The Center of the Universe

St Croix, United States Virgin Islands

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 December 17th, 2008

The Fed and Deleveraging, revisited

Posted by WARREN MOSLER on 17th December 2008

[Skip to the end]

Deleveraging involves nothing more than ‘reintermediation’ back to the banking system (as described in more detail previous posts).

The government has failed to facilitate this transition back to a banking model to allow it transpire in an orderly fashion.

All that needed to happen was for credit spreads to go to levels that represented competitive returns on equity for banks, as banks picked up loans and securities no longer wanted by the non bank entities.

The move to mark to market from mark to model for banks, however, effectively added ‘spread risk’ to holding longer term loans and securities.

This mark to market risk also effectively raised bank capital requirements (as required by bank investors) in order to invest in the suddenly higher volatility investments.

This also increased the risk to investors of banks already holding securities that were subject to mark to market accounting.

The Fed allowed this risk to interfere with banks ability to fund their liabilities, as the Fed lends to member banks only against specific collateral.

Faced with a potential liquidity crisis, banks were compelled to respond by restricting lending that would otherwise have been considered profitable.

This led to the (continuing) downward spiral of the real economy.

The downward spiral is also characterized by a general (deflationary) inventory liquidation of housing and commodities.

I have been proposing (for the last 15 years) the Fed as Congress to remove the collateral requirement for member bank borrowing (it’s redundant in any case).

I have also proposed they extend their lending to member banks to include longer dated lending to set the term structure of rates as desired.

The Fed continues to slowly move towards this ‘target’ with it’s ‘new lending facilities’ and polices, but it continues to fall short.

The failure to act on the mark to market issue keeps risk for bank shareholders ‘artificially’ elevated which keeps credit spreads wider than otherwise.

I have also stated that while taking the right steps to facilitate the ‘great repricing of risk’ and the reabsorbtion of lending by the banking system would end the ‘financial crisis,’ it does not address the accelerating shortage of aggregate demand that’s been evidenced by rising unemployment and the widening output gap.

The near universal belief that lower interest rates sufficiently add to aggregate demand to restore output and employment and the numerous ‘deficit myths’ have delayed the substantial fiscal adjustment required to sustain aggregate demand at full employment levels in the current environment.

I have therefore proposed a ‘payroll tax holiday’ where the Treasury makes all FICA, medicare, etc. payments for employees and employers, along with a $300 billion revenue sharing program for the States to immediately fund operations and infrastructure programs.

Additionally, any economic recovery not associated with a program to reduce crude oil consumption risks a sudden shortage of supply and re escalation of prices.

Our govt’s ongoing mismanagement of the economy since q2 08 can be entirely attributed to a fundamental lack of understanding of our monetary system by govt, the mainstream financial and academic economic community, and the media that promotes this misunderstanding to the political leadership and general public.


Posted in Articles, Fed | 12 Comments »

2008-12-17 Warren B is on the radio!

Posted by WARREN MOSLER on 17th December 2008

[Skip to the end]

Mike Norman’s show

Wednesday, December 17, 2008 @ 10:20 EST

Houston Area: Houston 1110 AM KTEK
Dallas / Fort Worth Area: DFW 1110 AM KJSA


Posted in Radio, Uncategorized | No Comments »

Quantitative Easing for Dummies

Posted by WARREN MOSLER on 17th December 2008

[Skip to the end]

FACTBOX: What is quantitative easing?

Tue Dec 16, 2008 3:30pm EST

NEW YORK (Reuters) – The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.

“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital

Under quantitative easing, central banks flood the banking system with masses of money to promote lending.

Central banks exchange non or low interest bearing assets- reserve balances- for longer term higher yielding securities.

Since lending is in no case ‘reserve constrained’, the ‘extra’ reserves do nothing for lending.

The purchase of the longer dated securities results in lower longer term rates than otherwise. The lower borrowing rates may or may not alter aggregate demand.

The lower rates for savers definitely lowers aggregate demand.

They usually do this when lowering official interest rates no longer is effective because they already are at or near zero.


The central banks add cash by buying up large quantities of securities — government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets,


giving them plenty of new money to lend.

No, they already and always have infinite ‘money to lend’.

Available funds are not a constraint for the banking system.

The constraints are regulated asset quality and capital requirements that are expressed in the rates bank charge.

Not the total quantity of funds available.

It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy.

Didn’t work then either. It was fiscal policy that kept them afloat, though not a large enough deficit to sustain output at full employment levels.


Posted in Articles, USA, Valance | 66 Comments »

2008-12-17 USER

Posted by WARREN MOSLER on 17th December 2008

[Skip to the end]

MBA Mortgage Applications (Dec 12)

Survey n/a
Actual 2.9%
Prior -7.1%
Revised -4.7%


MBA Purchasing Applications (Dec 12)

Survey n/a
Actual 286.10
Prior 299.60
Revised n/a

Down some, but still off the lows.


MBA Refinancing Applications (Dec 12)

Survey n/a
Actual 4156.00
Prior 3901.90
Revised n/a

Up and should move up further with lower rates.


Current Account Balance (3Q)

Survey -$179.0B
Actual -$174.1B
Prior -$183.1B
Revised -$180.9B

Worse than expected but looks to still be working its way lower.


Current Account TABLE 1 (3Q)


Current Account TABLE 2 (3Q)


Current Account TABLE 3 (3Q)


Current Account TABLE 4 (3Q)


Posted in Uncategorized | No Comments »