Last week the Bernanke Fed recommenced its interventionist tendencies and announced QE3. The world’s most important central bank will be able to buy its previously targeted range of securities to the tune of $40bn a month.
The Fed probably felt newly empowered by the ECB’s recent promises to action, and the deliberately awe inspiring words of ‘Super’ Mario Draghi. The world’s most systemically important central banks are building their balance sheets and with it an even bigger hand in the world’s most important financial game of poker.
The financial system gets more ‘managed’ every day, as the stewards at the helm implement their policies and ideologies.
What the debate is all about
There has been hot debate since the unfolding of the Financial Crisis in 2008 about the actual causes, the symptoms and necessary prescriptions.
The Neoclassical economists, who maintain numerical ascendancy in educational and research posts, central bank committees and political inner-circles, are convinced that we need to stimulate, borrow and spend more to prevent catastrophe, increase aggregate demand and monetary velocity, and generally protect and create jobs and wealth. This mainstream view, dominated by Keynesianism, is generally echoed in journalist circles and the mainstream media, and is still just about believed by the electorates in the Western hemisphere who hope the political and financial establishment can deliver on their ever increasing promises.
The Classical school of economic thought thinks that this way of thinking is a sham, and that the crash of 2008 was firm evidence that the intellectual emperor of the status quo had no clothes. Hedge fund manager Kyle Bass echoed these sentiments succinctly when he urged that: ‘Alan Greenspan traded the tech bubble for the housing bubble’. Concerns that central bankers trigger bigger and less manageable bubbles run high in this intellectual camp – you might have heard it referred to as the Austrian school of economics.
These Austrians argue that Keynes’ multiplier is generally illusory and that his theories were special theories not general ones. They argue that monetary velocity is the joker in the pack, and cannot be controlled as Monetarists like Milton Friedman would hope. This way of thinking, that real wealth is created by hard work and enterprise – not by debt and spending, has real concerns with the current modus operandi of our political establishment and central bankers.
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