STAFF NEWS & ANALYSIS
Did Deregulation Cause the Great Recession … Or Monopoly Central Banking?
By Staff News & Analysis - March 07, 2014

Janet Yellen's Nemesis – The Great Moderation … New Fed Chairwoman Janet Yellen has a great task ahead of her. How to combat the results of the Great Moderation, as it was called, that period of low inflation with moderate economic growth that prevailed from 1985 to 2007, according to Paul Krugman. But why, when lots of jobs were created, particularly the 22 million jobs created during Clinton's presidency? – Huffington Post

Dominant Social Theme: The cause of the Great Recession was too much freedom and free markets. Prosperity depends on reregulating the economy.

Free-Market Analysis: Whoops! Harlan Green is a good writer and sophisticated thinker, but his grounding is seemingly Keynesian; thus, this article, which appeared recently in the Huffington Post, drills down to unearth a rich vein of neo-socialist claptrap.

Who is Mr. Green?

Harlan Green has been the 11-year Editor-Publisher of PopularEconomics.com, a weekly syndicated financial wire service that publishes up to 3 weekly columns under the headings: Popular Economics Weekly, Financial FAQs, and The Mortgage Corner.

His mission is to enhance the popular understanding of economic issues. He also publishes the Popular Economics Weekly Blog. Harlan writes a weekly financial column for the Santa Barbara News-Press, is an economic forecaster and teacher of real estate finance. He has a 30-year record of success as a banker and mortgage banker.

Green's mission may be to "enhance popular understanding of economics" but from our point of view what this article mostly does is cast confusion. It builds on a previous article from Paul Krugman (one that Green curiously calls "recent," though from what we can tell it was published in 2010).

Nonetheless, this seems to us to be an important article because it does us the favor of explaining clearly the alternative faux-narrative that will likely be installed in economic textbooks of Western universities (assuming such institutions remain standing).

Let's try to capture Mr. Green's explanation for what happened as simply as possible. It is his contention (replete with numerous references to Krugman) that the proximate cause of the Great Recession was Fed Chairman Alan Greenspan's Great Deregulation.

In order to bring back prosperity (we kid you not) government must step in and furiously "prime the pump" in all sorts of ways. Green is a fan of Janet Yellen because he thinks she will do just this – and avoid too much of the dread "taper" that will offer disinflation or outright deflation if pursued with excessive enthusiasm.

Here's more of this analysis:

So it is Chairwoman Yellen's task to bring growth back to household incomes and the overall economy. She must ignore the maxims and experience of the Great Moderation to do it, however. She must push for more government stimulus programs–whether for infrastructure, education, or Research and Development – to accompany the Fed's efforts to hold down interest rates as long as possible to encourage moderate inflation. And she must not allow those "barbarians" at the Fed's gate who want to reduce its powers to moderate such Great Recessions.

From Green's point of view, central bank attackers like Milton Friedman have been proven wrong. Friedman wanted a "steady state" Fed that would inject money mechanically into the economy without pandering to risky human judgment.

Green is no fan of Greenspan, either, who – he seems to believe – went even farther than Friedman, pushing for radical deregulation of almost every part of the economy.

Finally, there is the present – a dangerous time from Green's point of view because Greenspan's deregulatory emphasis has now been recalibrated and has taken aim not only at the larger economy but at central banking itself.

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From Green's point of view, Janet Yellen is the right person in the right place at the right time. She won't put up with any fashionable nonsense about financial deregulation. She'll ensure that a too-big-to-fail financial industry is supervised by an even bigger government.

So he seems to think, anyway … Anything else, from Green's point of view, is apparently economic suicide. Deregulation is truly that the God That Has Failed. It promises much, but then delivers catastrophe …

Leaving the Federal Reserve to only worry about large cyclical swings, while allowing the markets to largely grow with little regulation or oversight worked too well, in other words. It lulled policy makers into allowing the massive deregulation of financial markets for one, which led to the Great Recession.

And much worse. The result was loss of so much wealth since the Great Recession for the 99 percent that didn't profit from deregulation. The labor market in particular has suffered most from deregulation, with globalization and free trade agreements allowing even highly skilled jobs to flow overseas, while states restrict collective bargaining for government employees and unions.

From the standpoint of market competition, this is a kind of narrative insanity. We are being told bluntly that markets only work when heavily supervised and will fail when more competition is introduced.

This is kind of a reverse Misesian logic that seems to maintain that price discovery is a good deal less important than the regulatory taming of speculation. But in fact, the more regulation you have, the more distortions you have – the more price-fixing, in other words, and price-fixing doesn't work. Not ever. Price discovery is the fundamental product of private markets. Without price discovery, people don't know what to charge for products.

When prices are confused – when economic consequences are suspended – people will cease to support the market. Crops will not be grown. Eggs will not be gathered. Cows will not be milked. Houses will not be sold, etc. But for people like Green, reining in the "excesses" of the markets via regulation is far more important than ensuring credible price discovery.

There is an almost religious zeal to this sort of approach, a Puritan-like approach to money and speculation that takes as a baseline the concept that these activities are wretched to begin with, even sinful.

Green quotes Krugman throughout the article, including jaw-dropping gems like this:

"[The Great Moderation] worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too," said Krugman in a recent column. "If we're living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way."

(Did you catch that? "Central banks have been [this Dark Age's] monestaries." Sheesh.)

He adds to the Krugman quote with a follow-up:

"…the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock… Also, sooner or later the barbarians were going to go after the monasteries too; and as the current furor over quantitative easing shows, the invading hordes have arrived."

To repeat: Despite our incredulity, we found this article worth commenting on because Green does us the favor of presenting what the power elite is surely trying to create as a narrative to explain the economic crisis that began in 2008.

We understand quite clearly that what caused the downturn was central bank rate manipulations that kept the easy money flowing. We're even of the opinion that Ben Bernanke precipitated the Great Recession by hiking rates sharply in the mid-2000s and inverting the yield curve. No one has ever grilled Bernanke on this issue that we know of. We hope some day that someone does.

In any event, we now have our narrative bookends assembled. Keynesians will argue it was "deregulation" that created the current economic disaster. Free-market types will argue it was mainly the rate manipulation and money printing of monopoly central banking.

After Thoughts

It seems obvious to us which is the more logical, sophisticated and realistic explanation.

Posted in STAFF NEWS & ANALYSIS
  • What is Green lying about? The era between 1985 and 2007 was
    a “great moderation”? When artificially high interests rates were being body
    slammed to the ground. When credit pumping created a red-hot economy in the
    90’s to be dumped in the 2000’s. Where
    regulation and union protections helped move jobs offshore.

    Speculation cannot be outlawed or eliminated and
    (de)regulation serves to add another tier to booms and busts, to supercharge a
    mechanism for wealth transfer, directed favorably to the economic planners.

    Since when did the Federal Reserve become the purveyor to
    regulation? Whether government moves into banking or banking moves into
    government doesn’t matter. The economic Authoritarians want their fascism any
    way they can get it.

  • Not one banker has been sent to jail for creating and selling worthless mortgages. Does that mean we should reduce regulation?

    • Mike P

      We should reduce the number of Congressmen and women, because they didn’t spend enough money to make up for the money lost by the bankers. And, we should reduce the number of people who buy mortgages because they didn’t pay back the money owed. And, we should reduce the number of worthless people in direct relation to their worthless mortgages.

    • alaska3636

      Crimes without victims are not crimes. Force without consent is tautological. Systems respond to the dynamic interactions of incentive. Humans can only create systems of force when there already exists something on which to force themselves. Usurious jews or bankers (or whatever harmless activity it is that you are against) are not the problem; institutions of force distort incentives; they are the problem. Force creates an unintended consequence because uncertainty is a certainty; force is used to correct the effect of an unintended consequence; unintended consequences ensue, so force is used to correct the…

  • Chris Hulme

    It always amazes me that so called intelligent main stream Keynesian economists actually believe that you can create real growth out of thin air! And that they are doing us all a favour by money creation and money manipulation!

    • jn

      Keynesians believe they are god and thus can create growth out of thin air just like they create “money” out of thin air…

      • I don’t think that Keynesians actually believe that. But it is imperative to their agenda that You and I believe it.

  • Danny B

    INTELLECTUAL INSULATION. I like that term. It works for some people. Bernanke just got paid $ 250 K for a speech.

  • Jon_Roland

    False choice. The answer is neither, although both contributed to the problem. The cause, then and continuing, is speculation in debt instruments, mostly not by central banks but by private investors in the financial sector. The attempted remedy was to inflate the financial sector by pumping newly created fiat currency into it, but while that might buy time, it does not avoid the eventual inevitable collapse of that sector. When it does investors will take any remaining debt currency they have and pour it into the production (“commodities”) sector, which will result in hyperinflation that will devastate the lives of ordinary people.

    There was never any regulation that could have prevented this, nor is there any now. The problem is mostly beyond the reach of any kind of regulation by national governments.

    The only way to avoid great depressions (and it is too late to avoid the next one) is for the nations of the world to coordinate in a regular schedule of bursting speculative bubbles, say every seven years, modeled on the ancient Hebrew shmita system of canceling all debts every seven years and suspending all production for a year. That would do it but it would take a world government to enforce it.

    • Who is issuing these “debt instruments?” Could it possibly be the federal government? No doubt, like Hamilton, you consider government debt to be a “blessing.” Are you, by any chance, in favor “usury-free?” greenbacks issued out by a national central bank? You believe ten men in a room fixing the price of money and interest rates is OK, but “speculation” is ruinous? Are you an Ellen Brown fan by any chance? Sounds like it …

      • Jon_Roland

        Actually, in the U.S. they are mostly not being created by the federal government, except for treasury bonds. The debt instruments called federal reserve notes are created by banks in the federal reserve system, but each bank does that whenever it loans out more than it holds in deposits. However, the great bulk of debt instruments, some of which are called “derivatives”, are created by private investment firms, and traded on their exchanges.

        I support repeal of legal tender laws that make fiat currency legal tender for the payment of debt. If speculators want to speculate in anything else, from derivatives to pork bellies, there is not much that can be done to stop them, but requiring only gold, silver, or other commodity, such as energy, to be legal tender, would go a long way toward insulating the foolishness of speculators from dragging down the production sector when their investments evaporate.

        • alaska3636

          It’s not speculation when the government fixes the price of interest rates, regulates every conceivable market not called a black one, then uses institutionalized forced to bail-out (monopoly taxation, either direct or by indirect monetization) their preferred constituents in crony-businesses. That is called mercantilism; speculation implies risk. Mercantilism is great work if you can get it and have no soul.

          There is nothing fancy about the fall of the current civilization or the fall of any civilization: eventually it becomes more lucrative to destroy capital then create it. Negative, self-reinforcing feedback loops ensue and those that can’t walk away, go down with the ship. I’d say historylessons should be mandatory but that would imply the use of force which would incentivize the distortion of history which would incentivize the adoption of a false paradigm of reality which would incentivize the destruction of capital rather than its creation, which would incentivize…

  • LawrenceNeal

    “The Great Moderation worked in part because the political insulation of central banks…”. The federal reserve is not politically insulated. The private owners of the federal reserve control the illusion of politics.

  • LawrenceNeal

    “The Great Moderation worked in part because the political insulation of central banks…” The federal reserve is not politically insulated. The private owners of the federal reserve control the illusion of politics.

  • Jon_Roland

    This may also be understood as an instance of the Einstellung effect (look it up). People can become mentally locked into a familiar approach to a problem that is not the best solution.

    • If I or my partner facilitate or enable a constant raid on your production or inventory, then I or my partner hold the key to your solution. yes?

      • Jon_Roland

        We also need to protect our production from such predation, and the way to do that is to never use fiat currency to fund it, but use only commodity-backed currency. If we fund it with fiat currency then we are only speculating along with the rest of the fools.

        • Thank you for that, I agree. Regarding your response to DB, speculators losing their shirts on a wrong bet doesn’t harm the economy unless THEIR loses are ‘socialized’ as they have been in so many ways. Then there is the fear of lost pensions. Well, it may take a generation to learn not to put something as important as retirement into the hands of sharks.

  • Wallbanger

    Central Banking (Federal Reserve)=Keynesian Malfeasance=Failure=UNCONSTITUTIONAL

  • Bill Ross

    “price discovery is a good deal less important”

    see that and raise. The assault is really on “value discovery”, something the unproductive must make murky, at all costs, else, they would be rapidly triaged by the “unseen hand” (of collective choice) realizing “no value, no deal”, since the sane are after maximum utility, lowest price.

    (Perceived value) EQUALS (Perceived utility) / price

    note that, in the area of states, “Perceived” is mainly over-hyped, far in excess of any real value, or, utility

    and, just like impaired “price discovery”, impaired “value discovery” prevents any sort of sane investment in areas that really matter and are of “value”

    should also point out that, to those who “get a percentage”, an unproductive “cut”, deflation is a survival threat and, inflation is “manna from heaven”. And, by sheer co-incidence, those who benefit by inflation are the same who cause it. What’s wrong with this picture?

  • pipefit9

    The cause of the ‘great recession’, starting in 2007/2008, was the fact that the world hit peak cheap oil on or about 2004. Obviously, oil production, counting all liquids produced, has increased since then, but only because sustained high oil prices have allowed more expensive oil to come to market.

    Starting in the 1970’s, in the early 80’s, in 1991, and again in 2000, each and every time the price of oil exceeded $30/bbl the USA economy dipped into recession. Now it is over $100/bbl. How can the economy be growing? Answer: it isn’t. If cpi inflation was measured the same way it was measured prior to 1980, it would show that prices are going up 9%/year. (see shadowstats)

    If you plug the 9% inflation number into the GDP calculations, you will see that we never came out of the ‘great recession’. It is quite obvious that we haven’t come out of the great recession, because the percent of adult Americans with a full time job is at a multi decade low.

    There is no amount of economic fine tuning that can maintain our standard of living, since it was based on cheap oil. That no longer exists, so our standard of living must drop. Switching from easy credit to tight credit, or budget deficits to austerity won’t alter these facts. We can adopt Austrian Economics until we are blue in the face, (probably should do this anyway) but it won’t find or produce a single barrel of cheap oil. The cheap oil has been found, produced, and burned.

    • I prefer to call it peak energy return, but there is no way of knowing if we have reached peak yet. It is plain to see however, that it is imposing limits to growth, bending the yield curve of productivity toward the horizontal. Some of it can be made up through efficiency, seen at the ground level, as inefficient operators die on the vine. This is especially troubling to the Elite since excess has been their main meal. Now they are beginning to wrestle scraps from snarling dogs and pushing bigger government intervention on their behalf. It will be interesting to see how all this plays out.

    • Philip

      Pipefit Reading your article on the causes of depression is like reading an article by Krugman. The Fed is not to be blamed at any price-give me a break. If you haven’t read Fekete on the causes of the 1930s depression and the present depression you are out of touch with real economics. Austrian economics pooh-poohs the idea of the real bills doctrine and the gold bill without which the gold standard has little meaning. If you think the economy isn’t growing because of the price of oil the next question is what caused the 30s depression? Keynesianism and the removal of commodity money, (Gold) along with removal of real bills, and then the ongoing open market (bonds) operation. Have you read Fekete’s work? IMHO he is the foremost contemporary monetary scientist and a brilliant mathematician a combination that ensures his fearless and impeccable approach to the present day monetary system. It starts with the understanding of sound money. Have a good day. Philip

      • pipefit9

        I’ve read every word Fekete has written in the past 10 years. He’s generally right, but if the 10 yr treasury yield doesn’t take out 1.4%, to the downside, and by a significant margin, and soon, then he has badly misdiagonosed the present situation. He’s calling for a deflationary end game to the present day ordeal, including a terminal bond bull market.

        With each passing day the amount of legacy cheap oil in the mix is less, and so are the chances of a deflationary end game. Far more likely is hyper inflation, as oil importers, like the USA, print wildly to maintain oil imports.

  • Philip

    Hi DB another great article. These guys Krugman,Green, Keynes, Shiller, Bernanke, Yellen etc are just accomplices, swindlers, for the PE and Central Banks

    http://www.professorfekete.com/articles/AEFBondsAndLogicPart2.pdf According to Fekete we are headed for deflation not inflation.The major cause the of 30s depression and the coming depression was the open market selling of bonds front running by speculators which created risk free profits. He points out that Keynes, and other accomplices, ignored the rule that the rate of interest and the price of bonds varies inversely thus creation of deflation with massive loss through capital destruction.

    http://www.professorfekete.com/articles/AEFIsTheGoldStandardNeededToStabilize.pdf This article is a friendly debate about Richard Eberling’s views and makes very interesting reading. Philip

  • Hugo

    Hi DB,

    Talking about price fixing. The economist is starting to write about the gold price fix http://www.economist.com/news/finance-and-economics/21598676-new-concerns-surround-way-world-gold-price-set-fix-mr-bond

    Here a nice rebuttal of the defender of the gold price fix they quote http://truthingold.blogspot.nl/2014/03/the-london-price-fix-is-rigged-heres.html

    Still directed history…..

  • KingTut

    Greenspan’s Randian pronouncement that the “free markets prevent fraud”, is ridiculous, especially in hindsigh
    However, 3000+ pages each of Sarbane’s Oxley, Dodd Frank, Obamacare etc. only make sense in the theater of galactic absurdity. Clearly the system has ceased to function on any level, from regulation making to adherence to enforcing. We are now completely adrift.

    This is very scary to the status quo soldiers like Krugman. They will say anything to prevent panic, which they see as anything that causes them to loose influence, wealth or power. So we get this verbal palliative constantly flowing over us.

    It is likely that the power elite (the owners of the banks, not their lackey managers), are well prepared for this, and it’s only the panicky bureaucrats that we hear. The power elite have doubtless studied at the Rothschild school of soaking the streets with blood, then buying it all up. The prospect of actually reforming the system seems heartbreakingly remote.

    .

  • Hugo

    hi DB,

    Here a very well done video of 5 minutes on why everyone is lying about the Ukraine situation. http://www.youtube.com/watch?v=UzLZw-dNlo4.

    Best line of this clip, ”This whole thing is coming across as an attempt by both sides as to hide the fact that this is just a massive geo politial fight between by two dying super powers and their allies.” To quote the DB ”Nuff said”

    Since Iam a person that tries to educate people about the ”real” reality I like short vids like that since they have at least a chance of being viewed by the people I try to educate. Did the DB already consider to add a section to the site called ”nice articles and videos that might help educate the ones you love”? Yes I mean the shortend down and maybe a bit dumbed down version of things we talk about here but sure a smartening compaired to the MSM.

    I sure would value that and contribute to it as well since I spend some time looking for videos I just posted for people I love but just dont (want) to get it. Indeed, it will be a service to your readers and not to gain many new readers. Just asking (smile).

  • dmartin11

    Um… Both?

  • Contrarianism

    There will always be those (like Krugman) who ignore the facts and attempt to revise history so that it fits with their narrative.

    Alan Greenspan was deified by the mainstream financial press when he was in office. They lavished praise upon him during his tenure. It wasn’t till years later, after he had fled the Fed, that his artificially low interest rate policies where credited with causing the housing bubble and crash of 2008.

    Today, Bernanke is credited with fixing the 2008 crisis that Greenspan created, however just like the debunked policies of his discredited predecessor the “Maestro”, history will not be kind to helicopter Ben either. With the benefit of hindsight it will be clear to all those who care to look, that all Bernanke did during his tenure was create a distortion driven mirage that offered nothing but a temporary stay of execution. History will show that Bernanke’s policies caused the great depression of 2015 – ?.

  • Bill Ross

    @DB

    Off topic, but here is what can only be considered a strategy document of the Canadian Judiciary for dealing with those who claim they are human beings, whose consent is required as opposed to all caps corporate entities, subhuman, who must “obey or else”:

    https://ucadia.s3.amazonaws.com/courts_canada/2012abqb0571ed1.pdf

    They don’t make their case, but, try their best to appear plausible, reasonable, occupying the moral high ground as they surreptitiously twist the knife in the back of civilization (the rules by which we peacefully co-operate for MUTUAL self-interest) which, as we all KNOW requires fully informed “consent of the governed”. We are living the “or else”.

  • Hugo

    Hi DB,

    Off topic but quite a nice and well researched read questioning the official history being told about dinosaurs. http://thetruthwins.com/archives/massive-dinosaur-soft-tissue-discovery-in-china-includes-skin-and-feathers

  • “So it is Chairwoman Yellen’s task to bring growth back to household incomes and the overall economy”. What rubbish!! The one meme that is repeated over and over is that we must look to government for prosperity!! What nonsense!! It seems we are being constantly programmed to look to government (or the Fed, which is even worse) for our financial well-being – which of course is the LAST place where any answers – or any prosperity – is to be found. Government (read The Fed) is the problem, not the answer.

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