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Another Look at Helicopter Money

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helicopter-money

As President Obama wraps-up his second term, people are looking back to reassess his handling of the Great Recession. During his first year in office, our Disappointer-In-Chief introduced his own version of “trickle-down economics” by way of a bank bailout scheme called the Public-Private Investment Program (PPIP or “pee-pip”).

Despite his July 15, 2008, campaign promise that if he were elected, there would be “no more trickle-down economics”, the President and the Federal Reserve embarked on a course of bailing out the banks, rather than distressed businesses or the taxpayers themselves.

As this writer pointed out on Sept. 21, 2009, Australian economist Steve Keen published a report from his website explaining how the “money multiplier” myth, fed to Obama by the very people who facilitated the financial crisis, would be of no use in the effort to strengthen the economy.

On Aug. 26, 2016, the Bureau of Economic Analysis reported that real gross domestic product (GDP) increased at the annual rate of just 1.1% during the second quarter of 2016. This graph illustrates the faltering rate of annual GDP expansion since the end of 2014, after the conclusion of the Fed’s quantitative easing program.

Concerns that the United States could be doomed to a Japan-like addiction to monetary stimulus gimmicks have amped-up enthusiasm for the Fed to become more aggressive about raising interest rates. Meanwhile, many economists contend that tightening monetary policy before the economy reaches a robust state could plunge the nation back into recession.

In April 2016, former Federal Reserve Chairman Ben Bernanke advocated the use of “helicopter money” as a last-resort strategy to jump-start a stalled economy. This provoked a response from economist Steve Keen emphasizing that Bernanke and other mainstream economists have shared a flawed belief that the public’s expectations for a healthy rate of inflation could cause such inflation to occur. In other words: “Inflationary expectations cause inflation.”

Steve Keen consistently emphasizes the need to understand how excessive private debt causes severe economic contraction and financial crises. Specifically, when the level of private debt exceeds GDP by 150% and that level continues to grow – disaster awaits.

So what can be done to keep the debt-to-GDP ratio in check? In this video, Steve Keen and Edward Harrison of the Credit Writedowns website explain how Ben Bernanke’s helicopter could be sent on a debt reduction mission.



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Sandy Politics

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Was Hurricane Sandy a Democrat?  Two weeks ago, Mitt Romney’s tormentor was a debate moderator named Candy.  This week, Romney’s nemesis is a storm named Sandy.  The latest blow to the Republican’s Presidential campaign came from an actual wind.  Precious news program time, normally devoted to the battle for the White House – which amounts to free infomercial time from the networks – is now being diverted to coverage of the storm’s havoc.  Worse yet, the Benghazi story has become “old news”, bumped back to oblivion.  As Romney’s surrogates complain that Obama cannot be trusted to work with Republicans, news coverage shows the President with Republican Chris Christie at his side so frequently that rest-home-bound geriatrics are remarking about the excessive weight gained by Joe Biden.  Despite the claim that government is the problem rather than the solution, many of Sandy’s victims are finding the opposite to be the case.  FEMA can no longer be described as a government extravagance.  If all that weren’t bad enough – global warming is back in the news  .  .  .  big time  .  .  .

What could likely be a lasting legacy from Sandy will have a bipartisan impact – a painful blow to Democrats and Republicans who remain dogmatically opposed to government-initiated fiscal stimulus programs.  Sandy is about to prove them wrong.  The massive infrastructure restoration efforts, which will be necessary to address Sandy’s damage, could end up providing the financial stimulus which Congress would never have approved if Sandy had not headed westbound.

Duncan Bowen Black has a PhD in Economics from Brown University.  His Eschaton blog presents the liberal perspective on more issues than those related to the economy.  Love him or hate him, his April 30 USA Today article is downright prescient.  Sandy will prove, once and for all, that Keynes was right.  Resistance is futile.  Consider his points:

To suggest that the response to the storm impact might improve the economy is not to suggest that the storm is somehow a good thing, but a quick mobilization of resources to complete necessary repairs could temporarily boost employment and improve business for companies producing and selling construction materials.  There would also be additional multiplier effects of this spending on the economy, as workers and business owners spend their increased wages and profits.

But this could be true even absent widespread storm damage.  Speeding up other infrastructure repair projects would also put people back to work.  For example, many cities have aging water systems that experience regular costly water main breaks.  These projects don’t need costly studies or lengthy environmental impact reports and could be implemented almost immediately. Buy materials, dig up the streets, replace the pipes, repair the streets and pay your workers.  They are truly shovel ready projects in need of funding.

No degree of Austerian opposition will be able to prevent the post-Sandy infrastructure restoration programs from being implemented.  Sandy is about to teach America an important lesson, which could motivate many politicians to repeat what Richard Nixon said in 1971:  “I am now a Keynesian in economics”.

Niall Ferguson Softens His Austerity Stance

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I have previously criticized Niall Ferguson as one of the gurus for those creatures described by Barry Ritholtz as “deficit chicken hawks”.  The deficit chicken hawks have been preaching the gospel of economic austerity as an excuse for roadblocking any form of stimulus (fiscal or monetary) to rehabilitate the American economy.  Ferguson has now backed away from the position he held two years ago – that the United States has been carrying too much debt

Henry Blodget of The Business Insider justified his trip to Davos, Switzerland last week by conducting an important interview with Niall Ferguson at the annual meeting of the World Economic Forum.  For the first time, Ferguson conceded that he had been wrong with his previous criticism about the level of America’s sovereign debt load, although he denied ever having been a proponent of “instant austerity” (which is currently advocated by many American politicians).  While discussing the extent of the sovereign debt crisis in Europe, Ferguson re-directed his focus on the United States:

I think we are going to get some defaults one way or the other.  The U.S. is a different story.  First of all I think the debt to GDP ratio can go quite a lot higher before there’s any upward pressure on interest rates.  I think the more I’ve thought about it the more I’ve realized that there are good analogies for super powers having super debts.  You’re in a special position as a super power.  You get, especially, you know, as the issuer of the international reserve currency, you get a lot of leeway.  The U.S. could conceivably grow its way out of the debt.  It could do a mixture of growth and inflation.  It’s not going to default.  It may default on liabilities in Social Security and Medicare, in fact it almost certainly will.  But I think holders of Treasuries can feel a lot more comfortable than anyone who’s holding European bonds right now.

BLODGET: That is a shockingly optimistic view of the United States from you.  Are you conceding to Paul Krugman that over the near-term we shouldn’t worry so much?

FERGUSONI think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was.  My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it’s no longer credible.  But I didn’t think that point was going to be this year or next year.  I think the trend of nominal rates in the crisis has been the trend that he forecasted.  And you know, I have to concede that. I think the reason that I was off on that was that I hadn’t actually thought hard enough about my own work.  In the “Cash Nexus,” which I published in 2001, I actually made the argument that very large debts are sustainable, if your borrowing costs are low. And super powers – Britain was in this position in the 19th century – can carry a heck of a lot of debt before investors get nervous.  So there really isn’t that risk premium issue. There isn’t that powerful inflation risk to worry about.  My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago.  And higher indeed that my colleague and good friend, Ken Rogoff implies, or indeed states, in the “This Time Is Different” book.  I think what we therefore see is that the U.S. has leeway to carry on running deficits and allowing the debt to pile up for quite a few years before we get into the kind of scenario we’ve seen in Europe, where suddenly the markets lose faith.  It’s in that sense a safe haven more than I maybe thought before.

*   *   *

There are various forces in [the United States’] favor. It’s socially not Japan.  It’s demographically not Japan. And I sense also that the Fed is very determined not to be the Bank of Japan. Ben Bernanke’s most recent comments and actions tell you that they are going to do whatever they can to avoid the deflation or zero inflation story.

Niall Ferguson deserves credit for admitting (to the extent that he did so) that he had been wrong.  Unfortunately, most commentators and politicians lack the courage to make such a concession.

Meanwhile, Paul Krugman has been dancing on the grave of the late David Broder of The Washington Post, for having been such a fawning sycophant of British Prime Minister David Cameron and Jean-Claude Trichet (former president of the European Central Bank) who advocated the oxymoronic “expansionary austerity” as a “confidence-inspiring” policy:

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs.  Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.”  He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate.  And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Nevertheless, you can be sure that many prominent American politicians will ignore the evidence, as well as Niall Ferguson’s course correction, and continue to preach the gospel of immediate economic austerity – at least until the time comes to vote on one of their own pet (pork) projects.

American voters continue to place an increasing premium on authenticity when evaluating political candidates.  It would be nice if this trend would motivate voters to reject the “deficit chicken haws” for the hypocrisy they exhibit and the ignorance which motivates their policy decisions.


 

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Obama On The Ropes

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You’ve been reading it everywhere and hearing it from scores of TV pundits:  The ongoing economic crisis could destroy President Obama’s hopes for a second term.  In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012.  Dean’s statement was unequivocal:  “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House.  A chorus of commentators has begun singing that same tune.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people.  After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

*   *   *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer.  Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner.  Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011.  At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery.  I remember that fall of 2009 as a very frustrating one.  It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit.  A number of us tried to make the case that more action was desperately needed and would be effective.  Normally, meetings with the President were very friendly and free-wheeling.  He likes to hear both sides of an issue argued passionately.  But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough.  As luck would have it, the next day, a reporter asked him if he ever lost his temper.  He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”.  Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal.  Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012.  Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years.  The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”.  Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin.  Barack Obama is probably suffering from some awful nightmares about that possibility.


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Time For Another Victory Lap

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I’m no cheerleader for President Obama.  Since he first became our Disappointer-In-Chief, I have vigorously voiced my complaints about his decisions.  At the end of President Obama’s first month in office, I expressed concern that his following the advice of “Turbo” Tim Geithner and Larry Summers was putting the welfare (pun intended) of the Wall Street banks ahead of the livelihoods of those who voted for him.  I lamented that this path would lead us to a ten-year, Japanese-style recession.  By September of 2010, it was obvious that those early decisions by the new President would prove disastrous for the Democrats at the mid-term elections.  At that point, I repeated my belief that Obama had been listening to the wrong people when he decided to limit spending on the economic stimulus package to approximately half of what was necessary to end the economic crisis:

Even before the stimulus bill was signed into law, the administration had been warned, by way of an article in Bloomberg News, that a survey of fifty economists revealed that the proposed $787 billion stimulus package would be inadequate.

Last week, I was about to write a piece, describing that decision as “Obama’s Tora Bora moment”.  When I sat down at my computer just after 11 p.m. on Sunday, I realized that the timing wouldn’t have been appropriate for such a metaphor.  The President was about to make his historic speech, announcing that Osama Bin Laden had been killed.  Just as many have criticized the Obama administration’s handling of the disaster in the Gulf of Corexit as “Obama’s Katrina Moment”, I believe that the President’s decision to “punt” on the stimulus – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  The consequences have been enormously expensive (simply adding the $600 billion cost of QE 2 alone to a better-planned stimulus program would have reduced our current unemployment level to approximately 5%).  Beyond that, the advocates of “Austerian” economics have scared everyone in Washington into the belief that the British approach is somehow the right idea – despite the fact that their economy is tanking.  Never mind the fact Australia’s stimulus program was successful and ended the recession in that country.

The Fox Ministry of Truth has brainwashed a good number of people into believing that Obama’s stimulus program (a/k/a the American Recovery and Reinvestment Act of 2009) was a complete failure.  You will never hear the Fox Ministry of Truth admit that prominent Republican economist Keith Hennessey, the former director of the National Economic Council under President George W. Bush, pointed out that the 2009 stimulus “increased economic growth above what it otherwise would have been”.  The Truth Ministry is not likely to concede that John Makin of the conservative think-tank, the American Enterprise Institute, published this statement at the AEI website:

Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S. growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.

On the other hand, count me among those who are skeptical that the Federal Reserve’s monetary policy can have any impact on our current unemployment crisis (it hasn’t yet).

Many of Obama’s critics have complained that the Presidential appearance at Ground Zero was an inappropriate “victory lap” – despite the fact that George W. Bush was invited to the event (although he declined).  Not only was that victory lap appropriate – Obama is actually entitled to run another.   As E.J. Dionne pointed out, the controversial “nationalization” of the American auto industry (what should have been done to the Wall Street banks) has become a huge success:

The actual headlines make the point. “Demand for fuel-efficient cars helps GM to $3.2 billion profit,” declared The Washington Post.  “GM Reports Earnings Tripled in First Quarter, as Revenue Jumped 15 Percent,” reported The New York Times.

*   *   *

“Having the federal government involved in every aspect of the private sector is very dangerous,” Rep. Dan Burton, R-Ind., told Fox News in December 2008.  “In the long term it could cause us to become a quasi-socialist country.”  I don’t see any evidence that we have become a “quasi-socialist country,” just big profits.

Rep. Lamar Smith, R-Texas, called the bailout “the leading edge of the Obama administration’s war on capitalism,” while other members of Congress derided the president’s auto industry task force.  “Of course we know that nobody on the task force has any experience in the auto business, and we heard at the hearing many of them don’t even own cars,” declared Rep. Louie Gohmert, R-Texas, after a hearing on the bailout in May 2009. “And they’re dictating the auto industry for our future? What’s wrong with this picture?”

*   *   *

In the case of the car industry, allowing the market to operate without any intervention by government would have wiped out a large part of the business that is based in Midwestern states.  This irreversible decision would have damaged the economy, many communities and tens of thousands of families.

And contrary to the predictions of the critics, government officials were quite capable of working with the market in restructuring the industry. Government didn’t overturn capitalism.  It tempered the market at a moment when its “natural” forces were pushing toward catastrophe. Government had the resources to buy the industry time.

In fairness, President Obama has finally earned some bragging rights, after punting on health care, the stimulus and financial “reform”.  He knows his Republican opponents will never criticize him for his own “Tora Bora moment” – because to do so would require an admission that a more expensive economic stimulus was necessary in 2009.  As a result, it will be up to an Independent candidate or a Democratic challenger to Obama (less likely these days) to explain that the persistent economic crisis – our own “lost decade” – lingers on as a result of Obama’s “Tora Bora moment”.


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Grasping Reality With The Opinions Of Others

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary.  Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution.  The incident was recently discussed by Brad DeLong.  (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.)  Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy.  On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15.  Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog.  Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle?  Seriously?  I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism?  Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant.  Her old man was an inspector of contracting in New York City.  He got surprisingly rich.  From that he went to starting his own contracting business.  He got surprisingly rich.  Then he went back to New York City in an even higher level supervisory job.  He got surprisingly rich.  So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated.  Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers.  The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold:  this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities.  And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems.  Timothy Geithner was even doing victory laps last month in Europe.  To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs.  But these losses exist already.  The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal.  Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team.  Volcker, Summers, Orszag, and Romer are all gone.  So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

  • The financial system was on the verge of collapse.  We all know that now – about US banks and European ones too.  Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King.  The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  • When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent.  It is still unclear whether this was a political or an economic decision.
  • The most difficult political aspect of the banking crisis response was socialising bank lossesAll banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent.  That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  • Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror.  Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds.  That is the Geithner view.
  • Once the system is healthy again, it should expand.  The reason you need to bail the banks out is that they have expansion opportunities abroad.  As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit.  American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets.  His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done.  The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery.  With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services.  I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development.  But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?


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Demolition Derby

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June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell).  Barry Ritholtz calls them the “deficit chicken hawks”.  The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”,  in reference to that same (deficit chicken hawk) group.   The Reformed Broker described them this way:

.  .  .  this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them.  Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it:  into a Demolition Derby.  The first smash-up in this derby was to sabotage any potential recovery in the job market.  Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through.  Removing fiscal stimulus too soon risks derailing the recovery.  Anti-deficit sentiment has already hampered a push for further stimulus to support job growth.  Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011.  Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits.  Because the unemployed don’t have any money to bribe legislators, they make a great target.  David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle.  You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today.  Unemployment is 9.7 percent.  Inflation in recent months has been zero.  States are cutting their budgets.  Congress is balking at spending the money to prevent state layoffs.  The Fed is standing pat, too.  Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk:  too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis.  It involves sabotaging the economic recovery as well.  In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak.  The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts  can impair economic recovery:

In the US, we must start to get our fiscal house in order.  But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with.  If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially.  And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming:  a cataclysmic crash.   As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns:  “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

*   *   *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap:  “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope.  Then the final years of decline will usher in capitulation and finally despair.”

So it is written.  The Demolition Derby shall end in disaster.





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