‘no one saw this coming’ : understanding financial crises through accounting models


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Objections to deficit spending-

1. Deficits now mean higher taxes later.

Response — Taxes function to regulate aggregate demand, not raise revenue per se.
Taxes will go up ‘later’ only if aggregate demand is ‘too high’ later which means unemployment becomes ‘too low.’
that is exactly the point of deficits today- to bring down unemployment and excess capacity

So what that statement actually says is that deficits ‘work’ and will bring down unemployment and close the output gap, hopefully to the point that taxes need be raised to cool things down.

2. How will the govt pay back all that debt?

Response — When treasury securities mature the BOE debits the holders security account and credits his transactions account.
End of story.

3. The currency will go down.

Response — maybe, maybe not, but in any case the level of the currency does not alter the real wealth of the nation. It is only an internal distributional issue and those issues can be addressed with other domestic policies.

4. We need to wait for the lower interest rates and quantitative easing to work.

Response — It is working- policy makers have it backwards- it reduces aggregate demand

Quantitative easing increases the BOE’s balances sheet as it buys securities.
It removes higher yielding securities from the private sector and replaces them with lower yielding balances at the BOE,
this reduces non government incomes and accumulations of net financial assets, and thereby reduces aggregate demand.

Lower rates reduces savers incomes more than borrowers as borrowing rates remain high due to credit concerns.
Banks net interest margins increase adding to bank earnings which have a 0 marginal propensity to consume.
Therefore lower rates reduce aggregate demand.

5. What can be done?

Response — Immediate suspension of VAT at least until aggregate demand is restored to desired levels.
However, income tax receipts will ‘automatically’ increase as GDP recovers which will ‘automatically’ moderate aggregate demand.

Keep the BOE rate at 0 to keep costs of production and investment low and thereby help control prices and promote supply to areas of demand. (removing VAT also keeps prices lower than otherwise.)

Use taxes to moderate demand when excess demand becomes a problem, not to raise revenue per se.


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Obama on the ‘stimulus’ package


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Obama Says Economic Stimulus Plan Worked as Intended

By Edwin Chen

July 11 (Bloomberg) — President Barack Obama said his $787 billion stimulus bill “has worked as intended” as he pushed back against Republican criticism that his recovery program has failed to rescue the economy.

What kind of policy is intended to keep unemployment rising for the next year?

The president either doesn’t understand the monetary system or is totally insensitive to the plight of his electorate.

“It has already extended unemployment insurance and health insurance to those who have lost their jobs in this recession,” Obama, who is traveling today in Ghana, said in his weekly Saturday radio and Web address. “It has delivered $43 billion in tax relief to American working families and business.”

It is sustaining over 10 million people rotting in the unemployment lines as more and more short term unemployed deteriorate into irreversible long term unemployed, lives and families are ruined, and untold trillions of useful output is irrevocably lost.

Obama spoke after stocks fell for a fourth week on concern that an economic recovery will be delayed. A government report last week showed that employers cut 467,000 jobs in June and the unemployment rate rose to 9.5 percent, the highest since 1983.

The weakening labor market is taking a toll on Obama’s popularity. A survey by Hamden, Connecticut-based Quinnipiac University released July 7 showed 49 percent of Ohio voters approved of Obama’s job performance, down from 62 percent in a May 6 poll. The disapproval figure for Obama was 44 percent, up from 31 percent in May.

Either he doesn’t care about his numbers or doesn’t know how the monetary system works.

Or is playing politics with our lives figuring if things improve towards the end of his term he will get re elected.

Obama, in his speech, said the stimulus program is helping state governments save jobs. Were it not for the program, the president said, “state deficits would be nearly twice as large as they are now, resulting in tens of thousands of additional layoffs — layoffs that would affect police officers, teachers, and firefighters.”

True, and with the right per capita distribution to the states and a payroll tax holiday unemployment would have quickly fallen back towards prior levels of 5% or less.

In asking for public patience, Obama said the recovery act “wasn’t designed to restore the economy to full health on its own, but to provide the boost necessary to stop the free fall.”

Enacted in February, the bill “was designed to spur demand and get people spending again and cushion those who had borne the brunt of the crisis,” the president said.

He doesn’t understand that it’s the current fiscal balance that is keeping demand down, though he’s correct that it all would be even worse if there hadn’t been any adjustment.

Obama said the measure “was not designed to work in four months — it was designed to work over two years.”

Why? What is the advantage to the population of a strategy like that???

The spending plan will “accelerate greatly” through the summer and autumn, creating “thousands more infrastructure projects” that will lead to additional jobs, he said.

And still not enough to make a dent in unemployment, lost output, along with all the collateral damage.

‘Right Direction’

“We’re moving in the right direction,” Obama said.

Agreed.

“We must let it work the way it’s supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.”

With the understanding that prior administrations were in over their heads as well.

In a Bloomberg interview last month, the president said he expected unemployment rates to exceed 10 percent.

Not enough for him to care enough to take further action to remove the current fiscal drag of government policy.

In his radio address, Obama also renewed his commitment to comprehensive health-care legislation that expands insurance coverage while cutting costs. He also vowed to address long-term entitlement overhaul.

The pledge to cut costs and make it pay for itself ensures it will not add to aggregate demand and not help shrink the output gap.

Earlier this week, Vice President Joe Biden also defended the Obama administration’s efforts to rebuild America’s economy, while expressing frustration with those who say progress is too slow.

“Remember, we’re only 140 days into this deal,” Biden said in a speech in Cincinnati. “It’s supposed to take 18 months.”

‘Supposed to’ ???!!!

Who are these people???


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Daniel Berger piece


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>   
>   (email exchange)
>   
>   On Wed, Jul 8, 2009 at 7:24 PM, wrote:
>   
>   By the way, I forgot to mention it the other day, but I’m sure you all saw the front-page
>   report in Monday’s Financial Times. It seems that Goldman Sachs and Barclays are now
>   marketing “insurance” products that can help buyers dodge capital adequacy rules. You
>   can’t make this stuff up. The term that comes to mind is “impunity.”
>   
>   When are regulators in the US and EU going to put an end to this nonsense? Wasn’t the
>   collapse of AIG a sufficient example of the deliterious effects of using structured credit
>   to window dress corporate balance sheets?
>   

It is up to Congress to decide if ‘taxpayer money’ is adequately ‘protected’ by bank capital which takes the initial losses.

However, the public purpose of using the public private partnerships we call banks, rather than just have the government make the loans directly, is the notion that the private sector can better ‘price risk’ than the public sector.

Banks will price risk differently as a function of capital requirements.

With no capital required and all FDIC insured deposits they will take lots of risk! etc.

So I look at any new fangled notion of what constitutes capital from this perspective of public purpose and the pricing of risk.

>   >   
>   >   The film WALL STREET (in all its cheesy glory) happened to be on TV the other night,
>   >   and I was amazed to see how plainly some of the issues we now face are laid out.
>   >   
>   >   Dan Berger’s piece does a great job of illuminating this:
>   >   Link
>   >   


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Racing


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>   
>   (email exchange)
>   
>   On Sun, Jul 12, 2009 at 9:20 AM, Dave wrote:
>   
>   Gravity Cavity was after the long straight away towards the
>   end of the track where you went down, then back up the hill
>   and under the bridge at the top.

Yes, that’s how it was in the 80’s when I raced there.

>   Maybe more memorable on a bike because you are running at the
>   bridge embankment FAST. Now they put a bus stop chicane before
>   the hill so you are not running at the embankment.

I think I would have left it alone. Was particularly challenging in the rain, and in the first lap at the run offs when i raced there in 86 and 87.

>   What is your favorite track?

Sebring. Long and short track. First time there I arrived just as my session was qualifying (showroom stock VW) and went out following another B car I knew was reasonably competitive. Didn’t know where any of the corners went. He gained on me the first lap or so then I started catching him and passed him on the last lap of qualifying and got pole.

First time i ever broke a sweat in a race car!


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California bill to allow IOU’s for State tax payments


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I have been writing about this for a long time.

If enacted, the ramifications are profound.

AMENDED IN ASSEMBLY JULY 1, 2009
AMENDED IN ASSEMBLY JUNE 29, 2009
AMENDED IN ASSEMBLY MAY 14, 2009
california legislature—2009–10 regular session
ASSEMBLY BILL No. 1506

Introduced by Assembly Member Anderson
(Coauthors: Assembly Members Adams, Bill Berryhill, Tom
Berryhill, Duvall, Fletcher, Gaines, Garrick, Hagman, Harkey,
Jeffries, Knight, Logue, Miller, Nestande, Niello, Nielsen, Silva,
Smyth, Audra Strickland, Tran, and Villines)

February 27, 2009

An act to add Section 17203.6 to the Government Code, relating to
state funds, and declaring the urgency thereof, to take effect
immediately.

legislative counsel’s digest

AB 1506, as amended, Anderson. State funds: registered warrants.
Existing law prescribes procedures for the issuance of registered
warrants and provides that a registered warrant is acceptable and may
be used as security for the performance of any public or private trust
or obligation.


This bill would require a state agency to accept, from any person or
entity, a registered warrant or other similar evidence of indebtedness
issued by the Controller endorsed by that payee, at full face value, for
the payment of any obligations owed by that payee to that state agency.

This bill would declare that it is to take effect immediately as an
urgency statute.


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