After The Recession: What Next For the Fed?

By Simon Johnson

The Federal Reserve was created in 1913 to help limit the impact of financial panics. It took a while for the Fed to achieve that goal, but after World War II – with a great deal of help from other parts of the federal government – the Fed hit its stride. Today the Fed has not only lost that touch but, given the way our political and financial system currently operates, its own policies exacerbate the cycle of overexuberance and incautious lending that will bring on the next major crisis (and presumably another severe recession).

Sudden loss of confidence in the financial system was not uncommon toward the end of the 19th century, and while the private sector was able to stave off complete disaster largely by itself, the tide turned in 1907. In that instance J.P. Morgan could stand firm only because, behind the scenes, his team received a large loan from the United States Treasury (on this formative episode, see The Panic of 1907: Lessons Learned From the Market’s Perfect Storm by Robert F. Bruner and Sean D. Carr). Leaders of the banking system realized they needed help moving forward, and there was general agreement that the widespread collapse of financial intermediaries was not in the broader social interest. The question of the day naturally became: How much government oversight would bankers have to accept in return for the creation of a modern central bank?

The skeptics from the left – but also from the nonfinancial private sector (including those speaking on behalf of small business people) – pointed out that the presence of a “lender of last resort” (of the kind already operational in Western Europe), would be likely encourage less care on the part of major financial institutions and the people who lent to them. The issue we now call “moral hazard” was front and center in the political discourse at the very founding of the Federal Reserve (although with different terminology).

Nevertheless, the original deal turned out to involve only a very light supervisory touch. In part this was about the individuals involved – the New York Fed was run by Benjamin Strong, a close associate of Morgan, until 1928. In part it was about the choice of organizational structure and internal rules – so the Federal Reserve Board in Washington had little de facto power relative to the New York Fed. But mostly the structural weakness was that the central bank was not designed to keep up with the pace of financial innovation.

This innovation had an important feature then, just as it does now. While some new products were sensible, many seemingly good ideas turned out to be ways to disguise the true nature of risks being taken. (In the early 1930s, “what did they know?” and “when did they know it?” were big questions for leaders of the financial sector regarding the true risks involved; see Michael Perino’s The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance, to be published in October.)

If banks had remained as they were in 1913, the Fed might have had a fighting chance. But banks changed dramatically after the tight World War I controls were removed and entered rapidly into the business of selling and trading securities. The result was the financial shenanigans of the 1920s – with big banks front and center. The victims in that instance were middle-class investors lured with the promise of easy money – the parallels with the subprime craze are all too apparent. But the banks also damaged themselves thoroughly – as with subprime lending, because much of the ultimate risk ended up on banks’ balance sheets, presumably much more than the top bankers intended.

As a result of that experience and the ensuing financial disaster, during the 1930s the Fed received more regulatory powers, became a tougher-minded supervisor and was supplemented by a range of powerful agencies – including the Securities and Exchange Commission. The tougher rules included the Glass-Steagall Act of 1933, which separated commercial banking from the world of investment (and speculation). Yet none of this was anti-business: the Federal Reserve plus tough regulation oversaw the post-World War II boom in which the United States managed to combine the kind of investing and risk-taking that supports nonfinancial innovation – pushing forward the technological frontier while maintaining high real-wage growth – all the while avoiding significant financial crises.

But effective oversight and constraint on financial-sector innovation was dismantled, starting in the 1980s and culminating when Congress in 1999 tore down (what little was left of) the Glass-Steagall wall with the Gramm-Leach-Bliley Act. And it was not reimposed or updated by the Dodd-Frank financial regulations of 2010. The Federal Reserve is again set to support a financial system within which “innovation” is not effectively constrained (at least this is my reading of Perry Mehrling’s The New Lombard Street: How the Fed Became the Dealer of Last Resort, forthcoming in January). As a result we face again the prospect of a 1920s-type roller-coaster.

Regulation remains largely ineffective (in fact, the industry has managed to demonize the word), the big banks are too important to fail, and interest rates are low across the yield curve. The Fed provides downside protection and there is no effective limit on the amount or nature of risks that the private financial sector can take. This is a recipe not for stagnation but rather for a metaboom in which we will receive warnings, including painful recessions – but consistently ignore them.

The 1920s opened with an 18-month recession, an eerie parallel to the 2007-9 experience. It ended with the Great Crash of 1929.

An edited version of this post appears this morning on the Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

59 thoughts on “After The Recession: What Next For the Fed?

  1. Not much to say here. But I recently found two posts on an interesting blog titled “Variant Perceptions”. I think it is closely related to the point you are making, and might be quite instructive. It has to do with loan to deposit ratios at banks. Notice on the first link/graph the ratio rises quite a bit right before the 18 month recession Professor Johnson mentions above:

    This second one deals with more recent years.
    Being a finance/economics blog junkie I look at a fair share of graphs, I think these two are two of the most enlightening on the crisis I have seen. I suppose it’s quite easy to come to the conclusion debt and debt instruments (like derivatives) get to the core of the problem, but to see it in these graphs makes it so clear.

    This also gets back to the point Thomas Hoenig at the Kansas City Fed has been trying so hard to make, screaming at the walls (or screaming into his colleagues’ vacant heads), we need to start rewarding people for saving, not borrowing. Preferably at your local Credit Union, since they have better interest rates, and better service than the banks.

    The sooner President Obama realizes targeted fiscal spending in growth industries will get us farther than QE2, the better off this nation will be. If that takes reconciliation in the Congress, or whatever, so be it. Giving large bankers cash (QE2) to sit in bank reserves or play with in speculative markets does nothing to create jobs for the middle class.

  2. I wonder if the proper parallel to 20-21 isn’t the 2001-02 recession, and that we’ve already lived through the 20’s roller-coaster analog (jobless recovery, intense wealth concentration at the top, destructive financial innovation, etc.) and the next Great Depression isn’t just around the corner.

    Add in right-wing nativist populism, and we have a recipe for fascism that I find quite frightening.

    Lo siento,

  3. @jazzbumpa,
    Your read of the real historical parallels is well informed. Too bad we’re a country run by people – on both sides of the aisle – who subscribe to Know Nothing-ism as their root philosophy.

  4. I’d appreciate seeing more responses to the recent proposal by Gary Gorton & Andrew Metrick for a system that purports to regulate the shadow banking system.

    As that paper says, many financial innovations make for more efficient markets, although it’s hard to see underneath the carefully-disguised high risks. It recognizes that the innovation cats are out of the bag and attempts to create a new separation of functions for the shadow and conventional banks.

  5. Brutal, brilliant.

    Simon do you think central banks should remain independent in regulating banks? Put another way, how do the risks of industry capture of central bankers look relative to risk of capture (or other mal-incentive effects) of politicians?

  6. Here’s a chance for the American Economists to stop playing handmaided to the rich; stop betting on Monday Night Banking pics; stop competing for the announcer’s job over the stadiums and arena; and get on the field and play ball. There will never be a better opportunity!


  7. New lies from johnson:
    1) Regulation remains largely ineffective (in fact, the industry has managed to demonize the word): Elizabeth Warren is going to do nothing?? I hope she does what she was appointe to do and prevent the abuse of banks by greedy borrowers looking to make a quick buck
    2) the big banks are too important to fail: myth, myth and more myth. Bear, Lehman, Wamu and a ton of others gone.
    3) and interest rates are low across the yield curve: 10Yr at 2.6% is what it is, it is a new paridgm till non-us investments become safer.

  8. I don’t have the knowledge to respond to Simon’s excellent Post in detail but his comments reinforce what feels like a constant throbbing in my mind – how can the citizens of so many countries have abdicated so much interest and concern in how they/we are governed. Wish I had even a clue as to the answer to that question.

    Significant social unrest would be very scary – the ‘law’ of unintended consequences and all that – but there are times when I wonder if this, in the end, might be the only form of real progress for the hard-working, tax-paying majority.

    End of rant! ;-)

  9. The 2008 panic is often compared to the 1929, but perhaps it should be compared to 1907. Our 1929 is yet to come. By failing to learn from 2008, are we creating fertile conditions for the Great Depression of the 21st century?

  10. “It took a while for the Fed to achieve that goal, but after World War II – with a great deal of help from other parts of the federal government – the Fed hit its stride.”

    When I read crap like this, I’m reminded of the saying, “Success has many fathers. Failure is an orphan.”

    Instead of using post hoc reasoning to credit the Fed and high tax rates, could the prosperity following WWII have been the result of the United States being the only major economic power that didn’t have its factories bombed?

    Under those conditions, it would’ve been hard not have prosperity no matter how badly the Fed and Government effed up.

  11. Well spoken Paul Handover. The system cannot and will not be changed politically or judicially because the malevolent forces who conjured the system own and control both the political and judicial operations and operators. Those operators work to advance the interests of the predatorclass whose operations, operators, and structures are malevolent.

    The people are the abused victims of predatorclass criminal enterprises bent on total control of the earths wealth and resources, and the enslavement or eradication of the rest of the population.

    The peoples only hope for implementing the changes necessary to form a more perfect union is best described here:

    (“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.”)

  12. thanx Simon for this review of history – much appreciated. I always find that history – even in abstract subject such as mathematics – goes a long way in explaining where we are now. Um yes, that is supposed to be ironic.

    People run around saying “it’s horrible”, “why is it this way?” but they rarely seem to know their history well.

    And thanks for the book recommendations. I find that “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm” is actually less expensive on Wiley than Amazon. That’s interesting also. I wonder how many people go to Amazon simply expecting that Amazon will have the lowest price?

    Increasing returns to scale (OK, maybe I repurposing that slightly)

  13. Sir, you raise a sad but true point when you ask how a majority of us citizens, on a worldwide basis, could have lost true “by the people” control of our own governments.

    For most of us the loss of healthy economic functioning has been the main consequence of this, something that has been very painful. But I also find myself reflecting on the unspeakable genocides in our collective human history. One gets an awful sense of how such things were permitted to arise…

  14. menommon writes, “but they rarely seem to know their history well.”

    We are a culture of forgetting. We forgot the Philippines and had Vietnam. We forgot Vietnam and had Afghanistan and Iraq. We had the Great Depression, but then we forgot Keynes’ explanation and prescription. We had the Pecora Commission, but then forgot the lessons learned, repealed Glass-Steagall, etc. and had the panic of 2008. We had the Gilded Age, and then forgot about the robber barons and antitrust allowed the same things to the point that Congress is now of the corporations, by the corporations, for the corporations. We had the Alien and Sedition Acts of 1798 (under John Adams!), but forgot and did it yet again and again (the Sedition Act of 1918, the Smith Act of 1940, and most recently the Patriot Act). We also forget lessons taught to us by history (e.g. in the consequences of empire learned by Athens and Rome). We screwed up in Iraq by overthrowing Mossadegh and in Indonesia with Sukarno, so of course we forgot and did it again in Brazil, Greece, Cambodia, and Chile (giving us people like Pinochet, the Shah, Pol Pot, and so on). We forgot those and so interfered again in East Timor, Guatemala, Honduras, and El Salvador. We had warnings of global warming by Arrhenius in 1896, Callendar in 1938, Revelle and Plass in 1956, Manabe and Wetherald in 1967, Jason in 1979, US National Academy of Sciences in 1979 and 1983, Hansen in 1988, the IPCC in 1990, 1995, 2001, and 2007. To date we have forgotten all that. Our parents read about global warming in Time magazine in 1956! Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, and Obama have all talked about the need for energy independence, but we always forgot. We’ve forgotten Wounded Knee 1890, Armenia 1915, Rwanda 1994. We’ve forgotten Tulsa 1921, Nakba 1948, Sabra and Shatila 1982, Qana 1996. We will certainly forget Gaza 2008 quite quickly.

    I guess the question is just what do we remember? 1941.12.07, the Shoah, and 2001.09.11 is about all I can think of. What does that say about the US? Oh yes, and we “remember” that greed is good.

  15. $700 billion too much? Why is $3 trillion OK?

    NEW YORK ( — “President Obama says the country can’t afford the $700 billion it would cost to permanently extend the Bush tax cuts for high-income households. He said it would be “irresponsible” to borrow that much money just to hand out $100,000 tax cuts to millionaires.

    Fair enough. The United States is staring at a serious medium- and long-term debt situation, so the less it’s aggravated the better. But why then is it OK to borrow $3 trillion to permanently extend the tax cuts for the majority of Americans — something the president and both parties support doing?

    The theory for extending any of the tax cuts is this: If we don’t, the economic recovery could be thrown into reverse. Once the cuts expire, everyone’s tax bill will go up, and households will have less to spend. And the rationale for doing it only for the masses is this: High-income households will be less likely to spend the extra cash they get from the tax cuts than Americans lower down the income scale who are less flush.

    So, the thinking goes, if you’re going to borrow to help the economy, make sure the money goes to those who will put it to the best use.”

  16. “What’s Next for the Fed” ? Sadly only more of the same “Gross Pilfering” from America’s TBTF’s on the working class stiffs! Ref: four (4) dated links regarding “Bretton Woods” decommission – so sad is the blatant abuse upon America’s Bounty…held hostage, while the “Entire Free World” watches with utter amazement? Thankyou once again “Simon and James” for your continued pursuit of justice, and enlightenment regarding our countries dire needs of pragmatic knowledge that can be put to useful external communication. Please never stop the “Good Digging for America’s Sake” Truly :-))

  17. “History has moved, up to now, in circles. That is what is meant when it is said that history repeats itself. It need not be so, it should not be so, but unfortunately it has been so up to now.

    There is a certain law behind this phenomenon of history moving in circles. I call it the law of mediocrity, because anybody who has any intelligence could have seen that we have been making the same kind of mistakes again and again and again. The mistakes are the same, the situations are the same. It is unbelievable how mediocre the human mind is.”


  18. Especially of the right wing comes to power in 1912 and suceeds in convincing a supine public that entitlements and government social spending, which have cushioned this recession, need to be gutted to control government spending and make the USA safe again for the wealthy.

  19. Central Banking in the Global political arena can’t be treated like a business orchestra leader through cycles and lawful regulations simply because money is power. The overdrafts of international finance are exploitations of opportunity that do not conform to normative business. In order to go beyond shadow banking and off shore finance into the real politik of finance, it is necessary to look at the marshall plan and the contrivances of the cold war that created the templates for policing the globe. this is not for the sake of making the world safe for democracy, as we all have seen, but for making the world safe for a universal financial services system and, consequently, making the world safe for corporations and commercial exploitation. Judge for yourself if these factors can be ignored in assessing the last 50 years of “economic” formations and emergence. Judge for yourself if the central banking apparatus is simply just a “dependency” trap or a system of supremacy and domination.

    NSC-68 – Wikipedia, the free encyclopediaNSC-68 would shape U.S. foreign policy in the Cold War for the next 20 years and has … Truman officially signed NSC-68 on September 30, 1950. … between its overall economic strength and that of the United States. … Imperial Brain Trust: The Council on Foreign Relations and United States Foreign Policy. … – Cached – Similar
    Containment – Wikipedia, the free encyclopediaThis article is about foreign policy. For other uses, see Containment (disambiguation). … Containment was a United States policy using military, economic, … A component of the Cold War, the policy was a response to a series of moves by …. the National Security Council to formulate a revised security doctrine. … – Cached – Similar
    How did the Cold War Shape U.S. Foreign Economic Policy?: Four …Marshall Plan and the other early Cold War economic policies, see for example, John … World development did not OCCUT until the mid-1950s. This innovation was …. establishing a Council on Foreign Economic Policy that year to “help … contemporary accounts and at least some official statements. James Reston …

    * This page is the fruit of research for the UK Green Party’s economics group for their 2001 mini-conference in Manchester. Bonesmen | BIS | IMF | Davos | Report | TABD | Trilat | BAP | Media | Rockefeller
    Other Western Élites
    The World Central Bank: The Bank for International Settlements
    Address: The Tower of Basel – Centralbahnplatz 2, 4051, Basel, Switzerland
    The BIS is the most obscure arm of the Bretton-Woods International Financial architecture but its role is central. John Maynard Keynes wanted it closed down as it was used to launder money for the Nazis in World War II. Run by an inner elite representing the world’s major central banks it controls most of the transferable money in the world.

  20. After which “ROLLBACK” (AND NOW “BLOWBACK”) followed the policies of containment:
    Reagan Doctrine
    From Wikipedia, the free encyclopedia
    Jump to: navigation, search
    U.S. President Ronald Reagan
    The Reagan Doctrine was a strategy orchestrated and implemented by the United States under the Reagan Administration to oppose the global influence of the Soviet Union during the final years of the Cold War. While the doctrine lasted less than a decade, it was the centerpiece of United States foreign policy from the early 1980s until the end of the Cold War in 1991.
    Under the Reagan Doctrine, the U.S. provided overt and covert aid to anti-communist guerrillas and resistance movements in an effort to “rollback” Soviet-backed communist governments in Africa, Asia and Latin America. The doctrine was designed to serve the dual purposes of diminishing Soviet influence in these regions, while also potentially opening the door for capitalism (and sometimes liberal democracy) in nations that were largely being governed by Soviet-supported socialist governments (with the American-led invasion of Grenada of 1983 being the sole case of the Cold War before the Revolutions of 1989 of a complete, successful rollback of an established Communist state).

  21. Simon, as you know, and in fact have said several times just in my readings, we are living in a country governed and ruled by a plutocracy. As I am also certain you will admit, having seen such schemae from the perspective of the IMF on repeated occasions, that what America is experiencing and is so apparent in the area of financial institutions, is the effects of living under that kind of rule, where all reform is largely marginal and essentially ineffective. We see this, not only in the area of finance where it is so patently obvious, but in many, if not most areas of governmental activity relating to the private sector. There are lots of examples, but a prime example serving to clearly evince such a fact is the recent salmonella recall of eggs. If the FDA were doing the job it is paid to do, and if it had the funding necessary, and the inspectors who were vigorously pursuing their jobs, this would not have been possible. And it happened simultaneously to two of the country’s largest egg producers. Or the oil spill, or the fiancial collapse, or….

    This is plutcracy at its finest, and the most substantial reason why Arianna Huffington’s new book Third World America should be required reading in order for American’s to maintain their citizenship in good standing.

  22. Paul Handover, that was not a rant. You are simply talking common sense.

    Scary is right. And it’s scarier by the day.

    We have to try to work constructively for change. I keep urging people to check out the potential for an economy based not on constant growth, which is impossible on a finite planet, but on some sane principles of equity and sustainability.

    If you go to and look at their position statement, you can see that people from all over the world are signing on–yes, just three or four people a day–but they are from every continent and just about every country.

    Now, can you help this “go viral”?

  23. Carla, what a find! Will sign up as soon as I have finished this reply – and there will be a Post coming out on Learning from Dogs by the end of the month – it’s exactly what I am trying to write about. Many, many thanks for your reply and opening my eyes to that organisation. Hope I won’t be the only one signing up from the many, many people subscribing to Baseline Scenario.

  24. Indeed, now signed up as a paying contributor. Recommend others go visit the site linked to in Carla’s comment and make their own judgement. I believe one of the definitions of madness is doing the same thing over and over again and expecting a different result!

  25. YAY! Welcome, Paul, to the Center for the Advancement of a Steady State Economy (CASSE), may it grow by leaps and bounds. Remember the old saying “Each one, teach one”?

    Well, now we need to make it “Each one, teach one hundred.” Then we can progress to “Each one, teach one thousand.”

    When I look at the list of individual signatures and see one from Cyprus, another from Chile, and oh, look–several from South Africa–it really gives me hope. — PASS IT ON !

  26. “Steady State” was wiped out with the “Industrial Revolution”.

    The giant purple with pink polka dots wart hog remains in the room,

    who has been taking the “pre-emptive” shots?

    We were moon walkers, now we’re delusional about the “value” of “paper” in the hands of PSYCHOS.

    I’m sorry, but I’ll get back to your lovely website, Carla, after Amendment 28 gets passed.

  27. Non-linearity is a hallmark of complex systems, and so I believe that steady state economics (a.k.a. sustainability) is largely a pipe dream.

    As I see it, the TARP bailout was required to put 100 cents on the dollar for all the bad mortgages out there to prevent the pension funds from getting wiped out. The senior tranche bondholder would have lost something if a free market correction had been allowed to occur, but the ‘regular’ investors would have lost just about everything, and then we would have people facing retirement with no prospect for being able to live comfortably in their golden years. The failure to allow the free market to work its invisible hand magic on the TBTF financial institutions (and everybody else with any sort of investments or retirement savings) was a rearguard holding action designed to postpone a full-on catastrophe with the hope that we could ‘grow’ our way out of the problem, sort of like how we wanted to believe that by cutting taxes we could grow the economy and thereby increase overall tax revenue. That is, we deferred payment of the piper by exchanging bad mortgages for T-bills. As a consequence, real estate did not correct, and therefore new homeowners still have to buy houses at inflated prices, thereby ensuring that all our disposable income will be put into interest payments.

    I refused to borrow so much, instead opting for a very, very long commute. A hidden cost, I suppose.

  28. nice Yogi! People just don’t get it. Greed for wealth can only go so far. But LUST for POWER well: self perpetuating and blind fury are their war dogs. I don’t think it is about money and I don’t think there is a single brainthrust here, just brute force and arrogance in a special elite herd instinct towards tyranny and a social darwinist’ ideology. To think that a thousand mini tyrants do not exist in this finacial empire is just plain peasant minded. Here’s the layout on the global scale from Michael Hudson. What we need to realize is that this patterned process has been turned on us…the USA. Control and domination of the United States of America is the grand prize.

    # ” It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.”

    September 20, 2010
    Challenging the Model of the North
    Where is the World Economy Headed? By MICHAEL HUDSON (excerpt)
    “Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners. Indebted “host economies” are in a similar position to that of defeated countries. Their economic surplus is transferred abroad financially, while locally, debtors lose sovereignty over their own financial, economic and tax policy. Public infrastructure is sold off to foreign buyers, on credit and therefore paying interest and fees that are expensed as tax-deductible and paid to foreigners.
    The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of bankers and money managers in charge of privatizing and financializing the economy. Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon. Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free”

  29. “Non-linearity is a hallmark of complex systems, and so I believe that steady state economics (a.k.a. sustainability) is largely a pipe dream.”

    Jeff, surely a sustainable way of living on this planet can be, and indeed would be, a complex system?

  30. It’s sort of hard to imagine a system that’s not complex that will support 6.5 bln (and growing) human beings.

    The better question is ‘stable’ (a stable – or metastable – complex system). Complex does not necessarily imply unstable. Many complex systems that have arisen in nature are more (not less) stable. Such as the world’s rainforests prior to industrial civilization.

    And when really large shocks hit a (complex) system like the earth’s biosphere, it’s amazing that in the cases of both the Cretaceous–Tertiary event (65 ma) as well as Permian–Triassic (251 ma) life came back stronger than ever (greater speciation). With many species gone it’s true but the complex system as such absorbed the blow and grew stronger.

    The next question is the extent to which each transition was composed of endogenous and/or exogenous causes. That there is a exogenous smoking gun associated with the 65 ma event is clear. In the case of the Permian-Triassic we’re still a long ways from understanding what occurred.

  31. Re: @ Yogi___Thankyou for the links…great insightful reads. What seems to me is…corralling the “Central Banks ( notably the US Federal Reserve) of the World” to fess-up about “Gold Reserves”. China is the largest mining/producer of the precious “Yellow Metal (Silver is also in great supply)” in the known universe, and is hoarding all! China’s dirt is fabulously fertile, and enormously valuable, contrary to what we read – they…like the United States can live independently upon their vast internal natural (nothing new here) resources. Let me reiterate…Gold, and Silver are the worst enemy of “Central Banks”, especially America’s Central (Printing Press) Bank. Sure gold has no intrinsic value, but neither do US Treasury Bill’s? Try buying a Big Mac with either one – my point being that, “Intrinsic at It’s Face Value” means absolutely (the definition of is,…is?) nothing, period! But the scarcity of the “Yellow Metal” is reaching epedemic proportions worldwide, and governments want their banks “Fiat Currency” backed up (shored-up for a good nights sleep?) with an iconic hard asset such as, and only as “Gold” to keep the deposits coming back? Only america’s central bank can print money. Why? I actually can’t answer my own question…but it’s safe to say at one time in our brief history the rest of the world looked up to us as a responsible, and fiscally sound sovereign government. Those days are numbered unless we go back to ( may I interject) a revised…”The New Bretton Wood’s III” ,and back our fiat currency with the hard asset called “Gold”! Currently gold is unbelievably cheap (IMHO) from where it will be three yeras from now – as I write…every gold producing country in the free world is buying up its precious natual resource, and hoarding it before it even gets on the open market. Finally, as a reminder – this precious metal has been used as the world’s money/currency for millenniums as a bartering tool, or a backstop for paper money {(fiat currency)(nothing new, but we seem to forget when our useless central bank thinks money comes out of thin air)} where the ink is worth more than the paper! Ref:

  32. I sit at your feet in humble appreciation. And not said tongue-in-cheek. Whether one agrees or disagrees with what is written on this Blog, it’s rare that it doesn’t provide some source of learning.

  33. Actually Paul, I hit the wrong button. I meant to put my post in-line with what started with Annie’s post. I meant to address the general topic of complex systems and not reply to any one person.

    I believe that nature drives relentlessly toward complex systems and that they are not as fragile as current thinking would have it.

  34. “What’s Next for the Fed””? Part II…The Fix is on and it ain’t gonna be pretty when “GATA” (Gold Anti-Trust Action Committee) starts to gain traction, period! Noteworhty: It was Nixon’s US Treasury Secretary Connelly who put it straight to the foreign contingency that awaited the untimely announcement of “Bretton Woods” decommission in utter duress of their own sovereign currencies future. The hubris Connelly looked them in the eye’s as does that of a nascent “Cheshire Cat” – this nefarious stolid, and stragem purveyor quips…”it’s your problem now”! Here’s…”What’s Next for the Fed” Part III ? The US Fereral Reserve must implement “Bretton Woods III”…that is back our fiat currency once more with “Gold” to show the world we are solvent, and care about our “Fiat Currency”! Ref:…

  35. Paul – I’d intended to reply to your post one below, but a reply link never appeared on the blog in the appropriate spot.

    At first I simply waited for it to appear (maybe some glitch in the software). I usually use Firefox so then I tried IE – still no link.

    I’ve noticed strange glitches in blog software both here and elsewhere although one alos wonders if it’s not a glitch but rather policy. This appears to be a glitch.

    The short answer to your question is: no, I haven’t written these ideas up in any place publicly accessible.

    A longer answer is look up Ilya Prigogine. A Russian-born Belgian physical chemist who won a Nobel Prize in Chemistry in dissipative structures, complex systems and irreversibility.

    It should be noted that nature’s drive towards complexity requires open systems and abundant free energy. Boltzmann supposed closed systems and this is where two important roads bifurcate.

    This is to mention two physical scientists. The domain necessarily opens up much further. (into biology, sociology and economics if one wishes to put those three into that order).

  36. One above – not below).

    It occurs to me now that maybe not glitch but policy. Maybe replies are allowed to nest to only a certain depth.

  37. menomnon,

    I agree, I think it is a design element to stop the nesting at some point. I use the same software on my Blog.

    Thanks for the references. Know so little about what you write about but find it’s tickling my curiosity – perhaps another day. Must stop hijacking Simon’s article. ;-)

  38. I would argue that examples of complex systems that are well-behaved (i.e., linear) are very rare. What I am getting at is the hubris contained in the notion that sustainability can be realized. This is not at all to say that it is not a worthy ideal and something for which should all strive, but rather that we should not be overly surprised when our efforts come up short.

    James Gleick’s book “Chaos” is a fascinating read on this subject, and addresses the issues far more thoroughly and eloquently than I can.

    I also don’t want to argue that non-linearity implies that the may vary wildly. Rather, just that it is not easily deterministic using simple models.

  39. A E-P has been one of my favorites since he was writing
    about the Foster “suicide” and OK City Bombing from the
    US in the mid-90’s.

    Here’s his latest:

    Ambrose Evans-Pritchard
    Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London.

    Shut Down the Fed (Part II)

    By Ambrose Evans-Pritchard Economics Last updated: September 27th, 2010

    288 Comments Comment on this article

    I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

    My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

    We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

    NO, NO, NO, this cannot possibly be true.

    Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

    Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.
    Inflation targeting: is Bernanke the new Von Havenstein, head of the Weimar Reichsbank?

    Inflation targeting: is Bernanke the new Von Havenstein, head of the Weimar Reichsbank?

    So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.

    The sophisticates at banking conferences in London, Frankfurt, and New York who aplogized for this primitive monetary creationsim – as I did – are the ones who lost the plot.

    My apologies. Mercy, for I have sinned against sound money, and therefore against sound politics.

    I stick to my view that Friedmanite QE ‘a l’outrance‘ is legitimate to prevent a collapse of the M3 broad money supply, and to prevent outright deflation in economies with total debt levels near or above 300pc of GDP. Not in any circumstances, but where necessary, and where conducted properly by purchasing bonds outside the banking system (not the same as Bernanke “creditism”).

    The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

    But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped.

    We have a very odd world. The IMF has doubled its global growth forecast to 4.5pc this year, and authorities everywhere have ruled out a serious risk of a double dip recession.

    Yet at the same time the Bank of Japan has embarked on unsterilised currency intervention, which amounts to stimulus, and both the Fed and the Bank of England are signalling fresh QE.

    You can’t have it both ways. If the US is not in deep trouble, the Fed should not be thinking of extra QE. It should step back and let the economy heal itself, if necessary enduring several years of poor growth to purge excess leverage.

    Yes, U6 unemployment is 16.7pc. But as dissenters at the Minneapolis Fed remind us, you cannot solve a structural unemployment crisis with loose money.

    Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles.

    Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

    Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

    If I have written harsh words about these heroic resisters, I apologise for that too.

  40. menonmon, “It should be noted that nature’s drive towards complexity requires open systems and abundant free energy.”

    What drives “nature” and what drives men towards “complexity” are disparate.

    Nature’s access to open systems and abundant free energy results in constant creation – so it’s not as “complex” as it first appears if you work back from a flower to atoms.

    Man’s brain, on the other hand, accesses nature’s “complexity” to destroy wealth and health for profit.

    Not all that complicated at all when you factor in the “risk” of “motive”.

  41. It was going to be a cheap, unfunded war that was never actually declared a war, remember?

    Earle, simple diagnosis – the entire planet was hijacked into beating ploughshares into swords

    and THIS is WHY

    it was about one “ism” versus another “ism”!!!

    Or so the story goes. Follow the money and it was always divide and conquer among the psycho class…Rome lost empire status with the rise of the Personality Cult – the belief in a Big Giant Head who


    is always off the NORMAL chart and into the classic psychotic definition/diagnosis.

    More misery for others = more money for ME ME ME

  42. If someone has time to write about the Fed and the Great Recession, I have a suggestion for a title:
    “Madman at the Helm: Bernanke and the Cult of Monetarism”.

    In my time at MIT, Fischer Black liked to make a very simple statement to help us understand how the economic plumbing works: “Assets have to be held.”

    The money that BB is pumping into the system has to be held somewhere, and it is pretty clearly being absorbed by commodities and financial assets. That won’t create any new jobs, outside the mining sector, but it sure will make things more expensive for those of us who don’t have an oil well or a mine.

    When will someone at the Fed have the decency to tell the good people in the Congress that they simply don’t have the ability to control the price level and to produce steady unemployment and real growth. Oh, I forgot – they are in a cult that actually believes they can do all that.

    I am so thankful that I had Black and Modigliani and Krugman as professors and not Friedman and Lucas and Prescott and Kydland. At least Lucas is expressing a bit of self-doubt these days. The rest of them are just lashing the horses to take us over the cliff as fast as possible.

  43. Post-1932, you cannot ignore FDR’s massive transformation of Hoover’s “Reconstruction Finance Corporation” into a Hamiltonian national bank promoting capital intensive infrastructure investment whose effect was to secure basic industries necessary for supporting “the kind of investing and risk-taking that supports nonfinancial innovation — pushing forward the technological frontier while maintaining high real-wage growth …”

    No properly regulated Fed would have amounted to a hill of beans to middle class Americans without this critical facet of American capitalism, known throughout our history as the “American System of Political Economy.” Increasing efficiencies (via capital-intensive investment) affecting industry and commerce is a uniquely American capacity exercised through institutions set forth by our government. The well-established history of implementation of public corporations directing credit throughout the economy simply is knowledge that cannot be erased. Indeed, it is along such lines any systemic restructuring must proceed. Short of this, chaos looms. There simply is too much leverage built atop a physical economy that, for decades has been allowed to collapse.

    So-called “financial innovation” whose affect has been to divorce from the American economy such capital-intensive infrastructure investment as increases industry and commerce is no “innovation” at all. Rather, it is an act of war. As anyone with courage enough to admit truth can see, too, the lack of criminal prosecution of gross financial fraud — a disparity widely loathed among middle class Americans — only reveals how deeply our institutions of government have become penetrated by an enemy to the United States of America. This much is plain.

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