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Geithner backwards again on banks, risk, and recovery

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No we don’t. We ‘get out of this’ with a fiscal adjustment sufficient to restore output and employment, and as credit worthiness improves lending picks up.

Banking is necessarily pro cyclical Tim, get over it!

Geithner Says Some Banks to Need ‘Large Amounts’ of Assistance

by Ryan J. Donmoyer

Mar 29 (Bloomberg) — U.S. Treasury Secretary Timothy Geithner said that for the U.S. economy to recover from the recession, banks need to show more willingness to take risks and restore lending to businesses.

“To get out of this we need banks to take a chance on businesses, to take risks again,” Geithner said today on the ABC News program “This Week.”


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Re: Financial services

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(email exchange)

Yes!

>   
>   Sounds like Krugman has been reading your blog:
>   

The Market Mystique

by Paul Krugman

Mar 26 (NY Times) — But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.


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Student exam at Wartburg College

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Congrats, Professor Fullwiler- there are at least some students learning how the monetary system actually works!

EC342

Winter 2009

Case Study 5

The following quotes from rather famous figures or institutions are all completely incorrect regarding the nature of government debt and deficits according to the modern money framework described in class. For this case the task is to explain how the following quotes are incorrect.

As with the previous two cases choose 2-3 points in these quotes contradicting modern money, and explain the refutation of the point in the modern money paradigm.

In the interest of political balance, the quotes here are from a Democrat (President Obama), a Republican (Senator Judd Gregg), and the bi-partisan Congressional Budget Office.

Writing grading criteria are in effect.

Quote 1:

President Obama on 60 minutes

Mar 22 (CBS) —

KROFT: Is there some limit to the amount of money we can spend?

OBAMA: Yes.

KROFT: Or print trying to solve this crisis?

OBAMA: There is.

KROFT: And are we getting close to it?

OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.

Quote 2:

March 22, 2009
Gregg: ‘This country will go bankrupt’
Posted: 03:41 PM ET

From CNN Associate Producer Martina Stewart

GOP Sen. Judd Gregg warned Sunday that the country might be headed for a fiscal crash if spending isn’t controlled.

WASHINGTON (CNN) – Even though he was almost a member of the new Obama administration, New Hampshire Republican Judd Gregg Sunday slammed President Obama’s approach to handling the country’s fiscal outlook.

“The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.”

Gregg, known as one of the keenest fiscal minds on Capitol Hill, also told CNN Chief National Correspondent John King that he thought it was “almost unconscionable” for the White House to continue with its planned course on fiscal matters with unprecedented actual and projected budget deficits in the coming years.

“It is as if you were flying an airplane and the gas light came on and it said ‘you 15 minutes of gas left’ and the pilot said ‘we’re not going to worry about that, we’re going to fly for another two hours.’ Well, the plane crashes and our country will crash and we’ll pass on
to our kids a country that’s not affordable.”

Quote 3:

From page 43 of A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook published March 2009 by the Congressional Budget Office (CBO; http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf)

“The primary difference between the current projections and the ones published in January is the effect of the American Recovery and Reinvestment Act of 2009. Although ARRA will boost output significantly in the next several years, any short run effects of the stimulus legislation on the business cycle will have dissipated by the end of the projection period. In the latter part of the period, the legislation reduces projected output by roughly 0.1 percent, principally through its influence on capital accumulation.”

“Capital accumulation is affected because the increase in government debt is expected to displace, or “crowd out,” a smaller amount of private capital. That result occurs because the reduction in overall national saving dampens spending on business fixed investment and the construction of housing. Although the size of such displacement is very uncertain, CBO assumes that, in the long run, each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital).”


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UK’s Brown and King re: failed auction

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Brown ‘Terribly Fragile’ After Bond Auction Flops

by Robert Hutton and Mark Dean

Mar 26 (Bloomberg) — The first failed British bond auction in more than seven years leaves Prime Minister Gordon Brown’s reputation for economic competence even more tarnished as he battles recession and a rising tide of voter anger.

Brown, who had the backing of 30 percent of the electorate in a ComRes Ltd. poll last week, must now cope with what amounts to a vote of no confidence by investors in his ability to end the recession. Bank of England Governor Mervyn King, his ally for much of the past decade, warned a day earlier that there’s no more money for further spending.

Wrong! Spending is not inherently constrained by revenues.

King must not understand how the monetary system works.

“The notion that Brown is leading us to the promised land is laughable,” said Ruth Lea, economic adviser to the Arbuthnot Banking Group Plc in Solihull, England. “He cannot get to grips with how other people see this country now, as the sick man of Europe.”

Yes, that’s how most see it, but they don’t understand how the monetary system works.

The Treasury yesterday tried to sell 1.75 billion pounds ($2.6 billion) of 40-year gilts and got 1.63 billion pounds of bids, a sign that investors are reluctant to finance his record borrowing.

No, a sign at that point in time that investors didn’t want to buy that many bonds of that maturity.

This does not constrain government spending.

“Brown’s strategy now looks terribly fragile,” said Mark Wickham-Jones, a professor of politics at Bristol University. “His situation is economically extremely uncertain, politically risky and this auction again highlights how we are now in un-chartered territory.”

He doesn’t seem to understand the monetary system either.

G-20 Tour

The auction failure couldn’t have come at a worse time for Brown, who set off on a five-day tour this week to win support for his economic-reform plans before a summit of leaders from the Group of 20 nations he’s hosting in London on April 2. He’s in Brasilia today and due to visit Chile after speaking in New York yesterday.

He does understand that he does not need their support for anything regarding the UK economy.

German Chancellor Angela Merkel has resisted Brown’s push for a new fiscal stimulus, saying her country already has committed to a boost worth 4.7 percent of gross domestic product.

Germany does have funding constraints the UK doesn’t have as per the eurozone institutional arrangements.

Brown’s Agenda

The government says the G-20 will focus on stabilizing financial markets, reforming global financial institutions and helping people get through the recession. Brown wants them to agree on a fiscal stimulus to support growth, something King warned might not be affordable.

More evidence King doesn’t understand the monetary system. ‘Affordable’ is not an applicable concept regarding nominal spending with a non convertible currency.

“Given how big these deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,” King said in Parliament on March 24.

Brown’s spokesman Tom Hoskin said yesterday the prime minister wasn’t troubled by the auction failure. “There have been other auctions that have been uncovered in other countries,” he told reporters in London. “The underlying strength of the market in gilts is there.”

More to the point, it’s not a necessary condition for deficit spending. The economics of deficit spending are the same whether or not guilts are sold. The difference is long term rates are higher if the Treasury issues long term securities. They should listen to Goodhart and not issue or sell them at all.


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Geithner Plan

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This is what happens with a government that doesn’t know how the monetary system works and thinks it needs private capital participation:

Geithner Tempts Investors with Loans, 25% Returns

by James Sterngold

Mar 24 (Bloomberg) — The U.S. government’s plan to rid banks of toxic assets may attract investors with financing that helps generate returns as high as 25 percent. The Public-Private Investment Program would encourage the purchase from banks of certain securities backed by mortgages and other assets, as well as whole loans. Loans from the Federal Reserve and Federal Deposit Insurance Corp. debt guarantees will bring out the bidders.


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Why it is likely the banks ARE solvent

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The FDIC has a legal responsibility to take over insolvent banks.

They have aggressively done that, including taking over WAMU for liquidity concerns when it was legally solvent.

I view that as overly aggressive, as the banking model includes FDIC insured deposits for the further purpose of not using the liability side of banking as the place for market discipline. And, in fact, legal action vs the FDIC’s response to WAMU’s liquidity issues is not in progress.

So what may have happened subsequently in the case of the major banks getting government capital may have been something like this:

Phone call:

Shiela: Hi Barry, just a head’s up. A couple of major banks are up for exam, and if they don’t pass I’m legally bound to shut them down.

President: We don’t want that to happen, is there anything we can do?

Shiela: Well, you could increase their capital to levels where you can be sure they are legally viable.

Presidents: Thanks!

Next phone call:

President: Hi Ken. We need to get you enough capital right away to make sure you are legally solvent for the coming FDIC exam.

Ken: We are solvent, Barry, we don’t need any capital, but thanks for your concern and the kind offer!

President: Sorry, but we can’t take the chance the FDIC might decide to mark something down, declare some asset impaired, or otherwise cause your capital to fall under the legal minimum and declare you insolvent.

Ken: Ok, whatever you say, but again, we don’t want it or need it. So let me ask one favor- make sure we are allowed to give it back as soon as you feel it’s no longer in the national interest for us to keep it.

President: Thanks!


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CA Real Estate

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Thanks- more evidence it all could be turning the corner.

New Supply of ‘jumbo’ financing in pipeline

by Kenneth R. Harney

Mar 22 (LA Times) — LA Times says jumbo mortgage financing to increase – major banks are about to ramp up financing availability into the jumbo mortgage market, not to then securitize the loans but to keep on their own books. The market has been starved for financing since the onset of the credit crunch in ’07. BAC is one of the lenders rolling out a large financing program for jumbos.


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China to keep buying Treasuries

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Clever, those Chinese. Now they get to keep their currency down to support their exports while claiming they are acting altruistically to support Obama.

Fortunately for us this keeps the imports flowing our way and supports our standard of living.

I don’t think we did this by design, but instead it falls under better lucky than good.

China to Keep Buying Treasuries, Top Official Says

by Dune Lawrence and Kevin Hamlin

Mar 23 (Bloomberg) — China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth.


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Trichet on funding the national governments

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Trichet on funding the national governments

When asked specifically if there are any obstacles to the ECB purchasing government assets, Mr Trichet reiterated that the ECB “are not pre-committed for any new decisions”, while his comments suggest the issue of risk-sharing and fiscal indemnity remains an important consideration: “One element which has to be taken into account is that the risks of the central banks and the risks of the governments are, in the euro area, clearly separated without combination of risks or blending of responsibilities”.


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Swiss National Bank confirms beggar thy neighbor policy

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AKA, “Beggar Thy Neighbor” policy straight from the book.

SNB’s Jordan says Franc Can’t be Allowed to Strengthen Further

by Dermot Doherty

Mar 22 (Bloomberg) — The Swiss franc can’t be allowed to appreciate further as “excessive” strength would put Switzerland’s export industry at a “disadvantage” and threaten the country with higher unemployment, Sonntag reported, citing Swiss National Bank board member Thomas Jordan.

The SNB’s decision this month to purchase corporate bonds is aimed at reducing the risk premium by narrowing the spreads on such debt instruments, Jordan said in an interview in today’s
newspaper.

“We are facing a severe recession” and need to be “unconventional” in dealing with it, Jordan said. The SNB will expand the money supply “as strongly as is needed” to prevent deflation, according to the newspaper.


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