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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 December 14th, 2009

Summers supports Obama administration policy stupidity

Posted by WARREN MOSLER on 14th December 2009

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Banking and the entire private sector in a capitalist society is necessarily procyclical. Only the Federal government can be countercyclical, and,
indeed that’s it’s role in supporting aggregate demand in a slowdown. The blame for current conditions falls unambiguously on current policy. Comments below

Obama Plans to Press Banks Monday to Start Lending Again

Dec. 13 (CNBC) —President Barack Obama’s economic advisers are talking tough about the banks ahead of his meeting Monday with heads of financial institutions.

Larry Summers and Christina Romer say Obama will press bankers to ease lending to help Americans get back to work.

As Summers put it, bankers need to recognize that “they’ve got obligations to the country after all that’s been done for them.”
He says no major bank would be intact without the government’s bailout of the financial sector, and now they need to do all they can to get credit flowing again.

Why would we want to demand releveraging of the private sector and not growth through increased incomes via my proposals for a payroll tax holiday, per capita revenue distribution, and an $8/job for anyone willing and able to work to facilitate private sector expansion as demand is restored?

Only one reason- the usual deficit myths.

Summers spoke Sunday on CNN’s “State of the Union” program.
Romer, on NBC’s “Meet the Press,” said Americans are still paying the price for Wall Street excesses.

No, we are still paying the price for poor policy response due to disgraceful flawed mainstream economics mired in deficit myths that has blocked the obvious means of supporting aggregate demand readily available.

On Saturday, Obama singled out financial institutions for causing much of the economic tailspin and criticized their opposition to tighter federal oversight of their industry.

Why does he care if “they” oppose any particular policy?

This shows a profound weakness of leadership where he can’t use his bully pulpit to lobby congress to do the ‘right thing.’

Unfortunately, however, due to the lack of a fundamental understanding of banking and the financial sector in general the administration’s proposals fall far short of the mark even if they did get them passed.

While applauding House passage Friday of overhaul legislation and urging quick Senate action, Obama expressed frustration with banks that were helped by a taxpayer bailout and now are “fighting tooth and nail with their lobbyists” against new government controls.
In his weekly radio and Internet address Saturday, Obama said the economy is only now beginning to recover from the “irresponsibility” of Wall Street institutions that “gambled on risky loans and complex financial products” in pursuit of short-term profits and big bonuses with little regard for long-term consequences.

Its just barely stopped the slide from a too little too late fiscal adjustment that added precious little to the work done by the fiscal ‘automatic stabilizers’ of rising transfer payments and falling incomes due to the slowdown.

Not to forget Fed policy that further removes personal interest income, which should be a good thing as it allows for lower taxes for a given level of federal spending. But of course that’s not recognized and therefore the 0 rate policy is instead a wet blanket on demand.

“It was, as some have put it, risk management without the management,” he said.

Right back to you.

The president also told CBS’ “60 Minutes” that “the people on Wall Street still don’t get it. … They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year … in decades and you guys caused the problem,” Obama said in an excerpt released in advance of Sunday night’s broadcast of his interview.

Right back to you.

The only question is whether this is innocent fraud or subversion.

(feel free to distribute)


Posted in Banking, Obama, Political | 6 Comments »

Citi to repay $20 billion TARP funding

Posted by WARREN MOSLER on 14th December 2009

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Does anyone in Washington realize any ‘profits’ govt makes reduces private sector net financial assets by that amount? Just like a tax, though a banks marginal propensity to spend is probably near 0.

And that TARP funds per se do nothing for banks, its just the change in capital ratios that matter, as the banks in question are not liquidity constrained?

And that the amount of private capital at risk was the same with our without TARP?

And that all TARP did was move that much risk of loss from the FDIC to the Tsy, which funds the FDIC in any case?

It would have been a lot simpler and burned a lot less political capital to have simply allowed Citibank and the others to operate with lower capital ratios with the TARP penalties and conditions to accomplish the identical outcome.

Bottom line: functionally all TARP did was provide regulatory forbearance in exchange for a type of tax.

Citigroup to Repay $20 Billion in Bailout Money

Dec 14 (Reuters) — Citigroup laid out a plan to repay the money it owes the U.S. government, including issuing $17 billion of stock immediately, as the bank looks to end the executive pay restrictions that came with the funds.

The deal begins to dissolve what has been a troubled relationship between Citigroup [C 3.76 -0.19 (-4.81%) ] and the government, which bailed out the bank with three rescues last year and this year but also pressured it to sell businesses and remove executives.

The government plans to start selling the roughly $30 billion of Citigroup shares it owns, and is ending its agreement to guarantee a roughly $250 billion pool of Citigroup assets against outsized losses.

The government estimates it could see a profit of $13 billion to $14 billion on its investment in the bank.


Posted in Banking, Government Spending | 5 Comments »

Obama vs the banks

Posted by WARREN MOSLER on 14th December 2009

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Looks like a lapse into behavior not becoming a President- name calling, cheap shots, demonizing, and failure to recognize the behavior in question is a consequence of incentives built into the current institutional structure.

The legislation in question completely misses the point.

More and more voters are beginning to believe this is deliberate.

‘True reform’ begins with my previous proposals:


If gold is a bursting bubble rather than a bull mkt correction and the dollar remains firm (which makes sense with crude breaking 70),

psychology could quickly turn deflationary with the concern that the Fed’s tools may be unable to deal with deflation.

And a government and mainstream economics profession that believes the government has ‘run out of money.’

Obama complains about “fat-cat bankers”

Dec 11 (Reuters) — President Barack Obama complained about “fat-cat bankers” and sharply criticized Wall Street banks for paying out big bonuses to executives in a television interview to air on Sunday.

Obama, who has taken some heat from Americans for supporting a Wall Street bailout, told CBS’ “60 Minutes” banks do not understand how angry people are with them.

“I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,” Obama said.

It very much appears that’s what he’s been doing.

The president said it appeared the only firms paying out bonuses and avoiding the caps put on them under the government’s Troubled Asset Relief Program (TARP) were the ones who had paid back their bailout money.

“I think that in some cases (to be able to pay bonuses) was the motivation,” Obama said.

That’s how capitalism is supposed to work- govt. establishes the incentives that determine private sector behavior.

“Which I think tells me that the people on Wall Street still don’t get it. They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down $10 (million), $20 million dollar bonuses after America went through the worst economic year in decades and you guys caused the problem,” he said.

No, the Bush and Obama administrations caused the problem by not supporting demand at full employment levels.

Obama told “60 Minutes” it was wrong for financial industry lobbyists to try to derail a financial regulatory overhaul that passed the Democratic-controlled House of Representatives on Friday.

It’s up to the administration to use the legal system to get the desired behavior. If what the banks are doing is illegal, prosecute them. If it’s legal but counter to public purpose, implement appropriate law.

“What’s really frustrating me right now is that you’ve got these same banks who benefitted from taxpayer assistance who are fighting tooth and nail with their lobbyists up on Capitol Hill, fighting against financial regulatory control,” he said.

They didn’t make the rules, govt. did. It’s up to govt. to make rules that promote public purpose.

After House passage of the financial overhaul, Obama issued a written statement in which he urged the Senate to join the House in passing what he called a necessary regulatory reform as quickly as possible.

“This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road, consistent and systematic enforcement of those rules, and a stronger, more stable financial system with better protections for consumers and investors,” he said. (Reporting by Steve Holland; editing by Todd Eastham)

Unfortunately, none of them have a sufficient grasp of banking and the monetary system to get it anywhere near right.

For example, how many understand that TARP is nothing more than regulatory forbearance?

How many recognize taxes function to support aggregate demand and not to raise revenue per se?

How many recognize that exports are real costs and imports real benefits?

It continues to be a case of the blind leading the blind.


Posted in Banking, Obama | 6 Comments »

oil supporting the dollar

Posted by WARREN MOSLER on 14th December 2009

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Crude oil below $69 is now offering even stronger fundamental support for the $US.

And it’s not impossible cash flow issues of member nations may be causing ‘cheating’ on OPEC quotas
that would ultimately show up in lower Saudi production as they try to hold price. The Saudis are currently
at about 8 million bpd, and the rest of opec could probably add 2 million bpd in production if it wanted to.
That would bring Saudi production down to a dangerously low 6 million bpd, where a drop in world crude
demand due to substitutions and output stagnation could be very difficult to match with production cuts.

The US is a large importer of crude- lower prices make dollars harder to get over seas.

And purchasing power parity already overwhelmingly favors the dollar, and there is no
domestic US inflation of consequence to reverse that, especially with now falling energy prices.

Yes, it is sometimes that simple.

Shifts in portfolio preferences can still push the dollar down but the ‘trade flows’ are the stronger force longer term.

Rising dollar = reduced S&P earnings due to translations of foreign profits and less competitive exports

The weak US consumer personal income kept low by the 0 rate policy and ‘over taxation)
will keep a lid on imports even with lower import prices.

Falling gold will quash the ‘Fed printing money’ inflation myth and reverse prices driven up by precautionary
‘inflation hedge’ allocations.


Posted in Comodities, Currencies | No Comments »

Greenspan comments

Posted by WARREN MOSLER on 14th December 2009

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In case you thought Greenspan actually understood monetary operation.
He obviously thinks quantitative easing is somehow inflationary per se:

Fed can do no more to cut unemployment: Greenspan

By Doug Palmer

Dec. 13 (Reuters) — The U.S. Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday.

“I think the Fed has done an extraordinary job and it’s done a huge amount (to bolster employment). There’s just so much monetary policy and the central bank can do. And I think they’ve gone to their limits, at this particular stage,” Greenspan said on NBC’s “Meet the Press.”

“You cannot ask a central bank to do more than it is capable of without very dire consequences,” Greenspan continued, saying the United States faced a serious long-term threat of inflation unless the Fed begins to pull back “all the stimulus it put into the economy.”


Posted in Government Spending, Inflation | No Comments »

Mankiw, you’re welcome…

Posted by WARREN MOSLER on 14th December 2009

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Published: December 12, 2009

IMAGINE you are a physician and a patient arrives in your office with a troubling and mysterious disease. Some of the symptoms are familiar, but others are not. You have never treated anyone with quite this set of problems.
David G. Klein

Weekend Business Podcast: Greg Mankiw on Fiscal Stimulus

Based on your training and experience, imperfect as it is, you come up with a proposed remedy. The patient leaves with a prescription in hand. You hope and pray that it works.

A week later, however, the patient comes back and the symptoms are, in some ways, worse. What do you do now? You have three options:

STAY THE COURSE Perhaps the patient was sicker than you thought, and it will take longer for your remedy to kick in.

UP THE DOSAGE Perhaps the remedy was right but the quantity was wrong. The patient might need more medicine.

RETHINK THE REMEDY Perhaps the treatment you prescribed wasn’t right after all. Maybe a different mixture of medicines would work better.

Choosing among these three reasonable courses of action is not easy. In many ways, the Obama administration faces a similar situation right now.

How hard is it to recognize a shortage of aggregate demand of this magnitude?????

When President Obama was elected, the economy was sick and getting sicker. Before he was even in office in January, his economic team released a report on the problem.

If nothing was done, the report said, the unemployment rate would keep rising, reaching 9 percent in early 2010. But if the nation embarked on a fiscal stimulus of $775 billion, mainly in the form of increased government spending, the unemployment rate was predicted to stay under 8 percent.

In fact, the Congress passed a sizable fiscal stimulus. Yet things turned out worse than the White House expected. The unemployment rate is now 10 percent — a full percentage point above what the administration economists said would occur without any stimulus.

To be sure, there are some positive signs, like reduced credit spreads, gross domestic product growth and diminishing job losses. But the recovery is not yet as robust as the president and his economic team had originally hoped.

So what to do now? The administration seems most intent on staying the course, although in a speech Tuesday, the president showed interest in upping the dosage. The better path, however, might be to rethink the remedy.

When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy.

Yes, govt spending has a higher ‘multiplier’ than tax cuts, but either way that completely misses the point

With non convertible currency and floating fx. The choice between the two is a political decision. Tax cuts will restore private consumption with income led growth, while spending increases generally first increase public consumption by producing public goods and services. With excess capacity it’s a matter of what we want. Once that’s decided, the ‘multiplier’ only gives some idea of how far to go with either tax cuts or spending increases. The size of the spending and/or tax cuts is of no consequence beyond the effects on the real economy.

Personally, I have a notion of what the ‘right sized’ govt is, and would target that in any case. I’d have it a lot smaller in many areas where it tries to perform tasks directly, while broadening funding intiatives to meet national goals. But that’s another story.

The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises G.D.P. by $1.57, while a dollar of tax cuts raises G.D.P. by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

This is a disgrace to Professor Mankiw and the rest of the economics profession that might agree and support this view.

The amount to spend and/or the amount of taxes cut per se is of no further economic consequence.

But it is the predominant view thats allowed the US economy to get into this mess in the first place.

Yes, there was a financial crisis, but gross ignorance is the only excuse for letting it spill over into the real economy, and stay spilled over for well over a year.

But various recent studies suggest that conventional wisdom is backward.

Those studies remain ‘out of paradigm’ as well, of course.

One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity.

According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 — three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Like it matters, as above. It’s the blind leading the blind, and giving each other Nobel prizes along the way.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”

Notice the prefix ‘debt financed’ which is an inapplicable gold standard term.

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Boccini University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”

The problem is none of them have the fundamental understanding of how a currency works to be capable of understanding what they have compiled.

Do they seriously believe, for example, that if govt went out and hired 10 million people private investment spending would go down, all else equal? Any of you want to take that bet???

These studies point toward tax policy as the best fiscal tool to combat recession,

Again with the word ‘best’ that implies taxing less than spending per se is ‘bad.’

particularly tax changes that influence incentives to invest, like an investment tax credit. Sending out lump-sum rebates, as was done in spring 2008, makes less sense, as it provides little impetus for spending or production.

The main incentives for investing are a backlog of orders and cost cutting.

And while the lump sum rebates were not anywhere near the top of my long list for policy options, they did add to aggregate demand and kept things from being even worse.

Like our doctor facing a mysterious illness, economists should remain humble and open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not be the best medicine.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

Feel free to send this along to him, thanks.


Posted in Government Spending | 6 Comments »

Obama vs the banks comment

Posted by WARREN MOSLER on 14th December 2009

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Looks like a lapse into behavior not becoming a President- name calling, cheap shots, demonizing, and failure to recognize the behavior in question is a consequence of incentives built into the current institutional structure.

The legislation in question completely misses the point.

More and more voters are beginning to believe this is deliberate.

>   (email exchange)
>   Of course, your reform is vastly superior to anything that is out there.
>   But this criticism of the banks is sheer hypocrisy on the part of Obama.
>   It’s kabuki.
>   It might even be deliberate: see Matt Taibbi’s evisceration of the Obama
>   financial reforms. He’s usually on top of the prevailing zeitgeits.
>   This legislation will be totally ineffective. Interesting today that the
>   bank stocks went UP on passage of the bill.


Policy just keeps getting worse.

I’ve about lost hope that he can ever get it right, unless accidentally.

The longer term risk is fiscal tightening. So far it’s not actually happening.

A driving force behind tax rate hikes is the misread that the Clinton tax rate hikes ‘worked’ to both spur the economy and drive the budget into surplus.

I suppose a repeat of the massive expansion of consumer debt that reached maybe 7% of gdp by 1999 could
somehow materialize isn’t impossible, but sure seems highly unlikely in the current environment.

Apart from the fact that it’s also not my first choice for supporting output and employment.


Posted in Banking, Obama, Political | 1 Comment »