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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for October 10th, 2008

Re: FDIC Emergency Idea

Posted by WARREN MOSLER on 10th October 2008

(email exchange)

Yes!

“There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.”

This presumably can include Fed deposits at member banks, which opens the door for Fed unsecured lending which is currently illegal.

Now the trick is to get the word to the right people at Treasury!

Along with, of course, a payroll tax holiday to sustain aggregate demand.

Warren

>   
>   On Thu, Oct 9, 2008 at 12:32 PM, Jeff wrote:
>   

We need to get it right

by William M. Isaac

Political leaders told us last week that if the Wall Street bailout bill did not pass, the stock market would drop by 1,000 points and millions of people would lose their homes, jobs and credit cards.

Congress passed the bill, yet the markets have gotten worse.

I believe the problem is that the bailout package does not deal with any of the four fundamental issues that must be addressed immediately: fear, bank capital, fiscal stimulus and help for homeowners.

Fear: The financial markets are frozen throughout the world. Banks will not lend to other banks and, to the extent they do, the cost is exorbitant. There is a lot of liquidity but it is being hoarded.

Which banks will fail and how will their creditors be treated? Will the government protect just the insured depositors or will it protect the uninsured depositors, bond holders, and other general creditors? The government has handled these claims in different ways in the failures to date, so there is considerable anxiety in the markets.

There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.
What would this cost taxpayers? In my view, nothing — indeed, it should save taxpayers a lot. It will get the financial markets working, help put the economy back on track and reduce the bank failure rate.

We already have an implicit guarantee in place for the largest banks, which control the bulk of our banking assets. Making the guarantee official during this crisis and extending it to the rest of the banks is essential and reasonable.

As I write this article, Ireland has guaranteed its banking system and Denmark and several other European countries appear headed in that direction. If enough follow, the U.S. will have no choice but to act.

Bank capital: The Securities and Exchange Commission adopted fair value accounting in the 1990s. This rule required financial institutions to mark their securities to market. I have argued against fair value accounting for more than two decades because I know that we could not have contained the severe banking problems of the 1980s if we had to deal with fair value accounting rules.

A bad idea became highly destructive when the SEC decided to continue fair value accounting after the market for mortgage securities evaporated last year. In the absence of a market, the SEC forced banks to mark these assets to an arbitrary index.

Mortgage securities were marked to a fraction of their true economic value, which destroyed $500 billion of capital in our financial system. Since banks lend about $10 for each dollar of capital, the SEC’s rule diminished bank lending capacity by $5 trillion. Is it any wonder we have a severe credit contraction?

Even now, the SEC continues to fiddle while the financial system and the economy burn. The SEC needs to suspend fair value accounting — act now, study it later. This will begin the process of restoring bank capital so banks can start lending again. Instead of the Treasury and Federal Reserve taking over our lending markets, we need to help our private banks do the job.

Another readily available tool to restore bank capital is one that the FDIC used in the banking crisis of the 1980s to give capital-short, but otherwise viable, banks injections of capital to help them get through difficult economic times. The program was a big help in the FDIC’s resolution of the $100 billion market insolvency in the savings bank industry at a total cost of less than $2 billion. A precursor of the 1980s program was the Reconstruction Finance Corporation, created to provide capital to banks during Great Depression.

The FDIC should resurrect this program immediately. It will limit the failures of community banks and put them back into the lending business more quickly.

Fiscal stimulus and help for homeowners: The bailout bill will not solve our banking crisis because it is not attacking the right problems. Instead, we should direct a good portion of the bailout money to providing permanent stimulus to the economy and to helping families who are in danger of losing their homes.

I believe Congress should get off the campaign trail and get back to Washington to get the bill right this time. The world is looking to us for leadership.

Posted in Email | 16 Comments »

Re: NZ gets your payroll tax holiday…

Posted by WARREN MOSLER on 10th October 2008

(email exchange)

Yes, looks like they are on the right track with what looks like a substantial fiscal package.

>   
>   On Thu, Oct 9, 2008 at 6:01 PM, Steve wrote:
>   
>   W
>   
>   Not quite the same wording. But the same idea. (skip to
>   highlighted line.
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>   Steve
>   

Report outlines plan to save NZ economy

October 10, 2008 – 7:46AM

The current global financial crisis is one of the most serious events the New Zealand economy has faced for decades, according to a new report.

The draft report, released Friday by the New Zealand Institute and NZX, said New Zealand’s response to the crisis needed to be “deliberate, serious and proportionate”.

“The response must be about more than battering down the hatches … We should see this as an opportunity to position the economy for the longer term, as well as manage the risks.”

The report suggested provisional tax payments be deferred for 24 months, capital investment be “prioritised and incentivised”, a two-year income cap tax at 20 per cent for New Zealanders returning home, firms be attracted to New Zealand with two years of no company tax and the Research and Development tax credit be retained.

In the longer term the report said a company should be created to manage commercial state owned enterprises, a taxpayer savings vehicle be created to manage financial assets, KiwiSaver be made compulsory and the biases in the tax code that promotes housing speculation be removed.

New Zealand’s response to past crises were the “insular” policies of Think Big and protectionism, the report said.

“Our lack of appropriate response then led us to the economic brink a decade later. We now face the same risk.

“We believe there is little we can do about Northern Hemisphere banks, there is a lot we can do to determine how well the New Zealand economy copes with permanent changes to global credit markets and a global economic slowdown.”

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2008-10-10 USER

Posted by WARREN MOSLER on 10th October 2008


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Trade Balance (Aug)

Survey -$59.0B
Actual -$59.1B
Prior -$62.2B
Revised -$61.3B

 
If oil prices don’t rise and the foreign sector’s desire to accumulate $US stays down this will go a lot lower.

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Exports MoM (Aug)

Survey n/a
Actual -2.0%
Prior 3.3%
Revised n/a

 
World economy takes pause.

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Imports MoM (Aug)

Survey n/a
Actual -2.4%
Prior 3.5%
Revised n/a

 
US economy pauses.

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Exports YoY (Aug)

Survey n/a
Actual 15.9%
Prior 20.1%
Revised n/a

 
Still way high.

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Imports YoY (Aug)

Survey n/a
Actual 13.4%
Prior 16.3%
Revised n/a

 
Still growing fast, but largely oil prices.

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Trade Balance ALLX (Aug)

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Import Price Index MoM (Sep)

Survey -2.8%
Actual -3.0%
Prior -3.7%
Revised -2.6%

 
Big drop.

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Import Price Index YoY (Sep)

Survey 12.2%
Actual 14.5%
Prior 16.0%
Revised 18.7%

 
Still very high.

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Import Price Index ALLX 1 (Sep)

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Import Price Index ALLX 2 (Sep)


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