The least bang for the buck the better- means taxes can be that much less for a given amount of gov spending.

Professor Bill Mitchell’s blog is about as good as it gets if you have 20 minutes for a comprehensive, scholarly review of how it all works:

billy blog

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Portugal 5 Year Bond Yield Since August 2009

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Seems like the wrong time to be cutting aggregate demand?

Obama Plans to Raise as Much as $120 Billion From Bank Fees

By Hans Nichols

Jan. 12 (Bloomberg) — President Barack Obama plans to impose a fee on banks expected to raise about $120 billion in order to help recoup losses from the Troubled Asset Relief Program, according to an administration official.

The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who request anonymity.

The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
Agreed.

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Also, when net financial assets (savings) are being ’supplied’ by deficit spending there it that much less need to borrow
for the same spending, and, in any case, the deficit spending can reduce what would have otherwise been borrowed to spend by that amount.

The amounts all depend on who gets the deficit spending. If the man in the moon wins the national lottery and gets $1T in deficit spending and just rolls it in t bills there is no further economic/financial effect on anything, to use the extreme example to make the point.

In general, the current deficit spending is functioning to allow more consumption out of income rather than out of savings/debt as income and net financial assets are added to the economy. The Fed’s financial burdens ratios are coming down, and financial equity is being restored.

Agonizingly and irresponsibly slowly.

It’s a disgrace to the economics profession that they haven’t figured out how to sustain demand when all it takes
are a few spread sheet entries by govt.

I could teach any third grader to do it in 15 minutes.

Yesterday we got a live Presidential announcement over $2.4 billion in new clean energy spending to create 2,000 jobs.

With over 15 million unemployed and an annual shortfall of aggregate demand that’s could be well over $1 trillion.

In November total credit dropped 8.5% annualized rate, and while auto-related nonrevolving loans dropped a mere -2.9%, revolving credit plunged 18.5% annualized. This is a full blown consumer borrowing revolt.

Here is the month over month change in total consumer credit:

A chart of total consumer credit: in November it was at $2.464 trillion, after a record 10 sequential months of decline.

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Well stated!!

Bernanke doesn’t understand the basic economics of central banking

By Marshall Auerback

Dec 19 — I would like to incorporate a critique of quantitative easing based on Bernanke’s comments in Ed’s post “Quantitative easing and inflation expectations.”

You’ve got to focus on improving the conditions for potential borrowers, not on the banks’ balance sheets. Banks are never reserve constrained. Even the BIS, the central banks’ central bank, understands this. In a recent report, the BIS said the following:

In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.

It is obvious why this is the case. Loans create deposits which can then be drawn upon by the borrower. No reserves are needed at that stage. Then, as the BIS paper says:

in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system.

The loan desk of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks. They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans. In approving a loan they instantly create a deposit (a zero net financial asset transaction).

The only thing that constrains the bank loan desks from expanding credit is a lack of credit-worthy applicants, which can originate from the supply side if banks adopt pessimistic assessments or the demand side if credit-worthy customers are loathe to seek loans. Banks are never reserve constrained, so this comment below from Bernanke is either ignorant or deliberately misrepresents the actual operations of the banking system (as opposed to the nonsensical Economics 101 version).

Ultimately, if the economy normalized, and the Fed took no action, the banks would take those reserves, try to lend them out, and they would begin to circulate, and the money supply would start to grow. And then, ultimately, that would create an inflationary risk. So, therefore, as the economy begins to recover, and as we move away from this very weak economic environment, the Federal Reserve is going to have to pull those reserves out of the system.

The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts. It is commonly claimed that it involves “printing money” to ease a “cash-starved” system, and based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates.

Bank lending is not “reserve constrained.” Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterward. Even the BIS recognizes this. In reality, if the banks are short of reserves then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost). But the reason that the commercial banks are currently not lending much is because they are not convinced there are credit worthy customers on their doorstep.

The current incoherence of our economic policy making could diminish if we had a Fed chairman who understood how the banking system genuinely operated, as well as one who would understanding the linkages between banking lending and fiscal policy, which he persistently downplays (or even worse when he starts calling for long term reforms to balance the Federal government’s budget). It is a national tragedy that this man is being given the chance at another term in office.

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Still looks to me like it’s probably one go all go as Greece guarantees its own banks and should deposit insurance be questioned a general run on the entire euro banking system could be triggered. That could result in the close the entire payments system until it’s all reorganized with credible deposit insurance. Much like the US in 1934.

Greece - the catalyst on the puke in cash and CDS today was
was the S&P action yesterday. The ECB this year relaxed their
own rules to accept collateral to BBB- from A-. This
accomodating criteria will last until the end of 2010. If the
ECB were todecide to go back to the status quo ante in January
2011 then GGBs may not be eligible as ECB collateral (assuming
S&P follows the negative watch with a downgrade).

Greece suffering badly in cash markets (helped by low liquidty
due to a religious holiday in Italy and Spain).In 3Y, Greek bonds
are losing some 35 bp to Germany, In 10Y it’s about 28 bp.

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Yes, the deficit reduction polls are likely having a lot of influence on policy going into the 2010 elections and are a major obstacle to any kind of meaningful recovery.

And, worst of all, it was reported that Budget Director Peter Orszag was also sitting in on these discussions:

Obama to Give Afghan Strategy Decision on Dec. 1, Official Says

By Tony Capaccio and Roger Runningen

Nov. 24 (Bloomberg) — President Barack Obama will announce his decision on the next steps in the war in Afghanistan on or about Dec. 1, according to a U.S. official familiar with the issue.

Defense Secretary Robert Gates, Secretary of State Hillary Clinton and Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, are expected to discuss the decision before Congress that same week, and General Stanley McChrystal, the top U.S. commander in Afghanistan, would testify the following week, the official said.

White House Budget Director Peter Orszag has estimated that each additional soldier in Afghanistan could cost $1 million, for a total that could reach $40 billion if 40,000 more troops are added.

This is clear evidence that budget myths are, indeed, influencing national security issues, and therefore posing a security risk. I’d go so far as to say the deficit terrorists are currently the greatest risk to both national security and national prosperity.

Voters Continue to See Deficit Reduction as Top Priority (Rasmussen) While official Washington has seen many twists and turns in the legislative process this year, voter priorities have remained unchanged. Deficit reduction has remained number one for voters ever since President Obama listed his four top budget priorities in a speech to Congress in February. Forty-two percent (42%) say cutting the deficit in half by the end of the president’s first term is most important, followed by 24% who say health care reform should be the top priority. Fifteen percent (15%) say the emphasis should be on the development of new energy sources, while 13% say the same about education.

1 in 4 Borrowers Under Water (WSJ) The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage, according to the Census Bureau. More than 40% of borrowers who took out a mortgage in 2006 are under water. Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home’s value.


AP-GfK Poll: Debt turning shoppers into Scrooges (AP) 93 percent of Americans say they’ll spend less or about the same as last year, according to an Associated Press-GfK poll. Half of all those polled say they’re suffering at least some debt-related stress, and 22 percent say they’re feeling it greatly or quite a bit. That second figure is up from 17 percent just last spring. 80 percent say they’ll use mostly cash to pay for their holiday shopping.


PC shipment forecast raised as 3Q sales pick up (AP) A rebound in purchases of personal computers worldwide will lead to a 2.8 percent increase in shipments this year. Gartner Inc. sees worldwide PC shipments topping 298.9 million in 2009, a reversal from its prior forecast of a 2 percent decline. PC shipments fell in the first half of this year. Gartner sees shipments for 2010 rising 12.6 percent to 336.6 million. But the value of computer sales is expected to drop by 10.7 percent to $217 billion this year because manufacturers are cutting prices to move product.

Businesses still cautious on borrowing (Reuters) The Equipment Leasing and Finance Association’s capex financing index fell to $4.3 billion in October, down 32.8 percent from last October and down 8.5 percent from September. The group said the percentage of borrowers delinquent 30 days or more on their capex loans, leases or lines of credit rose to 4.2 percent last month, up from 3.6 percent last year but down from 5.6 percent in September. Charge-offs as a percentage of all receivables rose to 1.7 percent in October, from 1.36 percent last year but down from 3.01 percent in September. Only 66.2 percent of applicants got the green light from lenders in October, down from 71.7 percent last year and 67.9 percent in September. More than half the money invested in plants, equipment and software in the United States in any given year is financed with loans, leases and lines of credit.

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this is telling:

Obama is Losing Independent Voters

By Scott Rasmussen and Douglas E. Schoen

Nov. 16 (WSJ) — A look at more detailed data shows why Mr. Obama’s ratings are likely to drop even further.

A CNN poll released Nov. 6 found that 47% of Americans believe the top issue facing the country is the economy, while only 17% say its health care. However, the bulk of the president’s efforts over the past six months have been not on the economy but on health care, an issue in which he continues to draw negative ratings.

In a Rasmussen Reports poll taken after the House of Representatives passed health-care reform by the narrowest of margins last Saturday night, 54% of likely voters say they are opposed to the plan with only 45% in favor. Furthermore, in the all-important category of unaffiliated voters, 58% oppose the bill. That’s one of the reasons why so many moderate Democratic House members opposed it.

The CNN poll also shows that in addition to health care, a majority of Americans disapprove of how Mr. Obama is handling the economy, Afghanistan, Iraq, unemployment, illegal immigration and the federal budget deficit. Put simply, there isn’t a critical problem facing the country on which the president has positive ratings.

An NBC/Wall Street Journal poll conducted from Oct. 22-25 found that the president’s personal ratings have suffered a similar decline. His rating for being honest and straightforward has fallen eight points from January to 33% and his rating for being firm and decisive has fallen 10 points to 27%.

Even more fundamentally, a Washington Post/ABC News poll conducted from Oct. 15-18 shows that the president has now reached a point where less than a majority of Americans believe he will make the right decisions for the country.

Deficit reduction and reining in spending are critically important priorities for the vast majority of the electorate. Indeed, according to a Rasmussen Reports Poll conducted at the end of last month, voters say deficit reduction is most important and health care is a distant second.

Moreover, according to a poll released by the Kaufman Foundation in September, a plurality of voters (32%) think the federal government should cut tax rates on payrolls and businesses to stimulate employment, particularly at a time when unemployment is at double-digits. Mr. Obama campaigned on tax cuts for 95% of the American people, but according to a Rasmussen Reports poll released in mid-August, just 6% of likely voters expect to get a tax cut. Over 40% of respondents believe that they will get a tax increase.

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A bit like the today’s economic policy drama

Except that at the end, the Greeks come to a constructive policy solution. We’re more like the Germans.

Didn’t Archimedes jump out of the tub and invent the vacuum cleaner?

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Yes, interesting that over 75% are still paying and probably will continue to pay for a variety of reasons, including they personally guaranteed the payments, their payments have, in many cases, gone down, they like living where they are living, and, not least, they believe in meeting their obligations.

A corrupting influence that, anecdotally, is widespread is that most assistance programs require you be delinquent. A friend of mine who is current on his mtg and intends to stay current was just told he could get assistance if he stopped making his payments.

When govt. implements programs with these kinds of incentives they induce a breakdown in the moral fabric of the society.
There have always been numerous examples of this, particularly with the income tax laws, but the last year has seen a disturbing increase in new legislation with counterproductive incentives.

This also begs for a payroll tax holiday and per capita federal revenue sharing for the states to enhance net incomes needed to make the mortage payments and ‘fix’ the economy from the bottom up.

Yet the entire Congress as well as the Administration seems silent on this issue.

Fitch Sees 60% of Current RMBS Borrowers Underwater

By Diana Galobay

Oct. 13 — The majority — 60% — of remaining performing borrowers within ‘06- and ‘07-vintage residential mortgage-backed securities (RMBS) bear negative home equity, meaning they are underwater on their mortgages and owe more than their houses are worth.

This overwhelming presence of negative equity is hampering sustained improvement in RMBS performance, according to Fitch Ratings.

“[N]egative equity reduces a borrower’s inventive to pay their mortgage and limits their options when faced with financial difficulties,” said senior director Grant Bailey in a statement.

The rate of previously performing borrowers rolling into delinquency status showed “notable improvement” in the first half of 2009 and stabilized during the summer at an elevated level. The percentage of previously performing borrowers rolling into delinquency “increased modestly” in September, Fitch said.

The rating agency expects US unemployment to peak at 10.3% in the middle of next year, further pressuring current borrowers. House prices will ultimately decline another 10% over the next year.

“Home price figures in recent months were temporarily helped by the reduced share of distressed property liquidations due to foreclosure moratoriums and servicers’ increased efforts to qualify borrowers for modifications,” Fitch said. “However, the number of distressed borrowers has continued to grow.”

The rating agency noted the number of non-agency borrowers 90 plus days delinquent reached 1.66m in September — the highest level on record.

“While increased modification efforts and an extension of the first time home buyer tax credit may help home prices, the ultimate increase in liquidations from the growing distressed inventory will likely cause a further price decline,” Bailey said.

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Professor Mitchell at his finest!

Billy Blog: Immediate cuts to budget deficit will worsen recession

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Tax Driven Money

By Mathew Forester

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On Mon, Sep 21, 2009 at 7:38 AM, Greg wrote:

Hi Warren

What are your thoughts regarding the scheme in Ireland announced this past week whereby the government takes real estate assets from the big banks in return for bonds (at a discount implying some sort of bank subsidy) and whereby said banks can in turn repo those bonds at the ECB for cash?

Of course the devil will be in the details but it seems to me this will require all of us to rethink garlic belt sov. risk, the Euro, and the ECB if it comes to fruition.

Haven’t seen the details but reads to me like the govt is simply purchasing real estate assets?

That leads to the usual questions of pricing, etc. the proved unworkable in the US and probably a lot of other places.

Banks are already public/private partnerships with govt guaranteeing the deposits.

So there are several other things the govt might do to get to the same end.

For example, allow the banks to put the designated assets in segregated accounts with specified capital set aside for those assets, wherein losses that exceed that capital specified for the seg account are covered by the govt and not the rest of the banks capital.

That way the govt still functionally owns the assets it’s trying buy but doesn’t have the servicing and accounting and brokerage issues associated with an actual purchase by the cb. and the banks are fully regulated and supervised.

The US govt could have done same with the mbs it has bought for itself and saved itself the accounting nightmare and expense and substantial fees to brokers from buying those secs directly.

And, as you say, in the Eurozone this adds a risk to the national govt itself. So far it seems markets aren’t disposed to challenge their liquidity, and the Fed rescued them last year with the unlimited dollar swap lines (unsecured loans) to the ECB that totalled maybe 600 billion globally.

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Levy Presentation as Presented

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http://www.levy.org/pubs/rpt_19_3.pdf

Levy Recap

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From ‘Lila:’

“Of all the contributions America has made to the history of the world, the idea of freedom from a social hierarchy has been the greatest…”

“And yes, although Jefferson called this doctrine of socially equality ’self evident,’ it is not at all self evident. Scientific evidence and the social evidence of history indicate the opposite is self-evident. There is no ’self-evidence’ in European history that all men are created equal. There’s no nation in Europe that doesn’t trace its history back to a time when it was ’self-evident’ that all men are created unequal. Jean Jacques Rousseau, who is sometimes given credit for this doctrine, certainly didn’t get it from the history of Europe or Asia or Africa. He got it from the impact of the New World upon Europe and from contemplation of one particular kind of individual who lived in the New World, the person he called the ‘Noble Savage.’

The idea that ‘all men are created equal’ is a gift to the world from the American Indian. Europeans who settled here only transmitted it as a doctrine that they sometimes followed and sometimes did not. The real source was someone for whom social equality was no mere doctrine, who had equality built into his bones. To him it was inconceivable that the world could be any other way. For him there was no other way of life.”

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From ‘Lila:’

“The idea that ‘man is born free but is everywhere in chains’ was never true. There are no chains more vicious than the chains of biological necessity into which every child is born. Society exists primarily to free people from these biological chains. It has done that job so stunningly well intellectuals forget the fact and turn upon society with a shameful ingratitude for what society has done.”

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From ‘Lila:’

“What the Metaphysics of Quality indicates is that the 20th century intellectual faith in man’s basic goodness as spontaneous and natural is disastrously naive. The ideal of a harmonious society in which everyone without coercion cooperates happily with everyone else for the mutual good of all is a devastating fiction. It isn’t consistent with scientific fact…Primitive tribes such as the American Indians have no record of sweetness and cooperations with other tribes. They ambushed them, tortured them, dashed their children’s brains out on rocks. If man is basically good, than maybe it’s man’s basic goodness which invented social institutions to repress this kind of biological savagery in the first place…”

…We must understand that when a society undermines intellectual freedom for its own purposes it is absolutely morally bad, but when it represses biological
freedom for its own purposes it is absolutely morally good. The destructive sympathy of intellectuals lawlessness in the sixties and since is derived,
no doubt, from what is perceived to be a common enemy, the social system. But the Metaphysics of Quality that this sympathy was really stupid.”

The idea that biological crimes can be ended by intellect alone, that you can talk crime to death, doesn’t work…Only social patterns can control
biological patterns, and the instrument of conversation between society and biology is not words. The instrument of of conversation between society and
biology has always been a policeman or a soldier and his gun. All the laws of history, all the arguments, all the Constitutions and the Bills of Rights and
Declarations of Independence are nothing more than instructions to the military and the police.”

A culture that supports the dominance of social values over biological values is an absolutely superior culture one that does not, and a culture that supports the dominance of intellectual values over social values is absolutely superior to one that does not.”

Where biological values are undermining social values, intellectuals must identify social behavior, no matter what its ethnic connection, and support it all the way without restraint. Intellectuals must find biological behavior, no matter what its ethical connection, and limit or destroy destructive biological patterns with complete moral ruthlessness, the way a doctor destroys germs, before those biological patterns destroy civilization itself.”

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We now fact the risk that Obama loses whatever control of Congress he might have had as he loses popular support and the nation goes rudderless, while rising unemployment and faltering financial markets again work to get the deficit where it needs to be via the very, very ugly automatic stabilizers that might have more work to do.

And nothing the right fiscal adjustments (payroll tax holiday/per capita revenue sharing) can’t immediately reverse, but that seems less and less likely with each passing day.

And a national media that continues to have it all wrong.

On Mon, Aug 17, 2009 Russell Huntley wrote:

I would agree and I am an Independent. I know he has lost the progressives.

I have not seen Obama do anything different that what Bush did:

Still doing extraditions and harsh interrogations (possibly torture)

Still fighting wars and wasting tax payer’s money.

Still imprisoning 3% of our population for profit.

Economy is still a mess because the man who stood for change surrounded himself with a Wall Street team, who know nothing different. So the banks keep barely surviving. He should have put the money in the hands of the civilians and business through a payroll tax cut. Business’s would have had more money to retain employees and employees would have more money to buy goods, and if needed to save. Those savings would have gone to banks.

Health care — will give him credit, he is trying to give it a shot, but probably will end up doing nothing new but lining some pockets along the way.

Cap and trade — again whose pockets does that line. Probably GS and JP Morgan.

Stimulus — Where are our great new infrastructure projects. I thought we were going to build a ladder to stars, not a pit to hell.

By the way — Peter Schiff, the doom and gloomer, gold advocate and a person who thinks the FED should be abolished, gets a lot of press coverage. He recently announced that is running for Senator Dodd’s seat as a Republican. In his first month he raised $800,000. Pretty impressive. I think there is a large mass of the population out there who feel 100% unrepresented and who will support someone who says that they will represent them. Obama did it, but it appears he cannot speak honestly and that he is merely a mirage and probably the reason why his poll numbers are going in Bush’s direction.

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