Category Archives: Banking

China Daily | Zhou Pledges More Tightening as China Raises Reserve Ratios

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As previously discussed, changing reserve ratios and the like does nothing more than raise the cost of funds to the banks, much like a ‘normal’ rate hike.

And, also as previously discussed, higher rates more often than not add to inflationary pressures, rather than subtract from them.

Ultimately, it is the fiscal adjustments that bite, including reduced deficit spending (both proactive and, more common, via automatic stabilizers, particularly increased tax receipts due to nominal growth) and reduced state lending, all of which is in progress. Reductions in state lending are also, functionally, best considered ‘fiscal’ measures.

This all typically results in a very hard landing.

China Raises Reserve Ratio to Curb Inflation as Zhou Pledges More to Come

April 17 (Bloomberg) — China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.”

Reserve ratios will rise a half point from April 21, the People’s Bank of China said on its website yesterday, pushing the requirement to a record 20.5 percent for the biggest lenders. The move came less than two weeks after an interest-rate increase. Zhou sees no “absolute” limit on how high reserve requirements can go, he said April 16.

The nation’s fifth interest-rate increase since the financial crisis may come as soon as next month after inflation accelerated in March to the fastest pace since 2008, Societe Generale SA said. Chinese policy makers may also consider allowing faster appreciation in the yuan, described by the U.S. as “substantially” undervalued, to reduce the cost of imported commodities such as oil.

Higher reserve requirements “will help tighten monetary conditions and prevent banks from lending aggressively in the coming month,” said Liu Li-Gang, an Australia & New Zealand Banking Group economist in Hong Kong who formerly worked for the World Bank. Policy makers may also increasingly rely on the yuan to contain “imported inflation,” Liu added.

Geithner’s Case

The Shanghai Composite Index rose 0.4 percent as of 11:09 a.m. local time. Non-deliverable yuan forwards were little changed, indicating expectations for the currency to rise about 2.3 percent in the next 12 months from 6.5293 per dollar.

U.S. Treasury Secretary Timothy F. Geithner says a stronger Chinese currency would both counter inflation within the Asian nation and aid efforts to reduce economic imbalances that contributed to the global financial crisis.

The yuan has gained about 4.5 percent against the dollar since June last year, when China scrapped a crisis policy of keeping the currency unchanged against the greenback. Analysts’ median forecast is for the currency to climb to 6.3 per dollar by year end.

Speaking in Washington yesterday, PBOC Deputy Governor Yi Gang said the yuan is close to being freely usable, which would allow it to be included in the International Monetary Fund’s Special Drawing Rights basket. He said April 15 that a gradual appreciation of the currency would help his country overcome inflation.

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CH Daily | New yuan lending falls to 2.24 trillion

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More evidence of restricted state lending as the fight against inflation continues.

To their credit, no signs of an actual hard landing yet, but the battle is still on.

China’ new loans stand at 2.24t yuan in Q1

(Xinhua) The People’s Bank of China (PBOC), the country’s central bank, said that new yuan-denominated loans stood at 2.24 trillion yuan ($342.83 billion) in the first quarter of 2011. The figure was 352.4 billion yuan less than that in the same period of last year, said the PBOC in a statement on its website.

Banks suspend mortgage loans

(China Daily) Some bank outlets in Shanghai have suspended mortgage loans to home buyers, the China Securities Journal reported. An anonymous developer said, the Shanghai outlets of the China Industrial and Commercial Bank, the Agricultural Bank of China, the China Minsheng Banking Corp Ltd and the Industrial Bank Co Ltd all suspended issuing loans. “Banks do want to lend, but they may have no money for lending” the developer said. China has raised the reserve ratios for banks nine times since last year, and 3 trillion yuan of banks’ capital has been frozen as a result. Sources with the above mentioned banks said they have not stopped mortgage loans, but have more strict requirements for granting these loans.

Beijing March New House Prices Plunge 26.7% M/M: Press

BEIJING (MNI) – Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission.

Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.

Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government’s crackdown on speculation in the real estate market.

Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data.

The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn’t been uniform.

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Plosser on ‘removing accomodation’

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Plosser Speach

Some comments below:

Let me begin by noting that the economy has gained significant strength and momentum since late last summer and seems to be on a much firmer foundation going forward. Consumer spending continues to expand at a reasonably robust pace, and business investment, particularly on equipment and software, continues to support overall growth. Labor market conditions are improving. Firms are adding to their payrolls, which will result in continued modest declines in the unemployment rate. The residential and commercial real estate sectors remain weak but appear to have stabilized. Nevertheless, I do not believe that weakness in these sectors will prevent a broader economic recovery. Indeed, the nonresidential real estate sector is likely to improve as the overall economy gains ground.

If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy.

No it won’t. As the Fed’s own Kohn and Carpenter have stated, there is no ‘monetary channel’ from reserves to anything else.

Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future.

Not true.

But what matters is that pretty much the entire FOMC believes it to be true and will act accordingly.
Market participants also believe it to be true and shift portfolios accordingly.

To avoid this outcome, the Fed must confront at least two challenges. The first is selecting the appropriate time to begin unwinding the accommodation. The second is how to use the available tools to move monetary policy toward a more neutral stance over time.

Looks to me like the current situation- 2 years of very modest gdp growth, high unemployment that is forecast to fall only slowly, and very little signs of private credit expanding- is telling us policy is already relatively neutral, given the circumstances.

First, monetary policy should operate using the federal funds rate as its policy instrument. Because the Fed can now pay interest on reserves, monetary policy could use the interest rate on reserves (IOR) as its instrument, establishing a floor for rates and allow reserves to be supplied in an elastic manner.3 However, targeting the federal funds rate is more familiar to both the markets and policymakers than is an administered rate paid on reserves. To make the funds rate the primary policy instrument, the target federal funds rate would be set above the rate paid on reserves and below the discount or primary credit rate that banks pay when they borrow from the Fed.

This means the that at the margin the NY Fed has to keep the banks net borrowed to keep the fed funds rate above the floor, and net long to keep it below the ceiling.

Good luck and who cares if the rate paid on reserves equals the fund funds rate?

This operating framework is sometimes referred to as a corridor or channel system and is used by a number of other central banks around the world.4 I have argued elsewhere that our goal should be to operate with a corridor system instead of a floor system,

Yes, this greatly simplifies life for the NY Fed trading desk, especially if you allow fed funds to trade at the floor rate. The should have done it a long time ago, like most other CB’s in the world. And while they are at it, they should also drop reserve requirements, like Canada did a while back, and get rid of that anachronism. (I recall being at a monetary conference in Canada, where a senior monetary crank- sorry, I mean senior mainstream economist- was on a rant about how dropping reserve requirements to 0 was going to be hyper inflationary.)

in part because it constrains the size of the balance sheet while the floor system does not.

Like the salesman who went on after he made the sale and discredited himself. This last part again reveals is anachronistic, gold standard understanding of monetary operations.

The second element of the environment follows from the first. To ensure that the funds rate constitutes a viable policy instrument and thus is above the interest rate on reserves, the volume of reserves in the banking system must shrink to the point where the demand for reserves is consistent with the targeted funds rate. This will require a significant reduction in the size of the Fed’s balance sheet, with reserve balances falling by $1.4 trillion to $1.5 trillion to about $50 billion.

Yes, pretty much the problem I described above.
So why would the fed funds rate not be ‘a viable policy instrument’ if it equaled the rate of interest the Fed payed on reserves?

My proposed strategy involves raising rates and shrinking the balance sheet concurrently and tying the pace of asset sales to the pace and size of interest rate increases.8

The important thing here is not the wisdom of the policy, but that these statements are in fact what the FOMC is likely to be doing.

The first element of the plan to exit and normalize policy would be to move away from the zero bound and stop the reinvesting program and allow securities to run off as they mature. Thus, we would raise the interest paid on reserves from 25 basis points to 50 basis points and seek to achieve a funds rate of 50 basis points rather than the current range of 0 to 25 basis points.

This indicates the fed funds rate and the interest paid on reserves would be roughly equal, which makes sense operationally.

We would also announce that between each FOMC meeting, in addition to allowing assets to run off as they mature or are prepaid, we would sell an additional specified amount of assets. These “continuous sales,” plus the natural run-off, imply that the balance sheet, and thus reserves, would gradually shrink between each FOMC meeting on an ongoing basis.

Again, good to know what they plan on doing. And it seems this time around the all seem pretty much to be on the same page. At least so far.

Now the remaining question is whether the employment outlook will improve sufficiently and core inflation measures stabilize sufficiently in the FOMC’s comfort zone for them to begin ‘removing accommodation’ as they call it.

I’d suggest that could be by Q4 if not for the global bias towards ‘fiscal responsibility’ along with the inflation fighting going on in China which threatens to keep output gaps wide and employment low.

And at least so far price pressures are mainly from crude oil, which the Fed (rightly) considers a ‘relative value story’ and from food prices, which are closely related to fuel prices through various bio fuels and fertilizer inputs. Wages and unit labor costs remain subdued and with productivity relatively high there are, so far, no signs of ‘pass through’ from food and fuel prices to core measures.

The second element of the plan would be to announce that at each subsequent meeting the FOMC will, as usual, evaluate incoming data to determine if the interest rate on reserves and the funds rate should rise or not. Monetary policy should be conditional on the state of the economy and the outlook. If the funds rate and interest on excess reserves do not change, the balance sheet would continue to shrink slowly due to run-off and the continuous sales. On the other hand, if the FOMC decides to raise rates by 25 basis points, it would automatically trigger additional asset sales of a specified amount during the intermeeting period. This approach makes the pace of asset sales conditional on the state of the economy, just as the Fed’s interest rate decisions are. If it were necessary to raise the interest rate target more, say, by 50 basis points, because the economy was improving faster and inflation expectations were rising, then the pace of conditional sales would also be doubled during the intermeeting period.10

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UBS Says Faces LIBOR Manipulation Probe

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As previously discussed, the US should outlaw the use of libor by its banking system.
It makes no sense to allow US dollar rate setting for our banks to be set overseas by the BBA.
Setting our banking system’s dollar rates is the Fed’s responsibility.

And, to further make the point, note the word ‘expect’ in this part from below:

“LIBOR is calculated daily by asking contributing banks the rate at which they expect term funding to be offered between prime banks at 11:00 am London time.”

See more of my proposals here.

UBS Says Faces LIBOR Manipulation Probe

March 16 (Reuters) — Swiss bank UBS said it had received subpoenas from U.S. and Japanese regulators regarding whether it made “improper attempts” to manipulate LIBOR rates, the benchmark price for interbank borrowing costs.

“UBS understands that the investigations focus on whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate LIBOR rates at certain times,” the bank said in its annual report on Tuesday.

The Financial Times in its Wednesday edition said regulators, including Britain’s Financial Services Authority, are probing all 16 banks that help the British Bankers’ Association (BBA) set LIBOR rates.

In particular, they are investigating how LIBOR was set for U.S. dollars during 2006-2008, just before and after the financial crisis, the newspaper said, citing sources familiar with the probes.

UBS said it had received subpoenas from the U.S. SEC, Commodity Futures Trading Commission and Department of Justice regarding its submissions to the BBA. It has also been ordered to provide information to the Japan Financial Supervisory Agency concerning similar matters.

UBS said it was conducting an internal review and is cooperating with the investigations. It declined to provide any further details.

The SEC declined to comment.

BBA said LIBOR has a straightforward and transparent calculation method which excludes any rates that are significant outliers.

“We observe rigorous standards in our scrutiny and governance of the LIBOR mechanism, and work with the industry to ensure their continued full confidence in one of its most accurate and reliable benchmarks,” it said in a statement.

LIBOR is calculated daily by asking contributing banks the rate at which they expect term funding to be offered between prime banks at 11:00 am London time. A set number of the highest and lowest contributions are discarded and the remaining rates averaged.

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Euro area takes huge step towards comprehensive policy package

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Euro area takes huge step towards comprehensive policy package

Euro area heads of state made far more progress than expected at last Friday’s summit. They reached an agreement on a number of elements of the comprehensive policy package which is due to be finalised on March 24/25.

Most important, in our view, was the decision that the cost of liquidity support can be reduced in order to help with debt sustainability. We have argued that the liquidity support that is being provided is too expensive to enable the peripheral sovereigns to achieve anything more than simply stabilise debt-to-GDP ratios at close to the peak levels. Even though the magnitude of the reduction in the borrowing cost envisaged at this stage (100 basis points) is not enough, it is a step in the right direction and it sends a signal that concessional lending could be used to enable the peripheral sovereigns to return to debt sustainability without disruptive debt restructurings.

But, it was also made clear that a lower borrowing cost of liquidity support is conditional on the behaviour of the recipient sovereign. In recognition of the commitments that Greece has made, the borrowing cost of the bilateral loans will be reduced by 100 basis points, and their maturity will be extended from 4 years to 7.5 years. In contrast, due to the reluctance of the new Irish government to discuss raising its 12.5% corporate tax rate, the borrowing cost of the EFSF and EFSM loans to Ireland have been left unchanged.

The comprehensive policy package which will be completed by March 24/25 is due to have five elements: an increase in the size and a broadening of the scope of the EFSF (which will provide liquidity support out to mid 2013); more details on the operation of the ESM (which will provide liquidity support beyond mid 2013); a reformed Stability and Growth Pact (which will guide fiscal policy across the region); a new macroeconomic surveillance framework (which will guide macro prudential and structural policies to limit intra regional imbalances); and a competitiveness pact (which will guide all policies towards lifting growth potential in the region).

Regarding the EFSF, Euro area leaders agreed that its lending capacity will be increased to 440 billion euros, although they did not specify how this would be achieved. In terms of additional functionality, only one thing was agreed: allowing the EFSF to intervene in the primary debt markets. This looks to be an alternative to providing liquidity loans, rather than taking over the role of secondary market support that the ECB has been doing. It looks like the ECB has failed in its attempt to have the EFSF take over this task.

Regarding the ESM, it was confirmed that it will have an effective lending capacity of 500 billion euros and that this will be ensured by a mix between paid in capital, callable capital, and guarantees. It will also have the power to purchase debt in the primary markets, but not the secondary markets.

On the reforms to the Stability and Growth Pact and the new macroeconomic surveillance framework, these will be finalised by the finance ministers before March 24/25.

On the competitiveness pact, Euro area leaders agreed on its broad contours (it is now called the pact for the euro). It is essentially about boosting growth potential in the region, motivated by the idea that ‘competitiveness is essential to help the EU grow faster and more sustainably in the medium and long term, to produce higher levels of income for citizens, and to preserve our social models’. It covers four areas: improving competitiveness (through inter alia a better alignment of wages and productivity, and through higher productivity); boosting employment (through increased flexibility and tax reforms); improving the medium term sustainability of public finances (through inter alia aligning retirement ages with demographics); and reinforcing financial stability (through legislation on banking resolution and regular bank stress tests).

Euro area leaders made some other announcements as well, including an agreement that the introduction of a financial transactions tax should be explored and there is a desire to develop a common corporate tax base.

Even though the final announcement on the comprehensive policy package is still almost two weeks away, the content seems pretty clear. No one should doubt that Euro area leaders are committed to ensuring the survival of the monetary union. On the question of whether sovereign debt restructuring is going to occur, the comprehensive policy package was never going to be able to fully resolve that issue. Whether or not any of the peripheral sovereigns end up restructuring their debt depends on both the extent of the fiscal effort they are willing to engage in and the extent to which the rest of the region is willing to subsidise the liquidity support. Both of these are still unclear, but the rest of the region has now sent a powerful signal that if the debtor sovereigns put in a good faith effort then debt restructurings could well be avoided.

David Mackie

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A few Boehnalities and other notables on the US going broke

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Cross currents of right and wrong but always for the wrong reasons.

Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech

By David J. Lynch

March 7 (Bloomberg) — House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville.

Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.

“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”

Wrong reason! Broke implies not able to spend.

The US spends by crediting member bank accounts at the Fed, and taxes by debiting member bank accounts at the Fed.

It never has nor doesn’t have any dollars.

The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007.

That’s simply a function of where the Fed, a agent of Congress, has decided to set rates, and market perceptions of where it may set rates in the future. Solvency doesn’t enter into it.

Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.

All taxing does is debit member bank accounts. The govt doesn’t actually ‘get’ anything.

To be sure, the U.S. confronts long-term fiscal dangers.

For example???

Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.

So?

“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.

So?
What does that have to do with govts ability to credit accounts at its own central bank?

$1.6 Trillion Deficit

A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.

Still, a rhetorical drumbeat has spread that the U.S. is tapped out. Republicans, including Representative Ron Paul of Texas, chairman of the House domestic monetary policy subcommittee, and Fox News commentator Bill O’Reilly, have labeled the U.S. “broke” in recent days.

Chris Christie, the Republican governor of New Jersey, said in a speech last month that the Medicare program is “going to bankrupt us.” Julian Robertson, chairman of Tiger Management LLC in New York, told The Australian newspaper March 2: “we’re broke, broker than all get out.”

A similar claim was even made Feb. 28 by comedian Jon Stewart, the host of “The Daily Show” on Comedy Central.

So much for their legacies.

Cost of Insuring Debt

Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the
G20.

There are two factors in default insurance. Ability to pay and willingness to pay. While the US always has the ability to pay, Congress does not always show a united willingness to pay. Hence the actual default risk.

Creditors regard Venezuela, Greece and Argentina as the three riskiest countries. Buying credit default insurance on a notional $10 million of those nations’ debt costs $1.2 million, $950,000 and $665,000 respectively.

“I think it’s very misleading to call a country ‘broke,'” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”

In any case, the euro zone member nations put themselves in the fiscal position of US states when they joined the euro.

That means a state like Illinois could be the next Greece, but not the US govt.

Less Likely to Default

CMA prices for credit insurance show that global investors consider it more likely that France, Japan, China, the United Kingdom, Australia or Germany will default than the U.S.

Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”

Presumably a statement with regard to willingness of Congress to pay.

George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.

That has nothing to do with it.

“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”

Any nation can do that with its own currency

The current concerns over debt contrast with the views of founding father Alexander Hamilton, the nation’s first Treasury secretary. At Hamilton’s urging, the federal government in 1790 absorbed the Revolutionary War debts of the states and issued new government securities in about the same total amount.

Alexander Hamilton

Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”

Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.

Far be it from me to argue with a Pulitzer Prize winner…

From Oct. 1, 2008, the beginning of the 2009 fiscal year, through the current year, which ends Sept. 30, 2011, the U.S. will have added more than $4.3 trillion of debt. Despite White House forecasts of an additional $2.4 trillion of debt over the next three fiscal years, investors’ appetite for Treasury securities shows little sign of abating.

It’s just a reserve drain- get over it!

Govt spending credits member bank reserve accounts at the Fed

Tsy securities exist as securities accounts at the Fed.

‘Going into debt’ entails nothing more than the Fed debiting Fed reserve accounts and crediting Fed securities accounts and ‘paying off the debt’ is nothing more than debiting securities accounts and crediting reserve accounts

No grandchildren involved.

Longer-Term Debt

In addition to accepting low yields on two-year notes, creditors are willing to lend the U.S. money for longer periods at interest rates that are below long-term averages. Ten-year U.S. bonds carry a rate of 3.5 percent, compared with an average 5.4 percent since 1990. And U.S. debt is more attractive than comparable securities from the U.K., which has moved aggressively to rein in government spending. U.K. 10-year bonds offer a 3.6 percent yield.

“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.

Who also completely misses the point.

Any doubts traders had about the solvency of the U.S. would immediately be reflected in the markets, a fact noted by James Carville, a former adviser to President Bill Clinton, after he saw how bond investors could determine the success or failure of economic policy.

No they can’t.

“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter,” Carville said. “But now I want to come back as the bond market. You can intimidate everyone.”

Only those who don’t know any better.

Republican Dissenters

Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.

“To say your debts exceed your income is not ‘broke,'” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.

The U.S. government nonetheless faces a daunting gap between its expected financial resources

It’s not about ‘financial resources’ when it comes to a govt that never has nor doesn’t have any dollars, and just changes numbers in our accounts when it spends and taxes

and promised future outlays. Fratto said the Obama administration’s continued accumulation of debt risked a future crisis, as most major economies also face growing debt burdens.

The burden is that of making data entries.

In the nightmare scenario, a crush of countries competing to simultaneously sell IOUs to global investors could bid up the yield on government debt and compel overleveraged countries such as the U.S. to abruptly slash public spending.

It could only compel leaders who didn’t know how it all worked to do that.

Not selling the debt simply means the dollars stay in reserve accounts at the Fed and instead of being shifted by the Fed to securities accounts. Why would anyone who knew how it worked care which account the dollars were in? Especially when spending has nothing, operationally, to do with those accounts.

Fratto dismissed the markets’ current calm, noting that until the European debt crisis erupted early last year, investors had priced German and Greek debt as near equivalents.

“Markets can make mistakes,” Fratto said.

So can he. That all applies to the US states, not the federal govt.

$9.4 Trillion Outstanding

If recent budgetary trends continue unchanged, the U.S. risks a fiscal day of reckoning, slower growth or both.

No it doesn’t.

Altman notes that the U.S. debt outstanding is “enormous.” As of the end of 2010, debt held by the public was $9.4 trillion or 63 percent of gross domestic product — roughly half of the corresponding figures for Greece (126.7 percent) and Japan (121 percent) and well below countries such as Italy (116 percent), Belgium (96.2 percent) and France (78.1 percent).

Once a country’s debt-to-GDP ratio exceeds 90 percent, median annual economic growth rates fall by 1 percent, according to economists Kenneth Rogoff and Carmen Reinhart.

Wrong, that’s for convertible currency/fixed exchange rate regimes, not nations like the US, Uk, and Japan which have non convertible currencies and floating exchange rates.

The Congressional Budget Office warns that debt held by the public will reach 97 percent of GDP in 10 years if certain tax breaks are extended rather than allowed to expire next year and if Medicare payments to physicians are held at existing levels rather than reduced as the administration has proposed.

So???

AAA Rating

For now, Standard & Poor’s maintains a stable outlook on its top AAA rating on U.S. debt, assuming the government will “soon reveal a credible plan to tighten fiscal policy.” Debate over closing the budget gap thus far has centered on potential spending reductions. S&P says a deficit-closing plan “will require both expenditure and revenue measures.”

Measured against the size of the economy, U.S. federal tax revenue is at its lowest level since 1950. Tax receipts in the 2011 fiscal year are expected to equal 14.4 percent of GDP, according to the White House. That compares with the 40-year average of 18 percent, according to the Congressional Budget Office. So if tax receipts return to their long-term average amid an economic recovery, about one-third of the annual budget deficit would disappear.

Likewise, individual federal income tax rates have declined sharply since the top marginal rate peaked at 94 percent in 1945. The marginal rate — which applies to income above a numerical threshold that has changed over time — was 91 percent as late as 1963 and 50 percent in 1986. For 2011, the top marginal rate is 35 percent on income over $373,650 for individuals and couples filing jointly.

Not Overtaxed

Americans also aren’t overtaxed compared with residents of other advanced nations. In a 28-nation survey, only Chile and Mexico reported a lower total tax burden than the U.S., according to the Organization for Economic Development and Cooperation.

In 2009, taxes of all kinds claimed 24 percent of U.S. GDP, compared with 34.3 percent in the U.K., 37 percent in Germany and 48.2 percent in Denmark, the most heavily taxed OECD member.

“By the standard of U.S. history, by the standard of other countries — by the standard of where else are we going to get the money — increased tax revenues have to be a part of the solution,” said Jeffrey Frankel, an economist at Harvard University who advises the Federal Reserve Banks of Boston and New York.

So much for his legacy.

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WSJ Euro Symposium- Eichengreen, Sinn, Feldstein, Solbes, Hanke

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The utter lack of understanding of monetary operations is telling.

None recognize the significance of the fiscal hierarchy move that shifted the euro member nations from currency issuer to currency users, making them much like US states in that regard.

None recognize the difference between deficits at the ‘currency issuer’ level and deficits at the ‘currency user’ level.

None recognize that the problem is a shortage of aggregate demand, that is not caused by a lack of available bank credit, and that ‘fixing the banks’ changes nothing in that regard.

None recognize that the liability side of banking is not the place for market discipline and that the ECB is the only source of credible deposit insurance.

None recognize that the ECB is in the role of currency issuer and is the only entity that is not revenue constrained.

None recognized the role of fiscal balance in offsetting the ‘savings desires’ that cause unemployment and the output gap in general.

None have proposed a means of allowing govt deficits that can be sustained at full employment levels.

None have recognized that the forces at work have resulted in the ECB has assuming the role of dictating permissible ‘terms and conditions’ for its funding that has become mandatory for the survival of the currency union. This includes the ECB dictating fiscal policy for the member nations.

This list could go on forever.

The text is below.

I couldn’t read it all and don’t suggest you read it either.

WSJ: The Future of the Euro: A Symposium

Fix the Banks, Fix the Currency
By Barry Eichengreen

For the euro to grow into a happy and healthy adult, many things must happen. Most importantly, Europe needs to fix its banking system. Many European banks, starting with Germany’s, are dangerously over-leveraged, undercapitalized, and exposed to Greek, Irish and Portuguese debt. Rigorous stress tests followed by capital injections are the most important step that governments can take to secure the euro’s place.

Since European leaders seem fixated on what to do after Greece’s rescue package runs out in 2013—often, it appears, to the neglect of more immediate problems—they should also contemplate transferring responsibility for supervising their banks from the national level to the newly created European Banking Authority. The mistaken belief that a single currency is compatible with separate national bank regulators is, at the most basic level, why Europe is in the fix it’s in.

Indeed, Europe’s budget deficits are largely a result of the continent’s festering banking crisis. Greece may be an exception, but it’s clearly of a kind. The whole euro area would benefit from stronger discipline on borrowers and lenders. However, it is fantastical to think that this can be achieved by imposing Germanic debt ceilings Continent-wide. Germany’s fiscal rules work because of Germany’s history. The idea that they can be mechanically transplanted to other countries is a historical thinking at its worst.

The only discipline guaranteed to prevent fiscal excesses is market discipline. Reckless borrowers and lenders must be made to pay for their actions. Governments with unsustainable debts should be forced to restructure them, damage to their sovereign creditworthiness or not. The banks that lent to them should similarly suffer consequences, as should the bondholders who provided those banks with funds.

But whether Europe can afford to let market discipline work comes back to the condition of its banks. Only if banks are adequately capitalized can they take losses without collapsing the financial system. Only if they are adequately capitalized can the European Central Bank refuse to buy more Greek, Irish and Portuguese bonds, and only then will the EU be able to say “no more bailouts.”

And once this experience with market discipline is burned into Europe’s collective consciousness, it will be correspondingly less likely that borrowers and lenders will again succumb to similar excesses.

In other words, European governments need to “put the risk back where it belongs, namely in the hands of the bondholders.” Those are not my words. They are from the mouth of Bundesbank President Axel Weber speaking in Dusseldorf on Feb. 21. But while President Weber is right about the principle, he is wrong to think this can wait until 2013.

Mr. Eichengreen is a professor at the University of California, Berkeley. His book, “Exorbitant Privilege: The Rise and Fall of the Dollar,” (Oxford University Press) was published in the U.K. last month.

Survival Isn’t Guaranteed
By Hans-Werner Sinn

In my opinion the euro should survive. Though its members are too many and too disparate, the monetary union must be maintained, largely with its current number of states, for the benefit of political stability. The euro also offers measurable economic benefits, among them substantial reductions in transaction costs and exchange risks, which are prerequisites for exploiting the benefits of free trade.

Whether the euro will survive is another matter. This very much depends on whether European countries implement political and private debt constraints that effectively limit capital flows. The trade imbalances from which the euro zone is currently suffering have resulted from excessive capital flows brought about by interest-rate convergence and the apparent elimination of investment risks after the currency conversion was announced some 15 years ago. While huge capital exports brought a slump to Germany, the countries at the euro zone’s southern and western peripheries overheated, with the bust and boom resulting in current-account surpluses and deficits respectively.

Automatic sanctions for excessive public borrowing, and a reform of the Basel system that forces banks to hold equity capital if they invest in government bonds, are among the political constraints necessary for the euro to survive. But much more important are private constraints.

After years of negligence, private markets have recently started to impose more rigid debt constraints on overheated euro economies. So the brakes kicked in eventually, but much too abruptly, triggering Europe’s sovereign debt crisis. What Europe needs is a crisis mechanism that is able to activate markets earlier and allow for a fine-tuning of the brakes they impose on capital flows; in sum, a crisis mechanism that helps to prevent a crisis in the first place and mitigates it when it occurs.

Such a system has recently been proposed by the European Economic Advisory Group at the Center for Economic Studies and the Ifo Institute for Economic Research (CESifo). The plan’s essential feature is a three-stage rescue mechanism that distinguishes between a liquidity crisis, impending insolvency, and full insolvency, and offers specific measures in each of these stages. The system places the most emphasis on a piecemeal debt-conversion procedure that contemplates haircuts in the second of these stages, which could help to avoid full insolvency by acting as an early warning signal for investors and debtors alike.

The system would allow Germany to gradually appreciate in real terms by living through a boom that generates higher wages and prices and thus reduces the country’s competitiveness, while cooling down the overheated economies of the south such that the resulting wage and price moderation would improve their competitiveness. European trade imbalances would gradually reduce.

If Europe, on the other hand, moves to a system of community bonds, where national debts are jointly guaranteed by all countries, then excessive capital flows would persist, and so would trade imbalances. The countries at Europe’s southern and western peripheries would abstain from necessary real depreciation, and Germany would not appreciate, with the result that trade imbalances would continue with ever-increasing foreign debt and asset positions respectively. In the end, Germans would own half of Europe. I do not dare to imagine the political tensions that would bring about. The death of the euro would be the least of our worries.

Mr. Sinn is president of Germany’s Ifo Institute for Economic Research and the CESifo Group.

David Gothard

Still an Economic Mistake
By Martin Feldstein

I continue to believe that the creation of the euro was an economic mistake. It was clear from the start that imposing a single monetary policy and a fixed exchange rate on a heterogeneous group of countries would cause higher unemployment and persistent trade imbalances. In addition, the combination of a single currency and independent national budgets inevitably produced the massive fiscal deficits that occurred in Greece and other countries. And the sharp drop in interest rates in several countries when the euro was launched caused the excessive private and public borrowing that eventually created the current banking and sovereign-debt crises in Spain, Ireland and elsewhere.

But history cannot be reversed. Despite these problems, the euro will continue to exist for the foreseeable future. It will continue even though that will require large fiscal transfers from Germany and other core nations to those euro-zone countries with large debts and chronic trade deficits.

One reason for the euro’s likely survival is purely political. The political elites who support the euro believe it gives the euro zone a prominent role in international affairs that the individual member countries would otherwise not have. Many of those supporters also hope that the euro zone will evolve into a federal state with greater political power.

There is also an economic reason that the euro will survive. While hard-working German voters may resent the transfer of their tax money to other countries that enjoy earlier retirement and shorter workweeks, the German business community supports paying taxes to preserve the euro because it recognizes that German businesses benefit from the fixed exchange rate that prevents other euro-zone countries from competing with Germany by devaluing their currencies.

The euro will not only survive but will likely continue to increase in value relative to the dollar as sovereign-wealth funds and other major investors shift an increasing share of their portfolios to euros from dollars.

Those investors had been quietly diversifying their investment funds to euros before the crisis began in Greece. They stopped temporarily because of uncertainty about the future of the currency. But they eventually came to recognize that the problems of the peripheral countries were not a problem for the euro and should be reflected in country-specific interest rates rather than in the euro’s value. The result was a rising euro and a renewed shift of portfolio balances to euros from dollars. As that process continues, the relative value of the euro will continue to rise.

Mr. Feldstein, chairman of the U.S. Council of Economic Advisers under President Reagan, is a professor of economics at Harvard University.

A Decade of Success
By Pedro Solbes

After 10 years with the euro, the economic crisis and its consequences in some countries of the euro zone have reopened the debate about the suitability of a single currency in the absence of a high level of political integration.

But the euro has been a great joint success, which has allowed for a long period of growth and price stability in Europe. It has had a different impact in each country, but its benefits have been seen across the board. The euro has permitted more coordinated action in Europe and has prevented competitive devaluations. This has been key not only for the euro zone, but also for the rest of Europe and even for the global economy. Without the euro, we would have witnessed an increase in protectionism, which would in turn have aggravated the impact of the crisis in Europe and elsewhere.

Would it have been easier to reach consensus in the G-20 without the euro zone? Would it have been easier to respond to the challenges and difficulties faced by the international financial system? Would there have been greater cash-flow access? The answer to all these questions is no. It could be argued that a fluctuating exchange rate could have limited the impact of the crisis in some countries. However, would the crisis have been avoided without correcting the fundamental problems in each country and subsequent generalized competitive devaluations? The absence of an exchange rate may have aggravated the problems that existed before the crisis. But have these been better tackled outside the euro? Some observers have affirmed that behavior outside the euro zone has not been any better.

Quite a few countries of the euro zone already faced significant risks before the crisis, both real (real-estate bubble, public and/or private debt) and financial (inadequate risk management or excessive dependence on external funding). In addition, in some cases, uncoordinated fiscal and monetary policies in the euro zone could have helped generate the problem. Experience shows that the Maastricht architecture designed to manage the euro zone has been lacking. Focusing economic-policy coordination in the fiscal arena, coupled with a somewhat lax implementation of norms, has not been enough. Leaving the task of correcting imbalances in the hands of euro member states has not worked. The crisis has brought to the fore the lack of a mechanism to help troubled countries before their problems end up affecting the entire euro zone.

As is often the case with the European construction process, the problem resides not only in diagnosing the problem. There is an urgent need for clear and quick solutions, backed by the political will to comply with what has been agreed, something not always easy to achieve when dealing with 27 different countries.

Even though it has not been adopted by all EU member states, the euro is today, as German chancellor Angela Merkel has recently expressed, an inherent element of the European integration process. The euro is here to stay and the real challenge is how to make it more efficient.

Mr. Solbes is chairman of the Executive Committee of FRIDE and former Spanish minister of economy.

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EU Daily | Europe’s Bank Signals It May Raise Interest Rates to Tamp Down Inflation

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So the ECB,
which is funding the entire euro zone banking system,
and for all practical purposes backstopping the funding of the national govts as well
to keep their funding costs manageable as they struggle with the terms and conditions of the austerity mandates,

That same ECB is now looking to raise rates, a proposal which is already working to increase the funding costs of those national govts.

They must think hiking rates is the tool to use to control the ‘inflation’ they are concerned about?

‘Inflation’ that’s come from tax hikes and relative value shifts in food and energy, as a foreign monopolist hikes crude prices and the burning up of our food supply for fuel hikes food prices?

Rate hikes that shift funds from borrowers, like the national govts they are supporting, to rentiers who will be getting the pay increase from higher rates?

And rising interest rates will require more austerity measures to offset the increased interest expense?

Yes, they also believe ‘inflation’ comes from elevated ‘inflation expectations’ but even that channel of causation, as far fetched as it is, has to be confused by the large output gap and general weakness of aggregate demand? Higher interest rates will somehow cause trade unions to soften demand for pay increases so their members can afford to eat?

Seems it goes back to the old Bundesbank dynamic, where the CB would threaten politically distasteful rate hikes if the govt didn’t tighten fiscal?

Well, today the ECB is already controlling fiscal, so it’s all moot.

But the old reflexes are still there.

Somewhat the like the old reflex with regard to export driven growth, but without the ideological option of buying dollars previously discussed.

So putting it all together, they have the export driven policy reflex without the dollar buying that’s undermining itself by driving the euro higher, working to limit demand from exports,
as the ECB both funds the financial structure and imposes austerity which is working against domestic demand.

And the rate hike reflex which won’t alter the price pressures from food, energy, and taxes.

And no telling what they may do next.
With their levels of unemployment, food price increases, and a general feeling that there are no ideas from on high to get them out of this mess, and large pools of newly arrived immigrants getting hurt them most, civil unrest is not impossible?

Maybe recognize that Europe is nothing more than a poorly managed theme park, and get a Disney exec to run it?

German Two-Year Yields Climb to Two-Year High on ECB Rate Bets

By Emma Charlton and Keith Jenkins

March 4 (Bloomberg) — German two-year government notes rose while their Greek equivalents fell, on concern higher borrowing costs may hamper the region’s most indebted countries, spurring demand for the euro zone’s safer assets.

Greece’s two-year yields reached the highest since May 10, the first trading day after the European Union and the international Monetary Fund announced the creation of a bailout fund to backstop the euro. European Central Bank President Jean- Claude Trichet said yesterday it’s “possible” that rates will rise at the central bank’s April meeting. His comments drove the German two-year yield up 23 basis points yesterday, the biggest increase since January 2009.

“There are some questions being asked about what tighter policy does for wider Europe, so that’s helping the bid toward core product,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London. “Trichet was pretty clear that there would be a hike come April, so that’s going to underpin the German front-end going forward.”

The two-year note yield was two basis points lower at 1.76 percent as of 10:56 a.m. in London after reaching 1.84 percent, the highest since December 2008, according to data compiled by Bloomberg. The 1.5 percent security due March 2013 rose 0.035, or 35 euro cents per 1,000-euro ($1,387) face amount, to 99.49. The yield on German 10-year bunds, Europe’s benchmark government debt securities, was one basis point lower at 3.32 percent.

March 25 Deadline

Trichet will speak alongside governing council members including Mario Draghi and Christian Noyer at a Banque de France conference in Paris today. The ECB’s anti-inflation stance comes as European Union leaders approach a March 25 deadline for a reinforced plan to aid debt-strapped countries.

Greece’s two-year yields surged 24 basis points to 15.16 percent. The yield difference between German 2-year notes and Greek securities of a similar maturity was 13.41 percentage points, the widest since May 7, according to data compiled by Bloomberg.

Ten-year bunds were higher before a U.S. labor market report that is forecast to show employers added 196,000 workers last month, after a 36,000 gain in January, according to the median forecast of 84 economists surveyed by Bloomberg News. The report may also show the jobless rate increased to 9.1 percent from 9 percent.

“Right in front of payrolls data, people aren’t going to want to set too much risk on their books,” Wand said.

German-U.S. Spread

The yield difference, or spread, between German two-year notes and U.S. securities of the same maturity, narrowed four basis points to 98 basis points. It reached 103 basis points yesterday, the highest since Dec. 30, 2008, as traders added to bets that the European Central Bank will raise borrowing costs before the Federal Reserve.

The Frankfurt-based central bank, which left its key rate at a record low of 1 percent yesterday, is concerned about so- called second-round inflation effects, when companies raise prices and workers demand more pay to compensate for soaring energy and food costs, Trichet said. Euro-area inflation accelerated to 2.4 percent last month.

Euribor futures fell, pushing the implied yield on the contract expiring in December 2011 up two basis points to 2.18 percent. Earlier it rose to 2.215 percent, matching the highest since Feb. 22, 2010, as investors added to bets that the ECB will increase borrowing costs.

Forward contracts on the euro overnight index average, or Eonia, signal investors think the ECB will increase the key rate 25 basis points by its July meeting, Deutsche Bank AG data shows.

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China’s “dynamic differentiated required reserve ratios”

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This only works to raise the cost of funds for the targeted banks.

It’s still about price, not quantity

So far the actual quantitative measures remain the govt telling its banks to lend less, or else.
That does work.
The problem is it works via a hard landing/widening output gap.

From Yang Kewei

As small and medium sized banks contributed ~70% of new loans in 2011. It makes sense the PBOC implemented punitive required reserves on them. Given that, the tight liquidity reflected on 7d repo is explainable as S&M sized banks have to borrow to meet their RRR. This gave big local banks great opportunity to squeeze on tenor repos, but o/n is still stable given ample liquidity 1) cash back to banks from households after LNY 2) pboc bill maturing (most are held by big banks) 3) FX reserve accumulation (one indicator is that o/n repo is still quite stable which signals current liquidity situation.).

One additional impact of significant net amount of PBOC bill expiring since 4Q10 is that big banks have been passively extending duration of their assets. To maintain balanced balance sheet, banks could have some adjustment on their asset allocation going fwd.

China has slapped punitive reserves on multiple banks

* First official confirmation of punitive reserve moves

* Differentiated reserves key part of central bank policy

* China is trying to slow credit and money growth

February 22 (Reuters) — China has already imposed punitive required reserve increases on more than 40 banks this year, targeting those that have issued too many loans, state news agency Xinhua reported on Tuesday.

This approach, formally known as “dynamic differentiated required reserve ratios”, has been effective in restraining lending by banks and will be continued as a core part of the government’s efforts to control inflation, Xinhua said, citing an unnamed central bank source.

The report was the first official confirmation that Beijing has been using a complex new system for tweaking mandatory reserve levels on a regular basis as a way of disciplining unruly and especially profligate banks.

China has increased reserve requirements across the board for all banks twice this year. The dynamic increases have been on top of those and can be reversed once banks fall back into line with official lending and capital guidelines.

“Since the start of 2011, the central bank has already started using dynamic differentiated required reserve ratios as a tool in its monetary and credit controls,” Xinhua said.

“It has already imposed differentiated reserve requirements on more than 40 local financial institutions that had low capital adequacy ratios, overly fast credit growth and increasing cyclical risks,” it added.

The report did not name any of the targeted banks, nor did it disclose the magnitude of the punitive reserve increases.

It did say that the central bank would continue to draw on a mixture of tools, including interest rates and required reserves, in implementing a prudent monetary policy.

NEW TOOL

A local magazine said on Monday that China had abandoned dynamic differentiated reserves because the formula for determining them was too complex, but the central bank denied that.

The Xinhua report served to underscore that differentiated reserves have, in fact, become an essential component of China’s monetary policy toolkit.

The People’s Bank of China first unveiled plans for “dynamic differentiated required reserve ratios” last year to keep a tighter leash on banks.

Higher reserves force banks to lock up more of their deposits at the central bank, inhibiting their ability to lend and slowing money growth. Excess cash in the economy has been one of the root causes of the run-up in Chinese inflation, which hit an annual pace of 4.9 percent in January, near a two-year high.

China had previously imposed differentiated reserve requirement ratios on banks as a way to punish rampant lending.

But a “dynamic differentiated” system marks a departure from the past because the central bank has been reviewing lenders’ balance sheets on an on-going basis and looking at a wider range of indicators, including lending, capital and liquidity levels.

Chinese inflation is expected to quicken in coming months as global commodity prices and domestic food costs climb.

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March 30 2009 post

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Here’s what I said back a couple of years ago.

Unfortunately, not much has changed (including my suggestion at the time in an earlier post that it was all a pretty good environment for stocks which could easily double).

Review of the recession and how to end it

March 30th, 2009

  1. The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
     

  2. Less important what caused the drop in aggregate demand

    • The end of the subprime expansion in 2006 reduced the demand for housing
       
    • The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
       
    • The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
       
    • A shift in the propensity to spend due to the pro cyclical nature of credit worthiness

     

  3. My proposals for restoring aggregate demand:

    • A full payroll tax holiday – This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
       
    • Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
       
    • Caveat – Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
       
    • Political options for reducing imported fuel consumption:
       

      • Regressive – utilizing allocation by price (Carbon tax, fuel taxes)
         
      • Closer to neutral – mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
         
      • Progressive – substantially reducing speed limits to discourage driving and advantage public transportation

     

  4. Redirect banking to serve public purpose

    • Ban banks from all secondary markets.
       
    • Allow bank lending only to serve public purpose.
       
    • Do not use the liability side of banking for market discipline.

     

  5. Analysis of current situation

    • Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
       
    • Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
       
    • Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
       
    • All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
       
    • Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
       
    • The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
       
    • The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
       
    • Employment will not grow until real output of goods and services exceeds productivity growth.
       
    • Fuel prices are already moving higher.

     

  6. Conclusion

    • Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
       
    • They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:

      lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

    • The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
       
    • They are in this way over their heads, and it’s costing us dearly.
       
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