Showing posts with label banking. Show all posts
Showing posts with label banking. Show all posts

Friday, October 28, 2011

Keep Your Eye On The Ball

In case you joined the parade of optimists thrilled by yesterday's step back from the brink by European banks, here's one of today's posts by Paul Krugman:


October 28, 2011, 8:09 am

Here We Go Again

European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at all. Spreads stay high, and maybe even start widening again.
Another day in the life.

Tuesday, October 25, 2011

Brussels Meeting Canceled

Tomorrow's meeting in Brussels of European Union Finance Ministers has been canceled. Apparently the ministers have been unable to craft a financial rescue package not only for Greece, but also for Italy and Spain. A meeting of EU leaders will go on as scheduled. The expectation seems to be that the prime ministers will work something out and provide direction to the finance ministers.

Doesn't sound good. The usual way in international negotiations is for functionaries and responsible ministers to work out the details and for the principals to meet and ceremoniously announce the resulting agreement. When the procedure is reversed, it doesn't bode well for agreement.

This is of interest to us because? The EU as a whole is a larger economy than our own and is our largest trading partner. Economic contraction in the Euro zone would be bad enough, but a crisis in the European banking system will inevitably spread to the US.

Cross your fingers that they will work it out. Don't, however, hold your breath.

Friday, October 14, 2011

What Does Government Do For Us?

I have been watching the Republican presidential debates with some sense of wonder. As in, I wonder what world the candidates inhabit.

When Ronald Reagan ran for president, he famously intoned: "government isn't the solution - government is the problem." The present batch of candidates takes this mantra to new levels.

It isn't true.

But we seem to have a national amnesia about the role of the federal government in fostering the degree of prosperity that we enjoy. The "Tea Party" and their adherents seem bent on destroying the structure that has built that prosperity.

An integral part of the attack on our general prosperity is an attack on the New Deal. This is nothing new. Republicans attacked the New Deal from the beginning and have been attempting to undo it ever since.

The attacks only began to achieve success in the late 1960's, after a generation came along with no personal memory of the Great Depression and the New Deal and no recollection of the poverty and backwardness of much of rural America before the New Deal.

I am old enough to have seen remnants of the poverty that preceded the New Deal and to have witnessed the transition to greater prosperity that the New Deal set in motion. Just last month I drove through rural Mississippi on highways built during the depression (my father worked on some of them), past schools built by the Works Progress Administration, along recreational waterways held in check by flood control projects. I drove past farms that wouldn't have electricity without the Rural Electrification Act of 1936.

Michel Hiltzik has published a timely book, The New Deal: A Modern History. Yesterday's edition of the on-line magazine, Slate, published a good review of the book and a summary, drawn from the book, of the New Deal's accomplishments. It is worth reading the review here.

It occurs to me that, by comparison to the visionaries who led America out of a very dark time in our history, today's Republicans have a cramped, crabby and very limited vision of our country.

But if we have eyes to see, here in Pamlico County, we see the New Deal at work. We have not been left to our own devices to recover from a major hurricane. Both as individuals and as a county and a state, we have been saved from total economic collapse by measures put in place by the New Deal. Without those measures, banks would have collapsed and even more jobs would have been lost.

Things could be a lot worse, and without the New Deal, they would be.

But the enduring accomplishment of the New Deal is that leaders of that effort had a vision of the future. That vision of Americans working together for progress and improvement dominated government planning and accomplishments for nearly half a century.

Let's not lose the vision.

Friday, August 5, 2011

Standard and Poor Showing

So Standard and Poor's has downgraded US long term debt.

That plainly represents a political judgment rather than an economic one. S&P explains it this way:
“In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.”

Pardon me if I don't genuflect toward the rating agency that gave a triple A rating to bundled sub prime mortgages. That mistake helped bring our entire economy to its knees. And, as Robert Reich points out here, if S&P had done its job and accurately assessed the risk, the bubble wouldn't have been so large and so destructive.

The downgrade could be very bad news for every American with any debt. It is a direct consequence of S&P's previous failure, coupled with irresponsible Republican intransigence.

We won't know until Monday how this news will affect the market for US Treasury bills, notes and bonds, all of which have been trading at very low interest rates. We also won't know until the Asian markets open Sunday evening (our time) how equity markets will react.

Monday, July 25, 2011

Debt Ceiling Kabuki

Here's what Brad DeLong thinks we should do about the debt ceiling: http://delong.typepad.com/sdj/2011/07/what-to-do-about-the-debt-ceiling.html

I like it. It's an example of the TACAMO principal (Take Charge and March Out).

There's another principal the Republican intransigents should consider if they get their way: you broke it, it's yours. In other words, if they succeed, everything that goes wrong with the economy in the next year and a half belongs to them! Be careful what you wish for, lest you get it (the Midas Principal).

Thursday, July 21, 2011

Debt Ceiling Analysis

What will happen if Congress doesn't raise the debt ceiling?

One analysis was provided today in an e-mail from Congressman Walter Jones.

"The House Republican leadership recently invited Jerome Powell - former Undersecretary of Treasury in the George H.W. Bush Administration - to present members of Congress with a nonpartisan debt limit analysis, and to present a fact-based look at what consequences our country will be facing without a resolution to the current budget crisis."

Actually, I don't agree that we have a current budget crisis. What we have is an artificially-induced political crisis over a matter that should be treated as a routine housekeeping matter. This is what President George W. Bush's Director of the Office of Management and Budget, Mitch Daniels, called the debt limit. He was right.
Link
Jerome Powell, George H. W. Bush's Undersecretary of the Treasury, provides a debt ceiling analysis here. Powell's analysis makes it clear that the consequences of a failure to increase the debt limit could be catastrophic. He describes the risks as serious. In my view, he understates the risk, because he doesn't address the cascading effects of resulting job losses, interest rate increases and contraction of the economy likely to result.

So read the analysis, but bear in mind the consequences of default could be very much worse.

Wednesday, July 20, 2011

Annoying (and Erroneous) Bloviations - Summary

Relating to several of my recent posts, economist Jared Bernstein today brings clarity to many issues in his post, "Roundup of Deeply Annoying Stuff."

I particularly like his analogy of the sinking boat. I may try to rework that one for Pamlico Sound.

Saturday, July 16, 2011

Paper Money: Let 10,000 Banknotes Bloom

If you are a businessman, how would you like to operate in a country with 10,000 different kinds of banknotes?

Sounds pretty chaotic, doesn't it? How would you know which banknotes were issued by sound banks and which were not?

That's what we had in the United States in 1860. Samuel P. Chase, Secretary of the Treasury during the Civil War, brought some order to that system.

Job Squeeze

I keep hearing it said that "government jobs aren't real jobs," that in fact, some assert, government jobs squeeze out private sector employment and actually hurt the economy.

Really?

If people who live in Eastern North Carolina really believe that, they should petition their representatives and senators to close down the Marine Bases at Cherry Point and Camp Lejeune, the Seymour Johnson Air Force Base at Goldsboro, the Army Base at Fort Bragg, state funded institutions such as ECU, and on and on. In Raleigh, the legislature's new budget has cut the funding for the capitol police in half. Can't we do more?

One of the mysteries of political discourse is the ability of participants to hold conflicting views at the same time and actually act on them. This requires a skill at intellectual compartmentalization that I never acquired.

By the way, those who serve in our military actually hold government jobs. When they walk into Wal-Mart or Target, their money looks like anyone else's. Their checking and savings deposits have the same economic effect on their community as anyone else's. And if they lose their jobs through a reduction in force, it contracts the economy just as much as if they had been working for General Motors or Google.

We hear a lot about the GDP. What actually goes into the GDP? GDP equals private consumption and investment, plus net exports, plus gov’t spending. It's as simple as that. Reduce government spending without increasing private consumption and investment, and the economy will contract.

The reason private consumption isn't increasing is that people have no money. The reason companies aren't investing in increased production capacity is that they have ample excess capacity already and can't see a near term increase in customers.

This is elementary business plan stuff. Businessmen (unless they have grown soft in the head) make business decisions based on reality, not on whether the president or members of Congress have hurt their feelings.

Economist Jared Bernstein has a good question and answer posting on his blog today.

In today's circumstances, any reduction in federal spending can only contract the economy. To be sure, some reductions would be worse than others, but right now any reduction will be bad.

As we await news from Washington on increasing the debt limit, I have my fingers crossed that the outcome will be merely very bad (reducing spending when we really need a stimulus) rather than disastrous (going into default).

Friday, July 15, 2011

Debt Ceiling

We wouldn't be talking about the debt ceiling if President Clinton's budgeting policies had continued. There would be no debt.

Publicly held debt of the United States right now is about 63% of GDP. Most US households would be happy if their debt, including mortgage, car loan, etc. were no more than 63% of annual income.

If the US defaults on its obligations, and you owe any money to anyone, you can expect your payments to increase, because one or more of your payments is likely pegged to US T-bills. This will drag our economy down even more.

Last week a columnist for the News and Observer wrote in glowing terms about the US economy of 1834. If that's where we are going, believe me - you won't like it. Where are you going to stable your horses?

Monday, July 11, 2011

Morality and Morality Plays

My favorite Nobel Laureate in economics, Paul Krugman, is fond of saying, "economics is not a morality play."

Late last year, he explained exactly what he means: "economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work."

Republicans who claim to be good Christians will certainly recognize the principle as stated in Matthew 5:45: "That ye may be the children of your Father which is in heaven: for he maketh his sun to rise on the evil and on the good, and sendeth rain on the just and on the unjust." In fact, the Book of Job in the Hebrew Bible (Old Testament) is devoted entirely to this theological problem.

This is not the same as saying that there are no moral issues involved with economics. Reinhold Niebuhr, the great 20th century American theologian, in his 1932 book Moral Man and Immoral Society explained: "human society will never escape the problem of the equitable distribution of the physical and cultural goods which provide for the preservation and fulfillment of human life." A few pages later, he explains the particular aspects of our own history and that of democracy in general that generate moral complexity: "...the creeds and institutions of democracy have never become fully divorced from the special interests of the commercial classes who conceived and developed them. It was their interest to destroy political restraint upon economic activity, and they therefore weakened the authority of the state and made it more pliant to their needs....[therefore] the economic, rather than the political and military, power has become the significant coercive force of modern society."

Franklin Delano Roosevelt was making much the same point in 1936 when he said: "We know now that Government by organized money is just as dangerous as Government by organized mob." And he did not yet have to deal with the power of today's multinational corporations who seem answerable to no national power.

But when Krugman says that an economic system must have a certain amount of inequality in order to work, we are still left to wonder what is meant by an economic system that works. Works for whom? Works to what end?

These are fundamentally moral, not technical, questions.

Sunday, July 10, 2011

What's Wrong With The Economy Today?

Economist Jared Bernstein has posted an analysis of the economy entitled "So Really, What's Wrong With This Economy?"

I promise - Professor Bernstein hasn't been reading my blog. But regular readers will recognize most of the themes. That's because "saltwater economists" are in agreement on what's wrong and what needs to be done about it.

We are also pessimistic that our government will do the right thing.

Saturday, July 9, 2011

Financial Regulation: Who and How?

One of the biggest challenges in government at every level is how to regulate complex economic and industrial institutions without putting the fox in charge of the hen house.

The answer, as it has been since the time of the Greek philosophers, is to have people in charge who combine knowledge and ability with integrity. The ideal of the "philosopher king."

More easily said than done.

You may not think of the Federal Deposit Insurance Corporation (FDIC) as a likely place to find Linka philosopher-king. Think again.

Joe Nocera, a financial reporter and op-ed writer for the New York Times has just published an exit interview with Sheila Bair, who just completed her five-year term as head of FDIC. His article is well worth reading.

The comments by readers are also worth reading.

The article answers a lot of questions about how we got where we are with the economy and who might have been able to keep things from being as bad as they are.

Sunday, June 26, 2011

Orwellian Political Economy

I am not an economist, though I once stayed at a Holiday Inn Express.

Joking aside, I did study International Economics as a part of my studies in International Law and Diplomacy in the late 1960's. But the core of my academic background was political science and history.

It was a time when public disputes centered around issues of war and peace, civil rights, women's rights, not about economics. Among academic economists there were some eccentric scholars calling for a return to the gold standard and some calling for flexible exchange rates. But in general, there was a widespread Keynesian consensus.

At that time, we had fixed exchange rates under the international payments system established at Bretton Woods near the end of World War II and designed (by Keynes) mainly to ensure economic recovery of both winners and losers of that conflict. Internationally, we had a gold-exchange standard and issues of "balance of payments" were described in terms of gold flow among nations.

It was a period of economic prosperity for both management and labor, with CEO's earning about 30 to 40 times the wages of the lowest paid employees. Pension benefits were fixed. Workers were responsible for doing their jobs and management took care of pensions and other benefits.

That all changed in the 1970's. Nixon abolished the gold exchange standard and the US adopted flexible exchange rates. Companies switched to "defined contribution" pensions rather than "defined benefit" pensions. After Nixon, the Federal Government began stripping away the financial controls that had maintained financial stability for more than three decades.

I recently decided to read up on current economic thinking. In the days of the internet, there is no better way to follow the discourse than to read economist's blogs.

I have had to learn or relearn such things as liquidity preference, propensity to consume, propensity to save, the problems of the zero bound, and IS and LM curves.

I also have learned the difference between "saltwater economists" [a school to which I adhere] and "freshwater economists." And it has become clear that when communicating with each other, economists can be a very sarcastic bunch of scholars.

Mark Thoma, a professor of economics at University of Oregon, recently started a thread on his blog dealing with Investment Saving/Liquidity preference Money supply issues. The discussion veered into the issue of "confidence" and the lack of clarity as to what the term means.

One participant, identified as "stunney," contributed the following:

I think that among not just billionaires, but multimillionaires in general, confidence is pretty high right now. In particular, they're confident that the financial crisis will be borne by the lower echelons, and that capitalism is being made safer and safer for unbridled rapacity.

They're also confident a large reserve army of unemployed labor will persist for a long time, ensuring that downward pressure on wages will not be relieved by any silly jobs program or other needed public investment

Their confidence that the massive military/industrial/national security expenditures of recent decades will continue is high.

Plutocratic confidence that trade agreements will be focused on making it as easy as possible to ruthlessly exploit cheap labor oversees without having to worry about workplace safety or environmental nonsense, while cracking down on foreign competitors via enforcement of intellectual property claims, whining about state subsidies, or whining about competitors' non-compliance with US regulatory standards.

Finally, they're confident that the socialistic insanity of Social Security, Medicare, and other forms of coddling US citizens will be progressively dismantled so that the richest can slave-drive the rest with utter abandon and, indeed, get them to vote for ever more savage forms of their own enslavement, abasement, degradation, and pauperization.

"Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future...

http://youtu.be/-YXWl6i2GBg

WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH!

Reply Sunday, June 19, 2011 at 11:36 A

The reference, of course, is to George Orwell's novel 1984.

Tuesday, June 7, 2011

Nobel Laureate Not Good Enough for Republicans

Two days ago, Peter Diamond, a Nobel Laureate in economics, appointed by President Obama to a vacant seat on the Federal Reserve Board, withdrew his nomination. His statement explained why. In a nutshell, Republicans don't want someone on the FED who is expert in the economics of employment.

Why does the president want an expert in employment economics on the FED? Because one of the statutory responsibilities of the FED is to take measures promoting full employment. No economist is better qualified to figure out how best to do that than Peter Diamond.

Senator Shelby of Alabama has been Diamond's main obstacle. Senator Shelby is not unintelligent. He is, it seems, intelligent enough to know which side of his bread the butter is on and who is buttering it. And it isn't unemployed citizens of Alabama or anywhere else in America.

Time Magazine's Michael Grunwald has a pertinent observation here.

Monday, June 6, 2011

Goals of the Wealthy and Powerful

I've been trying to make rational sense of the adamant Republican opposition to any measures that might actually ameliorate the economic distress of ordinary people. I've been looking for an explanation other than their contempt for people who work for a living.

Even a political party whose central organizing principal seems to be the welfare of the top 1% of the economic strata might be expected to worry about the economy as a whole, but that doesn't seem to be the case. I have had a dark suspicion that it is all about partisan manipulation: wreck the economy and blame the democrats.

Maybe not.

Here is a much simpler explanation, and one with deep roots in history.

Check it out.Link

Sunday, June 5, 2011

Debt Problem?

Suppose you could borrow money for ten years at a real interest rate of less than one percent? Even better, suppose you could borrow money for five years at an interest rate of less than zero? In other words, someone will pay you for you to borrow their money?

You'd probably think about borrowing that money and investing it in measures to improve your future wealth.

Strange as it seems, the US Treasury's real interest rate paid on inflation-protected securities is less than one percent for ten years and less than zero percent for five years. So why not borrow more at those rates and use the funds to stimulate jobs and reinvigorate the economy?

Ask the Republicans.

Is this what they mean by running the government like a business?

Friday, June 3, 2011

Jobs, Jobs, Jobs

Today's employment news isn't good.

Unemployment is up to 9.1%.

I hate to be a pessimist, but I'm not surprised. The stimulus plan (ARRA) wasn't big enough, and included too many tax reductions in lieu of direct government expenditures.

To understand why, you need to be familiar with three concepts:
A. Liquidity trap. That is when our national monetary authority reduced short term interest to zero, but banks aren't lending and companies aren't borrowing. We are in a liquidity trap. There are many reasons for this - companies, for example, aren't investing because they have no expectation that new customers will suddenly appear. Another reason is:
B. Liquidity preference. In uncertain economic times, companies prefer to hold liquid assets (that can be readily converted to money, like bonds) rather than illiquid assets, like real estate and other commodities;
C. Aggregate Demand. Classical economists have believed for nearly two centuries that there will never be an overall shortage of aggregate demand. Time and again they are proven wrong, but the belief persists. Our aggregate demand is way down because we have the lowest percentage of the population employed since the great depression.

The reason our recovery is stalled is that, in a liquidity trap only government expenditures have a realistic chance of overcoming liquidity preference, improving aggregate demand for goods and services, and therefore stimulating businesses to hire workers and invest in increasing productive capacity.

Businesses aren't refusing to invest because Democrats have hurt their feelings, as some seem to suggest.

Friday, May 20, 2011

Left Behind

I gather from reading Doonesbury [should that be renamed "Doomsbury?"] that sometime tomorrow the rapture is supposed to happen. If I have the right idea, the faithful are supposed to be whisked away to paradise while the rest of us stay here.

I gather that two novelists, Tim LaHaye and Jerry Jenkins, have written sixteen best-selling novels on this theme.

I have just one question.

Where did they put their money?

Wednesday, May 11, 2011

Economists

"An economist's guess is liable to be as good as anybody else's. "

Will Rogers

I think Will was too kind to the economists of his day. As of his death in 1936, none of the neoclassical economists had figured out how it came about that the economy had stabilized at a low utilization of economic resources. It took John Maynard Keynes to figure that out, and his General Theory wasn't published until after Rogers' fatal airplane crash at Point Barrow.

Here is what Keynes had to say about economists:

"
But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil."

I'm not convinced that even Keynes got this right. The power of vested interests, when coupled with the writings of defunct economists, amplified by "voices in the air" heard only by madmen in authority, can be very powerful, indeed. Present concerns about the nonexistent "debt crisis" and the imagined specter of "inflation" and "bond ratings" are examples. It's like relying on Elwood P. Dowd's conversations with Harvey for economic advice.

Even in Keynes' day, the intellectual influence of defunct neoclassical economists on policy led the Roosevelt administration to prematurely attempt to balance the budget in 1937, setting off a second dip of the Great Depression.

I was there.

It took five more years and immense war spending to dig out of that hole. Let's not go there again.