As loyal readers of EconoSpeak know, on Sept. 24 I posted a relatively substantial proposal that I headlined “Plan B: How to Restore Financial Markets Without a Bailout”. Three days later, I was surprised to see almost the same plan referred to in a New York Times column, but attached to the name of Andrew Feldstein, the director of a hedge fund. What struck me is that, not only were the two key general ideas—the public financial intermediary, the window to acquire distressed assets at market prices—the same, even the initial capitalization was pegged at an identical $300B. (Some of the details revealed in a followup Times blog were different and, honestly, not as good.) In my line of work, this is a prima facie case of plagiarism.
What this probably represents, however, is a difference in culture. In the academic world that I inhabit, there is a strong expectation that all borrowed words or ideas will be attributed to their source. Failure to do this constitutes an intellectual scandal; on the positive side, we try to impress our peers with a bottomless pile of citations. (This is called “scholarship”.)
The business world is different. There the rule is, if it ain’t nailed down you can take it. Having a bright idea and getting mentioned in the Times is worth real money. I can imagine that Feldstein’s fund may get an extra investor or two (or dissuade an existing investor from fleeing) by the halo effect of this publicity. I was dumb enough not to copyright my idea, so what do I expect?
Actually, while I like to have my ego stroked every now and then, and while I would come down hard on any student who submitted a paper that plagiarized, I don’t really care about attribution in this case. I would like this idea to be given a fair hearing, and someone with a hedge fund is likely to have a wider audience than me. In fact, I rather like the notion that an obscure economist can release an idea on some little corner of the web, it can bounce around for a while, and then reappear dressed up in real money.
Friday, October 3, 2008
The Problem with Trickle-Up
I’ve been hearing a lot recently about a so-called “trickle-up” approach to straightening out the financial system. The idea is that, rather than forking over hundreds of billions of dollars to speculators, we should give it instead to distressed homeowners. The government could issues grants or subsidized loans to folks having trouble making their mortgage payments; this would serve two purposes, to keep people in their homes and, by greatly reducing the default rate, validating the financial assets derived from mortgages.
Nice try, but it won’t work.
First, there is a nasty problem of equity vs cost: the program is affordable only if you give the money to the subset of owners falling behind in their payments, but why should they be the only ones to get a price break. Speaking just for myself, I own a house and have not skipped a payment yet, although not without occasional struggle. Why them and not me? Multiply this by a few million and you have a real question.
Second, and much more to the point financially, the underlying problem is a housing bubble. Prices overshot by about 30% or so on a national average, and a mountain of securities were piled on top. How will helping people make onerous payments correct this? Answer: you can only prevent the deflation of the bubble by permanently (or at least indefinitely) blowing more air into it. To sustain the overvaluation of a house, you not only have to subsidize its current financing, you have to subside new buyers so that the old ones can sell at the inflated price. If you don’t, the house drops in value and you are back to square one as far as derivative assets are concerned. The real point is that it is futile for the government to try to hold back the deflation of the bubble by throwing money at it. The prices have to come down one way or another.
This is why I like Dean Baker’s approach. He would let the mortgages fail but allow people to stay in their homes as renters. From a progressive point of view I see no particular value in mass home ownership. (Why should people concentrate their savings into a single asset, their home, rather than diversify? Or rather than own their own job, which could provide a greater measure of income security?) What needs to be prevented, however, is mass eviction.
Nice try, but it won’t work.
First, there is a nasty problem of equity vs cost: the program is affordable only if you give the money to the subset of owners falling behind in their payments, but why should they be the only ones to get a price break. Speaking just for myself, I own a house and have not skipped a payment yet, although not without occasional struggle. Why them and not me? Multiply this by a few million and you have a real question.
Second, and much more to the point financially, the underlying problem is a housing bubble. Prices overshot by about 30% or so on a national average, and a mountain of securities were piled on top. How will helping people make onerous payments correct this? Answer: you can only prevent the deflation of the bubble by permanently (or at least indefinitely) blowing more air into it. To sustain the overvaluation of a house, you not only have to subsidize its current financing, you have to subside new buyers so that the old ones can sell at the inflated price. If you don’t, the house drops in value and you are back to square one as far as derivative assets are concerned. The real point is that it is futile for the government to try to hold back the deflation of the bubble by throwing money at it. The prices have to come down one way or another.
This is why I like Dean Baker’s approach. He would let the mortgages fail but allow people to stay in their homes as renters. From a progressive point of view I see no particular value in mass home ownership. (Why should people concentrate their savings into a single asset, their home, rather than diversify? Or rather than own their own job, which could provide a greater measure of income security?) What needs to be prevented, however, is mass eviction.
Sandwichman Doubts the Work Ethic!
by the Sandwichman
PGL writes "No one doubts the work ethic of Americans..."
Nobody expects the Spanish Inquisition, maybe. But no one doubts the work ethic? What am I? Chopped liver?
Sandwichman doesn't doubt that there are endless panegyrics to hard work in American folklore. But Sandwichman doubts that what American politicians and pundits call the work ethic -- striving for financial success (or just survival), willingness to put in extra hours on the job in exchange for more income -- constitutes a genuine work ethic.
Sandwichman's argument continues to be that the conventional misconception about the work ethic is at the root of the economy's inability to generate sufficient demand to sustain full employment.
The revised American standard version of the work ethic falsely ties higher income to longer hours on the job. Well, if one takes that as an unquestionable article of faith, then there's no point in considering the Stewardian critique and alternative summed up in the ditty, "whether you work by the piece or work by the day, decreasing the hours increases the pay."
That ditty, by the way, expressed the founding philosophy of organized labor in the United States. Today's unions have strayed far from that idea, which may account in part, for their declining influence. But no one doubts? What does that mean? Doesn't it really frame the discussion in such a way as to exclude us nobodies who fundamentally questions the conventional wisdom about the connection between longer hours and higher income?
As long as "no one doubts the work ethic", the debate about how to "stimulate" the necessary demand can continue to go around and around in the same circles: "Reduce taxes" "No, increase government spending (on worthwhile things)" "No, reduce taxes" "No... No... No..."
To use a tired cliche: been there, done that.
PGL writes "No one doubts the work ethic of Americans..."
Nobody expects the Spanish Inquisition, maybe. But no one doubts the work ethic? What am I? Chopped liver?
Sandwichman doesn't doubt that there are endless panegyrics to hard work in American folklore. But Sandwichman doubts that what American politicians and pundits call the work ethic -- striving for financial success (or just survival), willingness to put in extra hours on the job in exchange for more income -- constitutes a genuine work ethic.
Sandwichman's argument continues to be that the conventional misconception about the work ethic is at the root of the economy's inability to generate sufficient demand to sustain full employment.
The revised American standard version of the work ethic falsely ties higher income to longer hours on the job. Well, if one takes that as an unquestionable article of faith, then there's no point in considering the Stewardian critique and alternative summed up in the ditty, "whether you work by the piece or work by the day, decreasing the hours increases the pay."
That ditty, by the way, expressed the founding philosophy of organized labor in the United States. Today's unions have strayed far from that idea, which may account in part, for their declining influence. But no one doubts? What does that mean? Doesn't it really frame the discussion in such a way as to exclude us nobodies who fundamentally questions the conventional wisdom about the connection between longer hours and higher income?
As long as "no one doubts the work ethic", the debate about how to "stimulate" the necessary demand can continue to go around and around in the same circles: "Reduce taxes" "No, increase government spending (on worthwhile things)" "No, reduce taxes" "No... No... No..."
To use a tired cliche: been there, done that.
The Employment Situation for September & Sarah Palin on the Fundamentals of the US Economy
Last night - Sarah Palin argued:
John McCain saying our economy was strong, he was talking to and about the American workforce, and the American workforce is the greatest in this world, with the ingenuity and the work ethic that is just entrenched in our workforce, that is a positive, that is encouragement, and that is what John McCain meant.
BLS reported this morning:
Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.
No one doubts the work ethnic of Americans. The problem is that the economy is not generating sufficient aggregate demand to fully utilize this work ethnic.
Payroll employment has declined by 760 thousand since December 2007. While the unemployment rate did not further increase last month, that’s not because of any good news from the household survey of employment which showed a 222 thousand decline last month alone. We should note that the employment-population ratio fell from 62.1% to 62.0% but that was accompanied by a decline in the labor force participation rate from 66.1% to 66.0%. Palin does not seem to be attributing this decline to less work ethic and she’s likely correct as this decline is more likely due to a discouraged worker effect.
Our graph shows both the employment-population ratio (EP) and the labor force participation rate (LF) from October 1998 to September 2008. From early 2001 to September, the employment-population ratio fell from its 64% plus level to only 62.0% as of September 2003 but then partially recovered to 63.4% by December 2006. Since then, this ratio has plummeted with the September 2008 level being as bad as the September 2003 level. While the rise in the unemployment rate sounds bad, the drop in the employment-population ratio has been worse since the labor force participation rate has also declined from around 67% as of the end of 2000 to only 66% now.
The next Administration needs to recognize that these hard working Americans want new job opportunities. Alas, I did not hear very much from Governor Palin last night as to how a McCain Administration would go about accomplishing this goal.
Update: John McCain has responded to the labor market news and proposes that we cut government spending as a means for increasing employment. Lord Keynes must be rolling over in his grave!
The 1960s - the subversive current continues
If somebody doesn't bring an end to this suicidal thrust that we see in the world today none of us are going to be around because somebody's going to make the mistake through our senseless blundering, with the dropping of a nuclear bomb somewhere, and then another one's going to drop, and don't let anybody fool you, this can happen within a matter of seconds....But this is were we have drifted, and we are drifting there because nations are caught up with the drum major instinct, 'I must be first. I must be supreme. Our nation must rule the world!' And I am sad to say that the nation in which we live is the supreme culprit. And I'm going to continue to say it to America, because I love this country too much to see the drift that it has taken. God didn't call America to do what she's doing in the world now. God didn't call America to engage in a senseless, unjust war as the war in Vietnam! And we are criminals in that war, we have committed more war crimes almost than any nation in the world, and I'm going to continue to say it! And we won't stop it because of our pride and our arrogance as a nation, but God has a way of putting nations in their place! The God that I worship has a way of saying 'Don't play with me!'
If we are to go forward, we must go back and rediscover those precious values -- that all reality hinges on moral foundations and that all reality has spiritual control.
Martin Luther King, Jr. 1929-1968, Baptist civil-rights leader in the US
Hidden conclusion here.
Thursday, October 2, 2008
Crisis Commentary: Third Installment
I just posted a short third installment.
http://michaelperelman.wordpress.com/2008/10/03/crisis-commentary-third-installment/
http://michaelperelman.wordpress.com/2008/10/03/crisis-commentary-third-installment/
Wednesday, October 1, 2008
The Second Shoe, Part I
by the Sandwichman
John Gray of the London School of Economics has evocatively compared Monday's bailout defeat and the events leading up to it to the fall of the Soviet Union. To fully comprehend the aptness of that comparison, one needs to take into account two factors: 1. the exceptional nature of the American post-World War II "bipartisan" national security state and 2. the failure of an ideologically-rigged accounting system.
In parliamentary democracies, governments get defeated from time to time on votes of non confidence. The government falls and there is an election to form a new government. In the US, a defeat of the government on a vote in the House ordinarily has no political significance. Business as usual slouches on. In short, the US is not a parliamentary democracy. It never has been.
Following the second world war, however, the two-party presumption was grafted onto the already un-parliamentary system. But even that duopoly was further constrained by a bipartisan foreign policy and an anti-Communist ideology. In effect, the US became a one-party state with an imperial presidency and a politically-impotent legislature. The essence of democratic political power resides in the possibility that an opposition may bring down -- not merely obstruct -- the government.
Monday's defeat of the bailout bill occurred at a propitious time and under extraordinary circumstances. The coincidence of an already scheduled election made the vote a de-facto no confidence vote. And the fact that the bill was supported by the leadership of both parties made it explicit who the ruling party actually was -- not the Democrats, not the Republicans but the center-right bipartisan party. That governing party suffered a humiliating defeat. The Republican contingent of the BPP suffered an even more profound defeat. A leadership that is repudiated by two-thirds of its constituents has no legitimacy.
"Lame" duck is not the anatomically accurate metaphor for what remains of George W. Bush's administration. Castrated is. The Republican House leadership is walking dead. Congressional Democrats have no mandate, a situation Speaker Pelosi conceded two years ago.
The government has fallen. But the one-party bipartisan non-parliamentary system, which has so successfully insulated itself from political consequences for 60 years virtually assures that this political crisis will not be resolved through the upcoming elections. Resolving the crisis will require dismantling that non-parliamentary regime, the American counterpart to the failed Soviet state.
Next: The Accounting Debacle.
John Gray of the London School of Economics has evocatively compared Monday's bailout defeat and the events leading up to it to the fall of the Soviet Union. To fully comprehend the aptness of that comparison, one needs to take into account two factors: 1. the exceptional nature of the American post-World War II "bipartisan" national security state and 2. the failure of an ideologically-rigged accounting system.
In parliamentary democracies, governments get defeated from time to time on votes of non confidence. The government falls and there is an election to form a new government. In the US, a defeat of the government on a vote in the House ordinarily has no political significance. Business as usual slouches on. In short, the US is not a parliamentary democracy. It never has been.
Following the second world war, however, the two-party presumption was grafted onto the already un-parliamentary system. But even that duopoly was further constrained by a bipartisan foreign policy and an anti-Communist ideology. In effect, the US became a one-party state with an imperial presidency and a politically-impotent legislature. The essence of democratic political power resides in the possibility that an opposition may bring down -- not merely obstruct -- the government.
Monday's defeat of the bailout bill occurred at a propitious time and under extraordinary circumstances. The coincidence of an already scheduled election made the vote a de-facto no confidence vote. And the fact that the bill was supported by the leadership of both parties made it explicit who the ruling party actually was -- not the Democrats, not the Republicans but the center-right bipartisan party. That governing party suffered a humiliating defeat. The Republican contingent of the BPP suffered an even more profound defeat. A leadership that is repudiated by two-thirds of its constituents has no legitimacy.
"Lame" duck is not the anatomically accurate metaphor for what remains of George W. Bush's administration. Castrated is. The Republican House leadership is walking dead. Congressional Democrats have no mandate, a situation Speaker Pelosi conceded two years ago.
The government has fallen. But the one-party bipartisan non-parliamentary system, which has so successfully insulated itself from political consequences for 60 years virtually assures that this political crisis will not be resolved through the upcoming elections. Resolving the crisis will require dismantling that non-parliamentary regime, the American counterpart to the failed Soviet state.
Next: The Accounting Debacle.
Bailed out with what!
"The Federal Reserve System was the crucial anomaly at the very core of representative democracy, an uncomfortable contradiction with the civic mythology of self-government."
This is what William Greider wrote in the first chapter of his book 'Secrets of the Temple - how the Federal Reserve runs the country." His book arrived yesterday in the mail. Here's a quick summary - and my extrapolation from - the first 6 pages.
The western capitalist system depends on 'deeper transactions' than elections. Central banks are inconsistent with representative forms of government. They are, in fact, more powerful than elected governments because they possess the power to answer the main questions of political economy - who shall fail and who shall prosper. Central banks are both directors of the private economy and the protector of the most powerful players within it.
The co-emergence of concentrated political and economic power in the hands of the modern global corporation has meant that these entities have been able to accumulate profits at a greater rate than the development of wealth on the planet. As a result, inflation became a permanent feature of the world economy. If the central banks had implemented policy to put the breaks on this dangerous development it would have worked against the narrow self-interest of these multinationals. Inflation was, instead, addressed by increasing dangerous forms of 'productivity'. Forests were no longer given time to regenerate. People in third world nations (in particular) were forcibly evicted from their lands and conscripted into low-wage manufacture for TNCs. Environmental regulation was dismantled and dangerous forms of industrial agriculture were expanded everywhere. Wages were kept low across the globe.
Profits for the global corporation continued to expand at an even faster rate and now exceeded any relation to real wealth. It became truly fictional. Having brought the planet beyond the brink of reversible climate change and increasing impoverishment of humanity everywhere there is now very few places left to 'invest'.
The role of the US Fed had been to ensure that debtors would be rewarded over savers because such action was the corollary of ensuring the profits continued to flow to big business.
In 2008 the debtors can no longer pay their installments. It should be game over but the global corporations want to be bailed out yet again. Bailed out with what?!
This is what William Greider wrote in the first chapter of his book 'Secrets of the Temple - how the Federal Reserve runs the country." His book arrived yesterday in the mail. Here's a quick summary - and my extrapolation from - the first 6 pages.
The western capitalist system depends on 'deeper transactions' than elections. Central banks are inconsistent with representative forms of government. They are, in fact, more powerful than elected governments because they possess the power to answer the main questions of political economy - who shall fail and who shall prosper. Central banks are both directors of the private economy and the protector of the most powerful players within it.
The co-emergence of concentrated political and economic power in the hands of the modern global corporation has meant that these entities have been able to accumulate profits at a greater rate than the development of wealth on the planet. As a result, inflation became a permanent feature of the world economy. If the central banks had implemented policy to put the breaks on this dangerous development it would have worked against the narrow self-interest of these multinationals. Inflation was, instead, addressed by increasing dangerous forms of 'productivity'. Forests were no longer given time to regenerate. People in third world nations (in particular) were forcibly evicted from their lands and conscripted into low-wage manufacture for TNCs. Environmental regulation was dismantled and dangerous forms of industrial agriculture were expanded everywhere. Wages were kept low across the globe.
Profits for the global corporation continued to expand at an even faster rate and now exceeded any relation to real wealth. It became truly fictional. Having brought the planet beyond the brink of reversible climate change and increasing impoverishment of humanity everywhere there is now very few places left to 'invest'.
The role of the US Fed had been to ensure that debtors would be rewarded over savers because such action was the corollary of ensuring the profits continued to flow to big business.
In 2008 the debtors can no longer pay their installments. It should be game over but the global corporations want to be bailed out yet again. Bailed out with what?!
Tuesday, September 30, 2008
Term Auction Facility - TAF
[Readers' comments would be most helpful here. I'm not at all sure whether I've missed detail or misrepresented some facts relating to the Term Auction Facility. Here's what I've pieced together today.]
The Term Auction Facility is an emergency provision implemented by the US Federal Reserve last December to address the freezing up of interbank lending during the so-called 'credit crisis'. The banks weren't - and aren't - using the existing 'discount window', which is the emergency facility traditionally provided. This was happening even after the Fed had dropped the rate charged. There was a lack of liquidity and something had to be done quickly.
"Lenders [were] hoarding cash and shunning their peers as if they were all lepers." [1] Banks had failed to mark their securities to market and there didn't appear to be any practical way to assess the real value of their assets and liabilities. Suspicions were very high after many years of unregulated/deregulated and lax lending practices. At that stage it appeared that all the good collateral of the banks had been pledged and what was left to lend against wasn't worth having.
"In the Federal Funds market the Fed, along with the Bank of Canada, Bank of England, the European Central Bank and the Swiss National Bank, decided to implement a new monetary instrument.... This program, known in the US as the Term Auction Facility, enables the Fed to auction a set amount of funds to depository institutions, against a wide range of collateral."[2] The financial press reassured the public that the 'collateral' was of good quality and had triple A ratings from respectable firms such as Standard and Poors and Moodys. The trouble was that the rating agencies themselves had given over to the free-for-all spirit and their standards had plummeted also.
In the middle of February this year - for the first time ever - "the banking system showed negative net non-borrowed reserves" in the US [3]. The banks were exploiting the Term Auction Facility as much as they could for a range of reasons. This was a sign of continuing distress in the financial market. The funding was cheaper than elsewhere provided. There were continuing difficulties raising funds from other sources. The collateral problems were bad and appeared to be getting worse under this new program. The bankers' greater reliance on government support resulted in the central banks increasing the amount of money they were using to fund the facility to the tune of hundreds of billions of dollars. The system lacks transparency. The public don't know who submitted the collateral. The banks are distorting their behaviour; they appear to have long begun to create Residential Mortgage-Backed Securities "and keeping them on the banks books as a quick way, in another liquidity squeeze like August [2007], to access ECB/FED liquidity." [4]
The trouble is that the assets involved in these auctions have still not been appropriately valued. The solvency of the institutions involved is unknown. The true situation appears to be coming to light only after the bank is formally declared bankrupt. The public are left liable and extremely vulnerable as the Fed and other central banks accrue more and more worthless or low-value collateral.
Last night the US Fed announced that TAF "will expand by $300 billion to $450 billion." [5] Under the circumstances described above this is, in effect, a massive bailout of these institutions by stealth.
“If all the bank loans were paid up, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial banks for our money. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible - but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.” - Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta
[1] Crisis may make 1929 look a 'walk in the park'. By Ambrose Evans-Pritchard. Last Updated: 11:02pm GMT 23/12/2007. http://www.telegraph.co.uk
[2] Term auction facility
From Wikipedia, on 29th September 2008
http://en.wikipedia.org/wiki/Term_auction_facility
[3] Term Auction Facility: Confirmation of Financial Stress? Tuesday, February 19, 2008. http://www.nakedcapitalism.com/2008/02/term-auction-facility-confirmation-of.html
[4] [3] A resonder to 'Term Auction Facility: Confirmation of Financial Stress?' Naked Capitalism. Tuesday, February 19, 2008. http://www.nakedcapitalism.com/2008/02/term-auction-facility-confirmation-of.html
[5] Fed Pumps Further $630 Billion Into Financial System (Update2)
By Scott Lanman and Craig Torres. 29th September 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahwz_k5JvuB8&refer=home
The Term Auction Facility is an emergency provision implemented by the US Federal Reserve last December to address the freezing up of interbank lending during the so-called 'credit crisis'. The banks weren't - and aren't - using the existing 'discount window', which is the emergency facility traditionally provided. This was happening even after the Fed had dropped the rate charged. There was a lack of liquidity and something had to be done quickly.
"Lenders [were] hoarding cash and shunning their peers as if they were all lepers." [1] Banks had failed to mark their securities to market and there didn't appear to be any practical way to assess the real value of their assets and liabilities. Suspicions were very high after many years of unregulated/deregulated and lax lending practices. At that stage it appeared that all the good collateral of the banks had been pledged and what was left to lend against wasn't worth having.
"In the Federal Funds market the Fed, along with the Bank of Canada, Bank of England, the European Central Bank and the Swiss National Bank, decided to implement a new monetary instrument.... This program, known in the US as the Term Auction Facility, enables the Fed to auction a set amount of funds to depository institutions, against a wide range of collateral."[2] The financial press reassured the public that the 'collateral' was of good quality and had triple A ratings from respectable firms such as Standard and Poors and Moodys. The trouble was that the rating agencies themselves had given over to the free-for-all spirit and their standards had plummeted also.
In the middle of February this year - for the first time ever - "the banking system showed negative net non-borrowed reserves" in the US [3]. The banks were exploiting the Term Auction Facility as much as they could for a range of reasons. This was a sign of continuing distress in the financial market. The funding was cheaper than elsewhere provided. There were continuing difficulties raising funds from other sources. The collateral problems were bad and appeared to be getting worse under this new program. The bankers' greater reliance on government support resulted in the central banks increasing the amount of money they were using to fund the facility to the tune of hundreds of billions of dollars. The system lacks transparency. The public don't know who submitted the collateral. The banks are distorting their behaviour; they appear to have long begun to create Residential Mortgage-Backed Securities "and keeping them on the banks books as a quick way, in another liquidity squeeze like August [2007], to access ECB/FED liquidity." [4]
The trouble is that the assets involved in these auctions have still not been appropriately valued. The solvency of the institutions involved is unknown. The true situation appears to be coming to light only after the bank is formally declared bankrupt. The public are left liable and extremely vulnerable as the Fed and other central banks accrue more and more worthless or low-value collateral.
Last night the US Fed announced that TAF "will expand by $300 billion to $450 billion." [5] Under the circumstances described above this is, in effect, a massive bailout of these institutions by stealth.
“If all the bank loans were paid up, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial banks for our money. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible - but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.” - Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta
[1] Crisis may make 1929 look a 'walk in the park'. By Ambrose Evans-Pritchard. Last Updated: 11:02pm GMT 23/12/2007. http://www.telegraph.co.uk
[2] Term auction facility
From Wikipedia, on 29th September 2008
http://en.wikipedia.org/wiki/Term_auction_facility
[3] Term Auction Facility: Confirmation of Financial Stress? Tuesday, February 19, 2008. http://www.nakedcapitalism.com/2008/02/term-auction-facility-confirmation-of.html
[4] [3] A resonder to 'Term Auction Facility: Confirmation of Financial Stress?' Naked Capitalism. Tuesday, February 19, 2008. http://www.nakedcapitalism.com/2008/02/term-auction-facility-confirmation-of.html
[5] Fed Pumps Further $630 Billion Into Financial System (Update2)
By Scott Lanman and Craig Torres. 29th September 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahwz_k5JvuB8&refer=home
Monday, September 29, 2008
Crisis Commentary: Second Installment
I just posted the second installment on my crisis commentary. Again, I would appreciate any comments, since it still needs more work.
Thanks.
Thanks.
http://michaelperelman.wordpress.com/2008/09/30/crisis-commentary-second-installment/
What was it about 1995 and the US Federal Reserve?
1990 – 1992 era. The changes began then that led to the elimination of the reserve requirement.
1992 The Fed Reserve ratios were lowered.
1995 – The US Federal Reserve effectively eliminated the fractional reserve ratio. Banks were no longer required to back assets that largely corresponded with “broad money” (M3) with cash reserves. The consequence was that banks could effectively create money without limitation. From early 1994 to late 1996, most of the remaining reserve deposits disappeared. "This transformation of banking practices seems to have started small, but really picked up steam by 1996 and 1997, likely due to competitive pressures among banks; those banks that used these methods could easily out-compete those that did not."[1]
1995 – US Fed and other central banks printing money like confetti….It is reasonable to suppose that such a gigantic increase in money supply would produce price rises in assets, housing and commodities BUT consumer price inflation remained under control. Why? Rapid growth of India and China (source of cheap labour)? Internet and telecommunications revolution rapidly improved the cost structures of existing products? Labour-free productivity of manufacturing. The stepping up of the rate of environmental rape (mining of raw materials and forests) associated with industrial production? The WTO established.
1995 Dow First close above 5000. Stock Market Keynesianism. Never before had a US economic expansion become so dependent on the ascent of the stockmarket.
Mid 1990s – the collapse of the First Italian Republic. It involved large-scale criminal influence in government and originated as an American parapolitical operation.
1995 – 1999 – The vice president of the Bank of New York sets up illegal accounts to facilitate the movement of funds into and out of Russia. Her crimes of money laundering did not result in a sentencing for her.
1995 – 2001 – the dot com speculative bubble.
1990 – 2005 – doubling of the global workforce
1995 – 2005 – about 3.2 million US homeowners bought houses on the basis of subprime mortgages or similar credit terms
1995 – 2005 Global ‘Savings’?? Glut. “..a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders…” (Ben Bernanke in 2005)
[1] What (Really) Happened in 1995? How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World. By Aaron Krowne
Also see: ‘Made in U.S.A. 1995’ by Eric Janszen. March 22, 2006
http://www.itulip.com/forums/showthread.php?p=1495
1992 The Fed Reserve ratios were lowered.
1995 – The US Federal Reserve effectively eliminated the fractional reserve ratio. Banks were no longer required to back assets that largely corresponded with “broad money” (M3) with cash reserves. The consequence was that banks could effectively create money without limitation. From early 1994 to late 1996, most of the remaining reserve deposits disappeared. "This transformation of banking practices seems to have started small, but really picked up steam by 1996 and 1997, likely due to competitive pressures among banks; those banks that used these methods could easily out-compete those that did not."[1]
1995 – US Fed and other central banks printing money like confetti….It is reasonable to suppose that such a gigantic increase in money supply would produce price rises in assets, housing and commodities BUT consumer price inflation remained under control. Why? Rapid growth of India and China (source of cheap labour)? Internet and telecommunications revolution rapidly improved the cost structures of existing products? Labour-free productivity of manufacturing. The stepping up of the rate of environmental rape (mining of raw materials and forests) associated with industrial production? The WTO established.
1995 Dow First close above 5000. Stock Market Keynesianism. Never before had a US economic expansion become so dependent on the ascent of the stockmarket.
Mid 1990s – the collapse of the First Italian Republic. It involved large-scale criminal influence in government and originated as an American parapolitical operation.
1995 – 1999 – The vice president of the Bank of New York sets up illegal accounts to facilitate the movement of funds into and out of Russia. Her crimes of money laundering did not result in a sentencing for her.
1995 – 2001 – the dot com speculative bubble.
1990 – 2005 – doubling of the global workforce
1995 – 2005 – about 3.2 million US homeowners bought houses on the basis of subprime mortgages or similar credit terms
1995 – 2005 Global ‘Savings’?? Glut. “..a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders…” (Ben Bernanke in 2005)
[1] What (Really) Happened in 1995? How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World. By Aaron Krowne
Also see: ‘Made in U.S.A. 1995’ by Eric Janszen. March 22, 2006
http://www.itulip.com/forums/showthread.php?p=1495
Sunday, September 28, 2008
Bailout can WORSEN things: top US budget director.
The Washington Post reported the following a few days ago.
A financial bailout could worsen the crisis, be insufficient to restore trust and cost ‘a few’ billion dollars a year to administer said Peter R Orszag, US Congressional Budget Office Director, in his testimony before the House Budget Committee. The key question he said what “What are we buying and what are we paying for it?" Orszag feared that the bailout as it stands might reveal that the large financial corporations are inflating prices of assets on their books. “Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X's real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.” Such corporations "look solvent today only because it's kind of hidden” [but they] “actually are insolvent".
Here's what I don't understand: Because short-term lending by the banks had almost completely shut down Treasury is acting as a go-between in short-term lending between banks. "Instead of Bank A lending directly to Bank B, as is customary, Bank A [purportedly] no longer had confidence that Bank B could repay the loan. So Bank A would give the money to the Treasury, which issued a security that was put into the Federal Reserve, which then issued the cash to Bank B." [That action implies that the US Government is already guaranteeing the debt of insolvent firms; already bailing them out. Is that correct?]
Bailout Could Deepen Crisis, CBO Chief Says
Asset Sales May Lead to Write-Downs, Insolvencies, Orszag Tells Congress
By Frank Ahrens, Washington Post Staff Writer. Thursday, September 25, 2008; D04
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092402799_pf.html
A financial bailout could worsen the crisis, be insufficient to restore trust and cost ‘a few’ billion dollars a year to administer said Peter R Orszag, US Congressional Budget Office Director, in his testimony before the House Budget Committee. The key question he said what “What are we buying and what are we paying for it?" Orszag feared that the bailout as it stands might reveal that the large financial corporations are inflating prices of assets on their books. “Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X's real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.” Such corporations "look solvent today only because it's kind of hidden” [but they] “actually are insolvent".
Here's what I don't understand: Because short-term lending by the banks had almost completely shut down Treasury is acting as a go-between in short-term lending between banks. "Instead of Bank A lending directly to Bank B, as is customary, Bank A [purportedly] no longer had confidence that Bank B could repay the loan. So Bank A would give the money to the Treasury, which issued a security that was put into the Federal Reserve, which then issued the cash to Bank B." [That action implies that the US Government is already guaranteeing the debt of insolvent firms; already bailing them out. Is that correct?]
Bailout Could Deepen Crisis, CBO Chief Says
Asset Sales May Lead to Write-Downs, Insolvencies, Orszag Tells Congress
By Frank Ahrens, Washington Post Staff Writer. Thursday, September 25, 2008; D04
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092402799_pf.html
How to afford a new pair of trousers
No need to scrimp when money is short. Just grab a piece of grandma's quilt, cut out a rectangle, double it over and sew up the seams. Viola! A new pair of trousers.
Takes about half an hour on the sewing machine.
Saturday, September 27, 2008
Debate Post-Mortem: The Limits of Framelessness
Both McCain and Obama are effectively running against Bush, but neither is able to frame his argument in a coherent way. That is, we have criticisms of this policy or that one, but no general position that ties them together and makes them look like anything more than random corrections. McCain’s problem is obvious—he’s really running against his party (the “maverick” trope)—but what about Obama?
Republicans have put forward different frames over recent years, but two are central to actual policy: free-market economics and the unrestricted, hegemonic use of police and military power (“standing tall”, “keeping us safe”). You could say that the current financial crisis blows away the first and that Iraq discredited the second. So this is an opportunity for the Democrats to engage in a little frame replacement to their own advantage. Instead, what do we get?
Obama talks about the Iraq disaster in an apolitical fashion, as a simple error in judgment. As one who saw through the bs from the beginning, he claims to have superior judgment compared to someone like McCain. What’s missing, however, is how his rejection of Bush’s war reflects a broader position on military and foreign policy. No doubt he is afraid of being labeled “soft”, and this explains his reckless belligerence regarding Pakistan. Yet it would not be very difficult to construct a politically saleable alternative to the shoot’em up philosophy of Bush/McCain.
You’d think he would do better on the economic side. The lessons of the financial mess are straightforward and lend themselves to a reframing of the public role in directing the economy. Still, Obama goes only halfway. He talks repeatedly of the “failed philosophy of the last eight years”, but he says nothing about what the new philosophy should be.
A failure to frame is politically disabling on multiple levels. It cedes too much of the political turf from the outset, and does nothing to predispose the voters to support you. It means that every policy initiative has to start from zero, with no ideological headstart. Above all, it represents an abandonment of the leadership role of politics, the struggle to change the political center of gravity. If one side hammers relentlessly on its frames and the other talks about competence and judgment—well, we know what you get.
There is no evidence at this point that the Democrats are prepared to conduct a political fight in broad daylight to change the direction of this country.
Republicans have put forward different frames over recent years, but two are central to actual policy: free-market economics and the unrestricted, hegemonic use of police and military power (“standing tall”, “keeping us safe”). You could say that the current financial crisis blows away the first and that Iraq discredited the second. So this is an opportunity for the Democrats to engage in a little frame replacement to their own advantage. Instead, what do we get?
Obama talks about the Iraq disaster in an apolitical fashion, as a simple error in judgment. As one who saw through the bs from the beginning, he claims to have superior judgment compared to someone like McCain. What’s missing, however, is how his rejection of Bush’s war reflects a broader position on military and foreign policy. No doubt he is afraid of being labeled “soft”, and this explains his reckless belligerence regarding Pakistan. Yet it would not be very difficult to construct a politically saleable alternative to the shoot’em up philosophy of Bush/McCain.
You’d think he would do better on the economic side. The lessons of the financial mess are straightforward and lend themselves to a reframing of the public role in directing the economy. Still, Obama goes only halfway. He talks repeatedly of the “failed philosophy of the last eight years”, but he says nothing about what the new philosophy should be.
A failure to frame is politically disabling on multiple levels. It cedes too much of the political turf from the outset, and does nothing to predispose the voters to support you. It means that every policy initiative has to start from zero, with no ideological headstart. Above all, it represents an abandonment of the leadership role of politics, the struggle to change the political center of gravity. If one side hammers relentlessly on its frames and the other talks about competence and judgment—well, we know what you get.
There is no evidence at this point that the Democrats are prepared to conduct a political fight in broad daylight to change the direction of this country.
The Bailout and the Deficit Recycling Loop
I’ve been thinking mostly about the global portion of the loop—how the dollars we send abroad on the current account (and now, just a bit, on net private capital outflows) are returned to us—and its operation under the Paulson plan. The Fed/Treasury team is proposing to allow this recycling to proceed under an asset cleansing program: the Fed removes the bad assets from our creditors’ portfolios while the Treasury replaces them with nice, reliable T-bills. (Metaphor: TARP as a giant mollusk in the sea of finance.) So far so good.
But this is only part of the picture. The other part is the domestic sector. Our current account deficit says that, as a country, we consume about 6% more than we produce, where “consume” in this context means total demand and not just the household piece of it. So the recycling process has to actually get the money into the hands of those who will spend it. This means credit expansion of some form. To be more specific, capital spending is very weak at present, and households are now holding up the tent. They have been borrowing against largely fictitious real estate equity and, to a lesser extent, running up credit cards and drawing down savings. If the popping of the housing bubble and the retrenchment of consumer credit mean that these channels are no longer available, how do we keep the engines running?
Basically, there are two channels still open: fiscal deficits and further drawdowns of savings. In the case of the former, it is important to be able to identify how the deficits will enter the spending stream. I worry that much of the eleven-figure disbursement will simply keep financial institutions, now highly risk-averse, afloat. This maintains existing wealth for the small minority that holds most of it, but it doesn’t translate into effective demand. And eating up savings can go only so far. Say what you want, the asset bubble(s) promulgated by earlier rounds of recycling at least propped up domestic spending. I worry that, even if the bailout keeps the global loop in operation, it will not be able to reconnect it to the domestic loop. The result will be a monster recession.
But this is only part of the picture. The other part is the domestic sector. Our current account deficit says that, as a country, we consume about 6% more than we produce, where “consume” in this context means total demand and not just the household piece of it. So the recycling process has to actually get the money into the hands of those who will spend it. This means credit expansion of some form. To be more specific, capital spending is very weak at present, and households are now holding up the tent. They have been borrowing against largely fictitious real estate equity and, to a lesser extent, running up credit cards and drawing down savings. If the popping of the housing bubble and the retrenchment of consumer credit mean that these channels are no longer available, how do we keep the engines running?
Basically, there are two channels still open: fiscal deficits and further drawdowns of savings. In the case of the former, it is important to be able to identify how the deficits will enter the spending stream. I worry that much of the eleven-figure disbursement will simply keep financial institutions, now highly risk-averse, afloat. This maintains existing wealth for the small minority that holds most of it, but it doesn’t translate into effective demand. And eating up savings can go only so far. Say what you want, the asset bubble(s) promulgated by earlier rounds of recycling at least propped up domestic spending. I worry that, even if the bailout keeps the global loop in operation, it will not be able to reconnect it to the domestic loop. The result will be a monster recession.
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