FED to Purchase Commercial Paper as an Offset to the Credit Crunch

Today’s 3-month LIBOR stands at 4.32% while yield on 3-month Treasury bills is less than 0.8%. While we thought Friday’s bail-out legislation would alleviate the credit crunch – the TED spread still exceeds 3.5%. Dean Baker says the FED has found a plan B:

It turns out that the Fed can buy commercial paper directly from non-financial corporations needing credit to maintain operations. This will keep the credit markets working even if the zombie banks aren't up to the task. In other words, the threat of a complete meltdown in the absence of a bailout was nonsense and the media once again got taken for a ride by the Bush administration.

The Federal Reserve reports interest rates both for 3-month nonfinancial commercial paper and for 3-month financial commercial paper. As of October 1 (latest date reported), the interest rate on the former (what Dean seems to be discussing) was only 2.27% while the interest rate on financial commercial paper was 3.81%.

The NY Times article that Dean relies on states:

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

Given the spread between interest rates on financial commercial paper and nonfinancial commercial paper, it would be interesting to see which sector the FED’s plan B will focus on.

Crisis Commentary Overview

I have tried to integrate the commentaries into a coherent whole, before I go on to new ones.

Some people have complained about the Word format. I tried to use open office, but it lost all my formatting. Help will be appreciated

http://michaelperelman.wordpress.com/2008/10/07/crisis-commentary-overview/

Me on Italian TV

So, folks, just back from two conferences in Europe. The first one, in Urbino, Italy, on Dynamic Modeling in Economics and Finance, was held in honor of me turning 60. There was a report from it that appeared on Italian TV. The announcer described me as "volcanic," and the co-organizer described some of my early work on bubbles and crashes as relevant to the current situation (accurate). One of the participants, Frank Westerhoff from Germany, presented a model discussed last week in a NYTimes column by Mark Buchanan on Tobin taxes stabilizing speculative markets. The link to see about the conference and get to the video of the Italian TV story is
http://www.econ.uniurb.it/bischi/MDEF2008.html.

McCain’s Health Care for the Well To Do But Maybe Not for You

Paul Krugman makes one definitive claim and speculates on McCain’s plan for Medicare:

Conservative Republicans still hate Medicare, and would kill it if they could — in fact, they tried to gut it during the Clinton years (that’s what the 1995 shutdown of the government was all about). But so far they haven’t been able to pull that off. So John McCain wants to destroy the health insurance of nonelderly Americans instead. Most Americans under 65 currently get health insurance through their employers. That’s largely because the tax code favors such insurance: your employer’s contribution to insurance premiums isn’t considered taxable income, as long as the employer’s health plan follows certain rules. In particular, the same plan has to be available to all employees, regardless of the size of their paycheck or the state of their health. This system does a fairly effective job of protecting those it reaches, but it leaves many Americans out in the cold. Workers whose employers don’t offer coverage are forced to seek individual health insurance, often in vain. For one thing, insurance companies offering “nongroup” coverage generally refuse to cover anyone with a pre-existing medical condition. And individual insurance is very expensive, because insurers spend large sums weeding out “high-risk” applicants — that is, anyone who seems likely to actually need the insurance.

The speculation had to do with Palin’s closing remarks during the VP debate and her tribute to Ronald Reagan. Laura Meckler assures us that this speculation is well founded:

John McCain would pay for his health plan with major reductions to Medicare and Medicaid, a top aide said, in a move that independent analysts estimate could result in cuts of $1.3 trillion over 10 years to the government programs. The Republican presidential nominee has said little about the proposed cuts, but they are needed to keep his health-care plan "budget neutral," as he has promised. The McCain campaign hasn't given a specific figure for the cuts, but didn't dispute the analysts' estimate.

As a member of the deficit hawk wing of the Democratic Party, I think fiscal neutrality is a good thing. But I also think this type of a move is really bad policy from an income distribution perspective.

Update: Jonathan Cohn does a nice job of explaining how the McCain position has evolved over time:

First McCain said he would elimin[at]e the entire tax deduction for health insurance, in order to pay for his new tax credit. This would have paid for itself, but it would have done so by raising taxes on a lot of people. Then McCain decided he was keeping part of the deduction after all. While he would be raising taxes on a very few people, he'd be lowering them for most. Of course, that would also have meant running much bigger deficits. Now McCain is saying, no, no, he's not going to increase the deficit with his health care plan. Instead, he's going to pay for it by cutting Medicare and Medicaid--which, at the levels he's discussing, might seriously weaken the program. I can't wait to see what they come up with next.

The usual GOP playbook – playing fast and loose with how their fiscal proposals are supposed to be paid for (if at all).

Economic and Social Importance of the Eight-Hour Movement

The opposition of the employing class to this measure has not risen so much from an aversion to improving the laborer's condition as from a misconception of their economic relation to the community, and especially to the laboring classes.... For nearly a century the colleges have taught, and the employing classes have believed, that an increase of wages always means a decrease of profits—that their income moves inversely with that of the laborer's, or, in the language of the economic instructors, that "profits rise as wages fall, and fall as wages rise."

This proposition has been periodically discussed for more than three-quarters of a century. The characteristic feature of the controversy is that the measure has always been favored by the laboring class and their sympathizers, and as uniformly opposed by the statesmen, economists and employers. This opposition, however, is not, as is commonly assumed, all due to abnormal selfishness on the part of the employing class. The average employer is not more unsympathetic and indifferent to the welfare of society than is any other citizen. There is nothing in the mere fact of being an employer that necessarily destroys one's interest in the social well-being of others. The opposition of the employing class to this measure has not risen so much from an aversion to improving the laborer's condition as from a misconception of their economic relation to the community, and especially to the laboring classes. Nor are they responsible for this misconception; but as we have elsewhere shown, it is mainly due to the erroneous teachings of political economy. For nearly a century the colleges have taught, and the employing classes have believed, that an increase of wages always means a decrease of profits—that their income moves inversely with that of the laborer's, or, in the language of the economic instructors, that "profits rise as wages fall, and fall as wages rise." With this conviction it is not surprising that they should regard every effort to improve the laborer's economic and social condition— which always involves an increase of wages—as inimical to their interests.

From this point of view the more clearly it could be shown that a reduction of the hours of labor would tend to increase wages, the more imperative seemed the necessity for the employers to oppose it. This attitude has been further strengthened by the fact that hitherto the subject has been presented on sympathetic and philanthropic rather than economic grounds. Appeals to sentiment rather than to science have been made for it. The employing class have been asked to grant a reduction of the hours of labor, not as an act of wise statesmanship, but as a boon to the laborer, out of sympathy for the "unfortunate classes." To this they have with some degree of consistency replied, that "factories are business and not charitable institutions," and have accordingly resisted all efforts in this direction as an unwarranted attempt to compel them to make involuntary contributions to the laborers—to force them to give something for nothing—all of which they regard as a violation of their rights as free citizens. In short, through the influence of these conclusions they have come to regard the labor movement as an unwarranted agitation against the best interests both of the employing class and the whole community.

This view of the subject being generally shared by the leading journalists, essayists and statesmen, who reflect the teachings of the colleges—we naturally find the daily press, the magazines and the legislatures averse to every proposition for reducing the hours of labor. Among the objections usually urged against this measure are, that it would increase dissipation among the masses, that it would diminish production, and make smaller profits, and lower wages or higher prices inevitable, and thus be injurious alike to the employer, the laborer and the consumer. If these views were correct, the opposition which they incite to this measure would be entirely warranted, and the movement for the general establishment of an eight-hour system should be abandoned. But are they correct? In order to give a comprehensive answer to this question, the subject must be removed from the domain of philanthropy to that of philosophy, and science must be substituted for sentiment as the guide to action.

Power is never having to say you are sorry

Citing a Greenspan interview: "The majority of lawyers, in my experience, seek to regulate -- that is, to contain certain activities with little weight given to the lost benefits of such activities," he says. "The question is: What do you lose? In this case, a very valuable instrument [credit default swaps, the derivatives at the core of the current mess] for the diminution of systemic risk. You can stop the system dead and eliminate speculative losses. But you will also get significantly reduced economic activity and ultimately lower standards of living."

Barrett, Paul. 2008. "Wall Street Staggers." Business Week (17 September): pp.

Recent Interview on the Crisis

I was on Realnews yesterday. The interview begins with a montage of congressional talks on the bailout, then a discussion with me for the final 3 minutes or so.

LINK to video

Economic and Social Importance of the Eight-Hour Movement

"There is nothing new or novel in the proposition for a general reduction of the hours of labor."

There is nothing new or novel in the proposition for a general reduction of the hours of labor. It introduces no new principle into society. It proposes no arbitrary interference with economic and social relations; it disturbs no existing interests; it does not change the relation of buyers to sellers, or laborers to employers; in fact, it does not in any way arbitrarily disturb existing economic and social institutions. All it asks for is that the laborer shall have more leisure; that the development of his social character may be commensurate with the increase of his productive power and the comfort and culture of his home may grow apace with the wealth-cheapening capacity of the factory.

4th Crisis Commentary: Capitalism 101

This commentary deals more with the nature of the efficiency of market investment.

commentary-4

Have you no sense of decency, madam Governor, at long last? Have you left no sense of decency?

by the Sandwichman

Senator Joe McCarthy: I perform this unpleasant task because the American people are entitled to have the coldly documented history of this man who says, "I want to be your President."

Strangely, Alger -- I mean, Adlai [laughter] -- But let's move on to another part of the jigsaw puzzle. Now, while you think -- while you may think there can be no connection between the debonair Democratic candidate and a dilapidated Massachusetts barn, I want to show you a picture of this barn and explain the connection.

Here is the outside of the barn. Give me the pictures of the inside, if you will. Here is the outside of the barn up at Lee, Massachusetts. It looks as though it couldn't house a farmer's cow or goat from the outside. Here's the inside: a beautifully panelled conference room with maps of the Soviet Union. Well, in what way does Stevenson tie up with that?

My -- my investigators went out and took pictures of the barn after we had been tipped off of what was in it -- tipped off that there was in this barn all the missing documents from the Communist front -- IPR -- the IPR which has been named by the McCarran Committee -- named before the McCarran Committee as a coverup for Communist espionage.

Now, let's take a look at a photostat of a document taken from the Massachusetts barn -- one of those documents which was never supposed to see the light of day. Rather interesting it is. This is a document which shows that Alger Hiss and Frank Coe recommended Adlai Stevenson to the Mount Tremblant Conference which was called for the purpose of establishing foreign policy (postwar foreign policy) in Asia. And, as you know, Alger Hiss is a convicted traitor. Frank Coe has been named under oath before congressional committees seven times as a member of the Communist Party. Why? Why do Hiss and Coe find that Adlai Stevenson is the man they want representing them at this conference? I don't know. Perhaps Adlai knows.

The Second Shoe, Part II

by the Sandwichman

"I hate to sound like a Marxist about this, but…" -- Doug Muzzo, Political Science Professor, Baruch College, commenting on Michael Bloomberg’s decision to seek a third term as mayor of New York City.

Hate it or not, in the context of a really, really big economic crisis, making sense of the conjuncture may indeed require that we occasionally "sound like a Marxist."

In his introduction to the 1891 edition of Marx's Wage Labor and Capital, Frederick Engels stressed the importance of the distinction that Marx subsequently made (years after writing WL&C) between labor and labor power. Engels called this distinction, "one of the most important points in the whole of political economy."

Engels framed his discussion of this most important point by remarking on the relationship between political economy and book-keeping:

Classical political economy took over from industrial practice the current conception of the manufacturer, that he buys and pays for the labor of his workers. This conception had been quite adequate for the business needs, the book-keeping and price calculations of the manufacturer. But, naively transferred to political economy, it produced there really wondrous errors and confusions.

Twenty-six years later, on the eve of the Russian Revolution these "wondrous errors and confusions" had been miraculously resolved, at least in the eager imagination of V.I. Lenin:

The accounting and control necessary for [the socialization of industry] have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.

Nothing had changed. Book-keeping still offered a wondrously erroneous and confused approach to political economy. Lenin simply didn’t know what he was talking about.

Then in the 1930s along came Oskar Lange and Ludwig von Mises and their debate about economic calculation under socialism. Lange won the debate at the time -- in theory. But, with the collapse of the Soviet system in the early 1990s, von Mises came to be seen as the winner on the ground. The dysfunctional Soviet accounting system, inspired by Lange’s arguments, had played an important role in that collapse. The unspoken assumption is that it was the Langian amendments to the accounting system -- not some intrinsic flaw in accounting-in-general -- that led to that collapse.

The joker in this deck is that the calculation debate revolved around comparing centralized state planning with some hypothetical competitive market. There is no such thing. In the real world, domination of markets by a few key players (bond rating agencies, the Federal Reserve, banks too-big-to-fail) and the principal-agent problem engendered by the separation between corporate shareholder ownership and management render the competitive scenario moot.

Oskar Lange wasn't alone in recognizing how the latter separation distorted economic incentives. Adolph Berle and Gardiner Means stipulated that the separation of risk and control in the modern corporation left a choice between conservatively protecting the assets of shareholders but thereby ['possibly'] inhibiting enterprise or granting free rein to the controlling group and risking "corporate oligarchy" and "corporate plundering". Berle and Means’s analysis was influential in establishing the securities regulatory policies of the Roosevelt New Deal. And guess what? The deregulation mania of the last three decades did indeed unleash enterprise, oligarchy and plundering.

But there’s no returning to the New Deal regulatory security blanket. In offering their fixes of financial regulation, on the one hand, and socialist calculation, on the other, Berle and Means and Oskar Lange ignored the old critique of political economy Engels had highlighted.

"Labor" may be a perfectly coherent book-keeping category from the limited perspective of the individual firm, but it is the source of error and confusion when brought over into political economy. National economic statistics rely heavily on the collection and collation of firm-level data based on accounting conventions. If firm-level data are silent on social costs than so will be national statistics.

Soviet accounting failed because state owned enterprises carried unsold goods on their books at official prices. It made no difference whether those goods were even salable. That created a perverse managerial incentive to produce shoddy goods.

Capitalist accounting fails because private firms are oblivious to the social cost of their labor and raw materials inputs. Those 'inputs' include byproducts of waste, pollution and worker health impacts. That has created a perverse managerial incentive to subsidize their input costs through off-the-book social and environmental "externalites".

The capitalist accounting fault is the mirror image of the Soviet one but the end result is the same. Accounting incentives encourage managers to count the destruction of value in the wider world as a plus for their own narrow enterprises.

Next: Accounting for labor power

The unemployed, the gambler and the whore

by the Sandwichman

I'm sure I'm not the only male in America who, when Palin dropped her first wink, sat up a little straighter on the couch and said, "Hey, I think she just winked at me."

"The 'keep smiling' on the job market adopts the behavior of the whore who, on the love market, picks up someone with a smile." -- Walter Benjamin, The Arcades Project

In the past decade, he has played on Mississippi riverboats, on Indian land, in Caribbean craps pits and along the length of the Las Vegas Strip. Back in 2005 he joined a group of journalists at a magazine-industry conference in Puerto Rico, offering betting strategy on request. "Enjoying craps opens up a window on a central thread constant in John's life," says John Weaver, McCain's former chief strategist, who followed him to many a casino.

"The capitalist who gives himself over to fate at the gaming table is replicating in his leisure his activity of gambling on the stock market during the 'work' day, but this parallel is for Benjamin less revealing than the characteristic 'futility, the emptiness, the inability to complete something' which connects the gambler and the machine laborer..." -- Susan Buck-Morss, "The Flaneur, the Sandwichman and the Whore"

Jobs are vanishing at the fastest pace in more than five years with pink slips likely to keep stacking higher in the months ahead, an urgent signal the country may be careening toward a deep and painful recession just as Americans prepare to elect a new president.

"The closer work comes to prostitution, the more inviting it is to describe prostitution as work -- as has long been true in the argot of prostitutes. The convergence here proceeds with giant steps under the sign of unemployment; the 'keep smiling' on the job market adopts the behavior of the whore who, on the love market, picks up someone with a smile." -- Walter Benjamin, The Arcades Project

Key words: unemployed, gambler, whore. Google the title of this posting and at the top of the list is a JSTOR file of Susan Buck-Morss's 1986 New German Critique essay, "The Flaneur, the Sandwichman and the Whore: The Politics of Loitering." This is not some clever google-bomb. It simply reflects that the deep connection between financial speculation, John McCain's craps addiction, unemployment and Sarah Palin's ostentatious winking is nothing new.

Meanwhile, A Lube Job

While attention was elsewhere, congress voted to give lend GM, Ford and Chrysler a $25B bailout all their own. I can remember a time not so long ago when that would have been considered real money. Critics protest: why should we prop up Detroit? What about Toyota and Honda, for instance: they produce in this country too, no?

But this misses the point. Toyota and Honda don’t need the money; they’ve been designing and building fuel-efficient vehicles for years. We should reward the Big 3 for binging on SUV’s and starving their research engineers.

It’s Not Over

It’s official: Henry Paulson is now authorized to begin shelling out the first tranche in his $700B plan to refloat financial markets. Don’t pull your money out from under your mattress just yet, however.

1. This is just a beginning. The writedowns in the mortgage market are estimated at $2 trillion and the bubble is still unwinding. The losses in derivative assets will be greater still. The bailout buys time but it does not constitute a solution.

2. The problem of pricing assets will be enormous. There is a technical problem, of course, in determining the price of something that no one currently bids for, but a deeper issue lurks. The plan was sold on the basis of highly ambiguous wording. It was stated for public consumption that the only problem is liquidity, and that the Fed/Treasury can solve it by offering to buy assets at their hold-to-maturity value. Everyone knows, however, that the real problem is solvency, and that the unspoken intention is to overpay in order to slip cash to players who might otherwise go under. No doubt it is possible to do this quietly, a few billion at a time, like the US military does in Iraq, but this is not big enough or fast enough to rescue the markets. There will need to be big, big overpayments, and in their search for congressional votes the plan’s backers couldn’t hope to ask for such a mandate. This means that everyone connected with the operation will be looking over their shoulders, worrying that, if they follow the unstated intent of the law, they will be held personally accountable.

But look on the bright side: mental illness will now be covered under more private health insurance plans (for those dwindling few that have them), and small timber-dependent communities out here in the Pacific northwest will be able to keep their schools open. So the bill will have some successes to crow about.

What Would a Scientific Economics Look Like?

This is the title of piece of mine just published in the Post-Autistic Economics Review. I happen to be a fan of science (I’m so pre-postmodern) and would like economics to move in that direction. Let me know what you think.