Re: Article from The Guardian newspaper

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Paul:

> It is time for policymakers to calm the nerves of financial market
> participants by flooding the system with sufficient liquidity for all who
> want to exit in an orderly manner.

Does "exit in an orderly manner" mean exit at or above some floor price
level?

The Dow is now some 25-30% above Greenspan's "irrational-exuberance" level -
when a "rational" monetary policy response would have been to "calm the
nerves of financial market participants" by taking away the punch bowl.

It strikes me as self-evident that Keynes, as life-long opponent of monetary
inflation, would NOT agree that the cure for the hangover is to "flood the
system" with more of what made it sick in the first place.

Gunnar


----- Original Message -----
From: "Paul Davidson" <pdavidson@xxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, September 06, 2002 4:10 PM
Subject: Article from The Guardian newspaper


> Here is an article that was published in THE GUARDIAN
>
> Paul Davidson
> Monday September 2, 2002
> The Guardian
> Since March 2000, the terrorist organisation "the bears" have struck Wall
> Street with a devastating impact on our enterprise economic system.
> Al-Qaida terrorists on September 11 may have made a more dramatic impact
on
> our way-of-life, but the number of lives destroyed by the bears may
> ultimately prove to be greater.
> Clearly, there is a yearning for the equivalent of a Rudy Guiliani who
> understands what has happened and seeks to quickly clear the debris and
> rebuild a stronger financial system.
> Unfortunately, the economists guiding the Republicans and the Democrats,
as
> well as Gordon Brown in the UK, and officials at theEuropean Central Bank,
> the Bank of Japan and the IMF are at a loss to provide any helpful advice.
> These economists have forgotten Keynes's vision for rebuilding a better
> capitalist economy after the last great attack of the bears during the
> second world war.
> Keynes saw that any irrational demand for liquidity as the cause of
> unemployment and depression in our otherwise wealth-producing enterprise
> economy.
> Liquidity is a double-edged sword. The good edge provides orderly,
> well-organised security markets where financial assets can be readily
> resold for cash. Liquid financial markets encourage savers to provide
> funding to entrepreneurs for durable investments that savers would not be
> willing to furnish if their investment was not liquid.
> Liquid markets encourage savers to believe they have a fast exit strategy
> to liquidate their position the moment they are dissatisfied with the way
> matters are developing. This calms savers' fears of the uncertain future.
> Without liquidity, the risk of funding investments as a minority owner
> would be intolerable.
> The bad edge appears when rampant fear induces a strong bearish view in
> financial markets and most savers try to rush for the exit. In times of
> fear, there are no "fundamentals" that determine the market price of the
> equities.
> More importantly, this irrational demand for a fast exit prevents
> unutilised or involuntarily unemployed real resources from being used to
> expand the economy's productive facilities. The result can be devastating
> to whole industries and the national economy.
> The financial market crises of the 1990s, cumulating in the 1997 East
Asian
> currency crisis and the Russian debt default of 1998, induced a seizing-up
> of global financial markets in the autumn of 1998 that almost precipitated
> a global market crash. The global economy still struggles with the
> uncertain aftermath of these crises. The terrorist attack of 9/11
increased
> uncertainty about the financial future.
> It is time for policymakers to calm the nerves of financial market
> participants by flooding the system with sufficient liquidity for all who
> want to exit in an orderly manner.
> Any potential disorderly decline in security prices can be offset by the
> banking system if the central bankers know their job and their
> responsibilities. During the stock market crash of October 1987, for
> example, the Federal Reserve flooded banks, government bond market makers,
> and other financial intermediaries with liquidity in order to encourage
> them to buy the financial assets that the bears were fleeing from.
> A similar but stronger action, flooding the financial system with
> liquidity, was taken by the Federal Reserve immediately after the
September
> 11 attacks. The Federal Reserve pumped $45bn (£29bn) into the banking
> system and simultaneously eased the cash concerns of primary dealers in
bonds.
> On Thursday September 13, the Fed snaffled up all the government
securities
> offered by dealers, $70.2bn (£45bn) worth. On Friday, it poured even more
> into the system. In effect, the Federal Reserve removed securities from
the
> public by making liquidity available to those who wanted to make a fast
exit.
> The price of financial assets can generate a wealth effect that can have
an
> impact on households' demand for real goods and services. As Keynes noted:
> "A country is no richer when it swaps titles to capital at a higher price
> than a lower one, but the citizens, beyond question, feel richer". It is
> about time that Central bankers took positive steps to make citizens feel
> richer, rather than let the terrorist bears make the public feel - and
> actually become - poorer.
> · Paul Davidson holds the J. Fred Holly Chair of Excellence in political
> economy at the University of Tennessee. He is the author of Financial
> Markets, Money and the Real World.
> Guardian Unlimited © Guardian Newspapers Limited 2002
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> Economics Department - 523 SMC
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> phone # (865) 974-4221
> fax # (865) 974-1686
> home phone  (865) 692-0802
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>
>
>
>
>