Thursday, August 20, 2015

Bloomberg: Two Policy Failures Keynes Would be Disappointed With

Here is an interesting little video blurb that was on Bloomberg recently. Robert Skidelsky, a member of the House of Lords and a Keynes biographer, was asked what policy decisions today would disappoint John Maynard Keynes. Below I have pasted in a quote from the article.


… the recovery has been very very slow. We've been for many years in a state of semi-stagnation, and the recovery is still very very weak in the European Union.The actual recovery measures we've taken, particularly quantitative easing, have actually skewed the recovery towards asset buying and real estate, thus threatening to recreate the circumstances that led to crash in the first place. I think he would have been disappointed by those policy failures. 


My added comments:

What I found interesting about these comments is that there was no mention by Robert Skidelsky of what policies would have actually worked. Here is a quote from Wikipedia related to what Keynes believed:

"According to Keynesian economics, state intervention was necessary to moderate "boom and bust" cycles of economic activity.[6] Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions."

In this interview Robert Skidelsky says there are two recent policy failures that would disappoint Keynes:

1) The lack of precautions taken to prevent a huge financial crash like the one we saw in 2008 (why didn't those in charge see it coming?)

2) Keynes would be "disappointed with the policy measures taken after the crash" 

Skidelsky then goes on to say that the the QE policies taken after the crash are causing bubbles in real estate and asset buying "leading to recreate the circumstances that let to the crash in the first place."

This raises some questions:

1) What would Keynes have done differently? He advocated state intervention to "moderate boom and bust cycles of economic activity." Didn't we get state intervention in spades with zero per cent interest rates, QE policies and all kinds of market interventions by central banks?

2) Is he saying that the intervention policies implemented were too small? That the problem is that they should have done much more QE? If so, wouldn't that just lead to even more money flowing into asset buying and real estate? (cause even bigger bubbles)

3) Is he saying that the easy monetary polices should not have been done at all? Everyone says if they had not been done a full scale depression would have taken place.

4) Is he saying there were different intervention policies that should have been done? If so, he didn't bother to explain what those should have been.

Critics of Keynesian theory say that the markets should have been allowed to adjust own their own (allow the bust to happen). They argue that while there would have been pain, the pain would have been less severe than it will be now and would have lasted less time (we would have gotten it over with and recovered quicker without the intervention).

So what can we learn from this debate?

We learn that intervention clearly does not prevent busts or recessions since we have had plenty of them despite interventionist policies. Robert Sidelsky is saying the interventionist policies in place right now are leading to another coming bust. Even if you believe that intervention can prevent or moderate recessions and busts, you still have to rely on human beings to implement the correct interventionist policies. Clearly, that is something none of us can count on since human beings make mistakes.

We can also learn that no matter whether you believe Keynesian theory is right or wrong, you need to be prepared for a "bust" at some point. The debate seems to be more about how long and severe the bust will last than whether there will eventually be one. Having some kind of backup plan to deal with one is just common sense.

No comments:

Post a Comment