billy blog Wed 2010-09-29 10:15 EDT

Budget deficits do not cause higher interest rates

Bill Mitchell

...An often-cited paper outlining the ways in which budget deficits allegedly push up interest rates is -- Government Debt -- by Elmendorf and Mankiw (1998 -- subsequently published in a book in 1999). This paper was somewhat influential in perpetuating the mainstream myths about government debt and interest rates...Their depiction of...Ricardian equivalence...alleges that: ``the choice between debt and tax finance of government expenditure is irrelevant...[because]...a budget deficit today...[requires]...higher taxes in the future...'' ...I have dealt with this view extensively...Ignoring the fact that the description of a government raising taxes to pay back a deficit is nonsensical when applied to a fiat currency issuing government, the Ricardian Equivalence models rest [on] several key and extreme assumptions about behaviour and knowledge. Should any of these assumptions fail to hold (at any point in time), then the predictions of the models are meaningless. The other point is that the models have failed badly to predict or explain key policy changes in the past. That is no surprise given the assumptions they make about human behaviour. There are no Ricardian economies. It was always an intellectual ploy without any credibility to bolster the anti-government case that was being fought then (late 1970s, early 1980s) just as hard as it is being fought now...So where do the mainstream economists go wrong? At the heart of this conception is the [pre-Keynesian] theory of loanable funds...where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times...Mankiw claims that this ``market works much like other markets in the economy''...[assuming] that savings are finite and the government spending is financially constrained which means it has to seek ``funding'' in order to progress their fiscal plans. The result competition for the ``finite'' saving pool drives interest rates up and damages private spending. This is what is taught under the heading ``financial crowding out''...Virtually none of the assumptions that underpin the key mainstream models relating to the conduct of government and the monetary system hold in the real world...When confronted with increasing empirical failures, the mainstream economists introduce these ad hoc amendments to the specifications to make them more realistic...The Australian Treasury Paper [used advanced econometric analysis to find that] domestic budget deficits do not drive up interest rates. The long-run effect...is virtually zero. The short-run effect is zero!...toss out your Mankiw textbooks...

Billy Blog; budgets deficit; caused higher Interest rate.

Mon 2010-05-24 10:55 EDT

The Root Cause Of Recurring Global Financial Crises

Henry Liu

Severe global financial crises have been recurring every decade: the 1987 crash, the 1997 Asian financial crisis and the 2007 Credit Crisis. This recurring pattern had been generated by wholesale financial deregulation around the world. But the root causes have been dollar hegemony and the Washington Consensus...The Washington Consensus has since been characterized as a ``bashing of the state'' (Annual Report of the United Nations, 1998) and a ``new imperialism'' (M Shahid Alam, ``Does Sovereignty Matter for Economic Growth?'', 1999). But the real harm of the Washington Consensus has yet to be properly recognized: that it is a prescription for generating failed states around the world among developing economies that participate in globalized financial markets. Even in the developed economies, neo-liberalism generates a dangerous but generally unacknowledged failed-state syndrome.

Recurring Global Financial Crises; root cause.

Mish's Global Economic Trend Analysis Sat 2010-05-22 13:55 EDT

Richard Koo On Why This Recession Is Different; Mish On What To Do About It

Michael Shedlock

The Business Insider has a very interesting presentation by Richard Koo on The Real Reason Why This Recession Is Completely Different...The reason the recession is different is this is credit bubble busting depression not a recession. The effects are masked because of food stamps, unemployment insurance, and because of foreclosure policy...Koo blames cutbacks in fiscal stimulus in 1999 and 2001 as the reason Japan remains mired in deflation. I do not buy it...The real lesson is no matter how much money you throw around, economies cannot recover until noncollectable debts are written off...The moment fiscal stimulus stops economies are virtually guaranteed to relapse until the core problem is resolved. The problem is Asset Bubbles, Malinvestments, and debts that cannot possibly be collected...

different; Mish; Mish's Global Economic Trend Analysis; Recession; Richard Koo.

Tue 2010-04-27 08:27 EDT

Web of Debt - COMPUTERIZED FRONT RUNNING: ANOTHER GOLDMAN-DOMINATED FRAUD

Ellen Brown

While the SEC is busy investigating Goldman Sachs, it might want to look into another Goldman-dominated fraud: computerized front running using high-frequency trading programs...Wall Street commentator Max Keiser...claims to have invented one of the most widely used programs for doing the rigging. Not that that's what he meant to invent. His patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating ``front running'' -- brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running...Keiser and HSX co-founder Michael Burns applied for a patent for a ``computer-implemented securities trading system with a virtual specialist function'' in 1996, and U.S. patent no. 5960176 was awarded in 1999...The listing for Keiser's patent shows that it has been referenced by 132 others involving automated program trading or HFT...

Computerized Front Running; debt; Goldman-dominated fraud; Web.

zero hedge Mon 2009-12-28 15:57 EST

What Came First: The Federal Reserve Or Economic Bubbles? A Brief History Of The Federal Reserve's Creation

A fantastic history of the reasons for, and the creation of, the Federal Reserve, courtesy of Murray Rothbard and our friends at Mises Institute, with the article originally appearing in Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp. 3--51. It is also reprinted in A History of Money and Banking in the United States and as a monograph. This is a must read for anyone who is curious why the Federal Reserve (with or without Goldman) is the sole organization responsible for not only perpetuating the interests of a select few of financial oligarchs, but in essence shaping monetary, fiscal, financial and political policy in the entire developed world.

Brief History; CAME; economic bubbles; Federal Reserve; Federal Reserve's Creation; Zero Hedge.

The Economic Populist - Speak Your Mind 2 Cents at a Time Sun 2009-12-13 09:08 EST

RUBIN'S RUBES: Matt Taibbi's slapdown of the Obama Administration

In the December issue of Rolling Stone the journalist Matt Taibbi hits yet another grand slam exposing the murky world of Wall Street and Washington politics ("Obama's Big Sellout"). Taibbi provides a detailed and thoughtful analysis on the myriad connections between numerous Obama appointees and Robert Rubin, the Obama presidential campaign's economic advisor, and former Clinton Treasury Secretary who led the charge for the passage of the Gramm-Leach-Bliley Act of 1999, to create the megamerger that was to become Citigroup.

economic populist; Matt Taibbi's slapdown; Mind 2 Cents; Obama administration; RUBIN'S RUBES; speaking; Time.

zero hedge Tue 2009-11-03 19:57 EST

Guest Post: Systemic Risk is All About Innovation and Incentives: Ed Kane

Edward J. Kane vi Chris Whalen

...we present the views of our friend and mentor Ed Kane of Boston College, who argues that the problem with the financial regulatory framework is not the law, regulation nor even the regulators, but rather the confluence of poorly aligned incentives and financial innovation... The financial crisis of 2007-2009 is the product of a regulation-induced short-cutting and near elimination of private counterparty incentives to perform adequate due diligence along the chain of transactions traversed in securitizing and re-securitizing risky loans (Kane, 2009a). The GLBA [Gramm-Leach-Bliley Financial Modernization Act of 1999] did make it easier for institutions to make themselves more difficult to fail and unwind. But it did not cause due-diligence incentives to break down in lending and securitization, nor did it cause borrowers and lenders to overleverage themselves. Still, the three phenomena share a common cause. Excessive risk-taking, regulation-induced innovation, and the lobbying pressure that led to the GLBA trace to subsidies to risk-taking that are protected by the political and economic challenges of monitoring and policing the safety-net consequences of regulation-induced innovation. These challenges and the limited liability that their stockholders and counterparties enjoy make it easy for clever managers of large institutions to extract implicit subsidies to leveraged risk-taking from national safety nets (Kane, 2009b)...To reduce the threat of future crises, the pressing task is not to rework bureaucratic patterns of financial regulation, but to repair defects in the incentive structure under which private and government supervisors manage a nation's financial safety net.

Ed Kane; Guest Post; incentives; innovation; systemic risk; Zero Hedge.

Thu 2008-02-14 00:00 EST

Hussman Funds - Going for the Gold

Four simple indicators for monitoring the condition of the precious metals markets; adapted from 1999 Hussman Econometrics

Go; gold; Hussman Funds.

Tue 2007-08-28 00:00 EDT

Hussman Funds - Weekly Market Comment: August 27, 2007 - Knowing What Ain't True

"Since 1999, the stock market has essentially gone nowhere in an interesting way, compared with risk-free Treasury bills." "One can go some distance in a mine field without anything blowing up it's just that the overall odds aren't good"

2007; ain't true; August 27; Hussman Funds; know; weekly market comments.

Sun 2007-04-29 00:00 EDT

The Journal's Russia Scandal

by Matt Taibbi and Mark Ames (The Nation, 1999-10-04)

Journal's Russia Scandal.