Posted by WARREN MOSLER on November 26th, 2008
Two ‘bailouts’ today, the Fed asset purchase program and Citibank:
Comments on the asset purchase program:
Major theme- the answer to the housing and automobile issue is consumers with enough income to be able to afford their mortgage payments and car payments along with expanding employment prospects to ensure the ability to repay in full over time.
The Fed’s function is to set the interest rate. This is all in the realm of monetary policy. Income adjustment at the macro level is a function of fiscal policy.
Specifically on the securities purchase announcement:
They finally got it right – the Fed purchases the financial assets, not the treasury. The TARP should have been a Fed operation.
What the fed does is set interest rates. It’s about the price of money, not quantity of money.
Buying agency collateral will lower the interest rates on agency mortgages. It does not ‘pump in money’ or anything like that.
Buying other collateral will lower interest rates for those types of lending.
This is what ‘monetary policy’ is all about – setting interest rates in the economy, and not quantity adjustments.
This does not directly add to the demand for mortgages or the demand for other loans.
It does lower interest rates for those loans with the hope that the lower interest rates increase borrowing to spend on houses, cars, and other purchases.
They could have done this a year ago before it became a crisis with no ill effects if there was no crisis.
Letting the crisis happen first did not serve public purpose.
This foot dragging due primarily to not fully understanding the fundamentals of monetary operations has contributed to the crisis.
While this ‘top down’ approach does improve the operations of the financial sector, it does not give them what they fundamentally need, which is borrowers with sufficient incomes to make their payments, aka declining delinquency rates.
This is directly achievable by the likes of a payroll tax holiday where the treasury makes all FICA contributions, or direct spending via revenue sharing to the states for their operating budgets and infrastructure projects.
Comments on the Citibank bailout:
What they did right is break the pattern of taking 79.9% of any remaining shareholder equity, which has meant the government has been the hand of death for shareholders. There is enough risk priced into stocks with that questionable addition.
What they did wrong is complicate matters by doing more than buying a sufficiently large preferred equity position to accomplish exactly what the rest of the relatively complex package accomplished.
This was probably done to minimize usage of funds allocated under the TARP.
They are also perhaps starting to acknowledge that a substantial part of Citibank’s difficulties are due to the failure of government to sustain reasonable levels of output and employment.
Assets that were not problems a year ago have become problems today as the economy has deteriorated due to a lack of aggregate demand.
This might be a good first step towards government fessing up and taking responsibility for the collateral damage of its own fiscal and monetary policies, and stop blaming the victims by putting them to death when they require assistance. In fact, if I were Obama I would take this approach.
The government already gets 30% of all earnings through the corporate income tax. If they want more, they can raise that tax rather than demand a percentage of the outstanding shares.