Olivier Blanchard didn't learn anything from the crisis

Olivier Blanchard, top economic honcho at the IMF (not the impossible mission force), says things are bleak and here are his four lessons from the crisis (brace yourself):
"First, post the 2008-09 crisis, the world economy is pregnant with multiple equilibria—self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications. Second, incomplete or partial policy measures can make things worse. Third, financial investors are schizophrenic about fiscal consolidation and growth. Fourth, perception molds reality."
As you can see it all depends on market mood. Apparently markets are not taking their Prozac and that's why we are in this conundrum. Translating into English, bad situations (bad equilibria) may happen if governments take indecisive action, markets are not sure that the fiscal consolidation (which he seems to support, and the IMF is certainly pushing) will work, and this generates perceptions that are self-fulfilling.

No lesson about the problems with fiscal consolidations leading to recessions (no matter what people may think about it). Also, nothing about the need for central banks to buy government debt and maintain interest rates down (irrespective of markets feelings about it, like in the US). No lesson about how a worsening income distribution and a deregulated financial sector push private agents to unsustainable debt positions. And this is the guy rethinking macroeconomics? Here is my New Year resolution: stop reading Blanchard; if this is what he learned, he obviously is clueless.


  1. Hi,

    Could you go into more detail regarding "Also, nothing about the need for central banks to buy government debt and maintain interest rates down"

    In other words, the importance of QE/ZIRP is paramount...but why? I'd appreciate it if you could explain it to me your reasoning, thanks.

  2. I think Matias is showing a general disillusionment with the mainstream economics profession embodied by Blanchard.

    Also, the examples he gives in the final paragraph are meant to be, I think, descriptions of policy actions that have real impacts on the economy, regardless of what "markets feel". Said another way, all of the real stories behind the current situation are being suppressed for more ideologically pleasing confidence fairy arguments.

    I think if you read more of Matias' blog, you'll find that he favors fiscal policy over monetary policy, but in light of the political impossibility of an adequate fiscal solution, QE is the best we will get. [If we think in simple terms (IS-LM), the IS curve has shifted a good deal to the left, in response the central bank has lowered rates to 0(expansionary monetary policy), which has been ineffective for achieving full employment (in the NAIRU sense). Imagine, instead, if the FED raised interest rates instead of pursuing QE, output (Y) would decrease making things much worse, i.e. contractionary monetary policy would have similar effects of the contractionary fiscal policy we are seeing now.]

    I don't have a link, but I think you might be interested in Kalecki's "Political Business Cycle" paper. In times like these, fiscal policy is "dangerous" because if workers figure out that governments can provide the necessary investment when private businesses won't, we might decide they (the capitalists) aren't necessary after all, or only necessary in certain situations as we, the people deem fit. Of course this isn't amenable to those in power, so we get expansionary monetary policy and contractionary fiscal policy. (To hell with the well being of people right?) Sad state of affairs.

  3. Exactly, Blanchard is a big fan of the confidence fairy! QE is not TARP (money for banks); it is just the Fed buying public bonds, maintaining their price, and hence their remuneration (interest) low. The ECB should do it, buy Greek bonds and end this pseudo-crisis. The link for Kalecki's classic paper "Political Aspects of Full Employment" (must read) is here http://mrzine.monthlyreview.org/2010/kalecki220510.html


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