her. The reality is that an increase in spending and output will indeed put upward pressure on inflation.

What is Palin’s solution:

"If the President was serious about getting the economy moving again, he’d stop supporting the Fed’s dangerous experiments with our currency and focus instead on what actually works: reducing government spending and boosting business investment through good old fashioned supply side reforms (cutting taxes and reducing overly burdensome regulations). "

Leaving aside that Bernanke was appointed by a Republican President, and that even Republican oriented economists like Gregg Mankiw-if they are consistent-will support quantitative easing, Palin is now simply wandering off into an incoherent argument. Palin believes that reducing government spending (in other words, cutting social security, cutting off unemployment benefits, refusing to expand liquidity) will all magically make it easier to create jobs. And she also believes that cutting taxes is the path to reducing deficits. While it is true, that under some circumstances, a one dollar cut in taxes (just like a one dollar increase-that’s right-increase-in government spending) will give us more than a one dollar increase in output, it is simply not true that a one dollar cut in taxes will yield more than one dollar in increased tax revenue. The very, very best that Palin’s solution could result in is no change in aggregate spending at all. And this ignores the uncertainty that will result from starving infrastructure, laying off teachers, cutting social security benefits and the long run damage to the nation’s capacity to grow from the same.

What then is Palin’s solution. There is only one rational way to interpret it. She believes that what we must do is "liquidate, liquidate, liquidate." As Keynes once said (paraphrasing) the advocates of "liquidate, liquidate" need to explain what jobs they think should not have been created and what factories should not have been built. And this also raises the question as to why it is the working people of this country who should be asked to "liquidate", but not Wall Street financiers.

Does Palin understand what she is advocating? There is a part of me that sincerely doubts it. There is also a part of me that thinks it is irrelevant. Whether Palin really is the typical D+ student, simply parroting the wisdom of defunct economists someone whispers in her air, or whether she can actually explain what she says doesn’t matter one wit. What does matter is that we are being sold a package of snake oil and yet, no one has been able to call the Republicans out for advocating a strategy of "liquidate, liquidate, liquidate".

Whether or not the strategy of "liquidity, liquidity, liquidity" can work remains to be seen. If it does indeed create inflation, that may well be a good thing, because that will mean that aggregate demand and spending and output and employment have all increased. The best, the correct policy right now is actually 900 billion in real fiscal stimulus. There is no evidence right now that we have an excess demand for money. My best guess is that quantitative easing won’t work, and because it won’t work, it won’t create inflation.

Having said all that I'd much prefer "liquidity, liquidity, liquidity" to "liquidate, liquidate, liquidate" just as surely as I would rather have a full bottle in front of me, than a full frontal lobotomy.

Originally posted to Citizen Rat on Wed Nov 10, 2010 at 04:18 PM PST.

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Comment Preferences

  •  Good Coherent Analysis - I have a Question (3+ / 0-)
    Recommended by:
    walkshills, Citizen Rat, statsone

    You use the terms money being defined as cash plus bank deposits.   When you speak of bank deposits are you speaking of demand deposits or deposits that banks have at the Fed?  I assume the latter, but I want to make sure.  Also, if banks had demand for loans (use of bank's cash) they could just sell their bonds in the open market couldn't they for liquidity?  What is the advantage of the Fed buying the bonds instead of "market"?

    •  Good questions (2+ / 0-)
      Recommended by:
      walkshills, statsone

      Demand Deposits held by the public and cash are generally classified as money. I would also classify "near monies" (time deposits, money market accounts, commercial paper, etc. ) as money. Reserves are not money because they cannot be used as a unit of account, store of value or medium of exchange because they are out of circulation.

      If you think about it in terms of the bank's balance sheet, where the  monetary base is reserves and the banks also hold loans and bonds on the asset side, and customer deposits on the liability side:

      Then banks make computations on the basis of expected rates of return about how much of their portfolio to hold as bonds vs. loans. By the FED buying bonds, they are able to induce banks to sell those bonds and thus accept excess reserves, leading to more loans. Because the FED is a big enough player, they can drive the price of bonds up or down.

  •  She is a moron speaking to other morons. (5+ / 0-)
    Recommended by:
    tacet, walkshills, DMiller, millwood, mama jo

    Our problem is the MSM that gives her coverage.

    "When fascism comes to America, it'll be wrapped in a flag and carrying a cross." Sinclair Lewis

    by lakehillsliberal on Wed Nov 10, 2010 at 04:36:29 PM PST

    •  True but... (5+ / 0-)

      Where have we gotten pointing out that Palin, O' Donnell, Angle, Miller, etc. are "morons". Nobody cares. It seems that when we win against these people it is because we are able to persuade the public that their ideas are bad ideas. O'Donnell is an exception because she was so out there. I wasn't sure if I was watching a TV political ad or listening to a Buddhist sermon. But that's an exception.

      I think we should stop pointing out these people are morons and starting pointing how destructive their arguments really are.

    •  MSM gives her coverage because (4+ / 0-)

      she strikes a potent sensitive nerve with people that have half a brain.  Using the paradigm of the conservative view of the world she is a success beyond all expectations because she has taken advantage of our dysfunctional political process,  the freedom of speech that allows TV stations to spew whatever message they want with no checks on whether there is any factual basis (however one defines that) and her celebrity cult like status.

      In many ways she is a modern tent faith healer that travels around saying whatever she thinks her audience wants to hear collecting the gate receipt on the way out town.  Viewed as an enterprise I have to say I admire her placing herself in the position of governor and using her innate ability to take advantage of a previously unavailable opportunity created solely by John McCain. Through that prism she has done quite well for herself and is a success on almost any basis of measurement.  She should not be underestimated nor laughed at.  Don't get me wrong I truly dislike her and what she stands for.

  •  Very Interesting (1+ / 0-)
    Recommended by:

    We all know most of Palin's 'declarations' are nonsense but it's nice to read a rational and logical rebuttal of her view.

    by Renie57 on Wed Nov 10, 2010 at 04:38:09 PM PST

  •  should be "Palin's Ghostwriter says..........." (7+ / 0-)

    I am frustrated by ANY supposed quotes by Palin.
    Palin does NOT write her posts, she does NOT understand her posts and likely does NOT even read her posts. Palin is vapid.

    "To sin by silence when we should defend makes cowards out of men." ~Ella Wheeler Wilcox

    by katanalori on Wed Nov 10, 2010 at 04:39:51 PM PST

  •  The banksters and the (1+ / 0-)
    Recommended by:
    mama jo

    team managing the economy for the current WH occupant are channeling Mellon.  Palin at the moment is irrelevant -- but should she succeed beyond my wildest nightmares, she'd move into the WH along about the 21st century version of 1933.

    Bring Our JOBS and Troops Home NOW!

    by Marie on Wed Nov 10, 2010 at 04:45:00 PM PST

  •  Well, Hoover did liquidate (2+ / 0-)
    Recommended by:
    Citizen Rat, enhydra lutris

    some of the members of the Bonus Army.

    Just sayin'.

  •  not just her (2+ / 0-)
    Recommended by:
    wayoutinthestix, mama jo

    I'm convinced Sarah Palin is incapable of an original thought in the arena of monetary policy, let alone a comprehensive understanding of it.

    The problem, according to Palin, is that Obama’s "big spending" (which is actually non-existent) has created "uncertainty" for business, and therefore, businesses won’t borrow and banks won’t lend.

    This has been the drumbeat of the WSJ, CNBC, and I'm sure Fox Business, though I never watch Fox.  The whole "uncertainty" caused by "over-regulation" and Obamacare is their way to shift the blame for the bad economy from the Bush policies which caused it to President Obama's efforts to fix it.  

    There is no snooze button on a cat who wants breakfast.

    by puzzled on Wed Nov 10, 2010 at 05:01:34 PM PST

  •  First, Palin didn't write this, so stop with the (1+ / 0-)
    Recommended by:
    mama jo

    "The first argument that Palin makes...she can't make arguments, she can olny publish or speak what others write for her and she could not explain this to you in person.

    now proceed!!

    •  So what? (1+ / 0-)
      Recommended by:

      It doesn't matter whether she makes the argument, understands the argument, parrots something someone whispers in her air accurately, or parrots something someone whispers in her air half accurately.

      It's irrelevant. Nobody cares that the Tea Party proponents are stupid (save for you and I and other people at DKOs). But aside from us, the public at large doesn't care.

      What the public does care about is how policies will affect them.

      I think we should take these people deadly seriously and show why their arguments are destructive.

      Exposing their stupidity helps us feel good-nothing more.

  •  Three things Americans refuse to accept (2+ / 0-)
    Recommended by:
    mama jo, enhydra lutris

    There are certain things Americans just refuse to learn about economics, no matter how many crashes we have:

    1. in a depression, tax cuts and budget cuts don't turn into consumer spending because people are too scared to spend, and they're paying off debt - which doesn't stimulate the economy.
    1. the Keynesian multiplier - when you create a dollar, it gets spent multiple times.  When you remove a dollar by paying off debt, you remove several dollars from the GNP.  The speed with which it gets spent varies with factors such as public fear.
    1. inflation does not cause or perpetuate depressions, already.  I can't stand hearing that one over and over again.

    All of these are due to right-wing myths that perpetuate right-wing biases in public policy preferences, and naturally Palin is all over them.

  •  conservatives living in ideological bubble (0+ / 0-)

    These people could all care less what's happening in the real world with the real economy. They're on a mission to cut taxes and cut spending, and come hell or high water they'll do it, no matter the cost to anyone, not even themselves, since the gap between rich and poor will grow faster than wealth is destroyed, so they actually come out ahead despite everything.

  •  Well, do you have an explanation for the failure (0+ / 0-)

    of the stimulus and QE1? OK, maybe tax cuts and de-regulation won't work, but in order to say that, and that we should continue with fiscal and monetary stimulus, we need some kind of an explanation as to why they haven't worked to well in for the past 20 months.

    •  Qe1 and Stimulus 1 worked (1+ / 0-)
      Recommended by:
      enhydra lutris

      And they worked eerily in a kind of back of the napkin calculation sort of way.

      If you use Okun's empirical generalization (aka Okun's "Law") every 2 point decrease in total output below potential translates into a 1 point increase in the unemployment rate.

      So, that makes output about 2 trillion below potential (like I said, back of the napkin). If the historical fiscal policy multiplier as calculated by Romer is about 1.6, then a 700 billion dollar stimulus spread out over two years is about a 1.1 trillion increase in output spread out over two years.

      That is just about right to restore us from official recession (negative GDP growth) to a technical definition of recovery (positive GDP growth) but with an inadequate and anemic rate of growth.

      Qualitative easing-the buying of Mortgage backed securities by the FED-did in fact help to provide the liquidity at a time when there actually was excess demand for money.

      All of this was designed by the Clinton re-treads (summers and Rubin) to be an "insurance" policy against complete collapse. It was never designed to create a full recovery.

      In other words, this policy worked, eerily, in a back of the napkin, 1970's/1980's mainstream principles textbook kind of way exactly as it was designed.

      The problem was, it was badly designed.

      Obama is indeed a Clinton Democrat-and that's the problem.

      •  Well obviously it depends on your (0+ / 0-)

        definition of "worked". Politically, it didn't work because the perception is that it didn't work. They might've dug their own graves on that one by promising that if the stimulus passed unemployment would stay below 8% and running around talking about a "recovery summer" when unemployment was stuck at 9.5%+.

        Economically, it only worked as against a "counter-factual" that is impossible to prove or disprove. Yes, we did not slip into GD2, but who's to say that we would've anyways. Some think that it was TARP that prevented that. I happen to disagree, and believe that the "crisis" never threatened GD2 as evidenced by how quickly even bailout recipients returned to profitability, not to mention the rest of the corporate America. There were a few major institutions that got in way over their heads, and would've gone the way of WaMu and Wachovia -- poof into thin air, and barely missed.

        But again, that's all unprovable counter-factuals. All that we know is that the perception is that it did not work, and that likely cost the Democrats the House of Representatives, and now Bernanke and Obama are doubling down, even though nearly the entire rest of the G20 thinks it's a bad idea, and it could provoke at worst a currency war, and at best some inflation.

  •  I am almost as sick of Palin(TP) as I am of (3+ / 0-)
    Recommended by:
    Citizen Rat, mama jo, enhydra lutris

    the lie of 'supply side' economics. We need demand side economics. Thought experiment, to make it simple. I open a lemonade stand. I have money saved after I open. Problem: I don't have enough customers. How does making a loan cheaper to expand my business help, when there are no customers? What I would want, would be for my customers to get a larger allowance to spend (if there was demand but no money), or somehow make them thirsty for my product (make them spend the money they have/increase demand). And one final important point. Tax. Cuts. Don't. Fix. Everything. Yes, it seems simple, but those with the scarlet R after their name don't seem to grasp that fact. Sometimes, I could just scream.

    "Genius may have its limitations, but stupidity is not thus handicapped." - Elbert Hubbard

    by BusyinCA on Wed Nov 10, 2010 at 05:56:47 PM PST

  •  It won't ever be knownif it creats inflation or (0+ / 0-)

    not because we have inflation right now and further inflation will not bear quamtum dot markers blinking "created by QE".

    That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt -

    by enhydra lutris on Wed Nov 10, 2010 at 06:29:38 PM PST

  •  Not really so (0+ / 0-)

    For some of the reasons you point out, any kind of decisive refutation or confirmation in the social sciences is probably impossible to achieve.

    I still think it will be possible to weigh and assess the empirical evidence.

    Your rather cynical position makes it virtually impossible to ever say if anything, anywhere is ever true or false.

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