Sat 2010-07-24 15:55 EDT

The Path of Unemployment

Dean Baker

...The US, unlike most western European countries, is not set up to sustain long periods of high unemployment. Its system of social welfare is very much centered on work. This is most evident with health care. The vast majority of non-elderly people get their health care through employer provided health insurance. Individual policies tend to be very expensive, especially for people with any history of medical problems. When people lose their jobs, they generally lose their health care coverage as well...While the downturn has led to high and prolonged unemployment in the US, it has not had quite the same effect in Europe...several European countries, most notably Germany and the Netherlands, have adopted a policy of work sharing to limit unemployment...Under work-sharing schemes, instead of just paying workers for being completely unemployed, the government pays workers for being partly unemployed...Germany has been able to use this system to keep its unemployment rate from rising at all in the recession...In the US workers are seeing near double-digit unemployment with the implied loss of income and benefits, as well as the loss of self-esteem and social status that is associated with long-term unemployment. By contrast, workers in Germany and the Netherlands are adjusting to the falloff in demand with shorter workweeks and longer vacations...

path; unemployment.

Thu 2010-07-22 10:39 EDT

A Dual Mandate for the Federal Reserve, The Pursuit of Price Stability and Full Employment

Willem Thorbecke (2000)

Federal Reserve currently has two legislated goals--price stability and full employment--but a debate continues about making price stability the Fed's primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflation-averse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.

dual mandate; Federal Reserve; full employment; priced stabilize; pursuit.

naked capitalism Mon 2010-07-19 17:02 EDT

Elizabeth Warren in Treasury Crosshairs Again, Geithner Opposes Her as Head of Consumer Financial Services Protection Agency

To say there is no love lost between Treasury and Elizabeth Warren is probably putting it mildly. Treasury was gunning for her ouster in early 2009...During the period when the COP was openly and effectively critical of the TARP, there was also a full court press in the media against Warren. Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier...this Administration...may actually see loss of the Democrat majority in the House as a win (as in is finding creative ways to rationalize its fallen standing as a possible longer-term advantage). First, it allows Team Obama to blame whatever happens (or fails to happen) on the Republicans. Second, it gives the Administration plenty of air cover to become more openly corporatist (recall Clinton's famed move to the right after the 1994 mid term debacle).

Consumer Financial Services Protection Agency; Elizabeth Warren; Geithner opposes; Head; naked capitalism; Treasury Crosshairs.

The Money Game Fri 2010-07-16 18:52 EDT

Here's The Real Reason Cities And States Would Never Be Allowed To Default

David Goldman at Asia Times nails it: It's not about the impact on the real economy (the attendant cut in public services and public employment), it's about the effect that such defaults would have on the banks...that's a good rule of thumb. If it's going to hurt the banks, it's probably not going to be allowed to happen...The $800 billion bailout package for Europe's PIIGS (Portugal, Ireland, Italy, Greece, Spain) in May was in fact a bailout for the banking system...

allowed; default; Money game; Real Reason Cities; s; state.

Rajiv Sethi Tue 2010-06-15 14:25 EDT

Defenders and Demonizers of Credit Default Swaps

Rajiv Sethi

The recent difficulties faced by Greece (and some other eurozone states) in rolling over their national debt has let some to blame hedge fund involvement in the market for credit default swaps...Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider...such contracts allow pessimists to leverage (much more so than they could if they were to short bonds instead). The resulting increase in the cost of borrowing, which will rise in tandem with higher CDS spreads, can make the difference between solvency and insolvency. And recognition of this process can tempt those who are not otherwise pessimistic to bet on default, as long as they are confident that enough of their peers will also do so. This clearly creates an incentive for coordinated manipulation...

Credit Default Swap; defending; demonic; Rajiv Sethi.

Wed 2010-06-09 18:45 EDT

London business figures embroiled in Kaupthing fraud investigation: Serious Fraud Office team thought to be to be scrutinising Deutsche Bank's role in alleged suspect trades| Business | The Guardian

Simon Bowers| The Guardian

A Serious Fraud Office investigation into Kaupthing, the failed Icelandic bank, is understood to be pursuing a number of allegations of market manipulation involving investment vehicles controlled by some of the bank's largest clients, including several high profile UK business leaders. It is alleged that in the weeks and months before Iceland's financial system went into meltdown, certain trades improperly used at least €500m (£413m) of Kaupthing funds in an effort to manipulate credit derivatives. Bank bosses hoped this would restore crumbling confidence in Kaupthing's solvency in the months before the bank collapsed in October 2008...The effect was for investment vehicles -- financed by Kaupthing loans, and at least nominally controlled by some of the bank's largest clients -- to take on risk associated with the bank going bust. Kaupthing loans were being use to write insurance against Kaupthing bonds defaulting...Iceland's Truth Commission obtained details of emails sent by Deutsche Bank staff to Kaupthing which, according to its report, demonstrated that the German bank had been offering advice on how to influence the CDS price on Kaupthing bonds from early 2008...

alleged suspect trades; business; Guardian; Kaupthing fraud investigation; London business figures embroiled; scrutinising Deutsche Bank's role; Serious Fraud Office team thought.

Tue 2010-06-01 18:54 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 3

Bill Mitchell

The debate seems to be slowing down which means this might be my last response although we will see...I urge all those who are interested in finding out more about the employment guarantee approach to price stabilisation to read our major Report (released in December 2008) called Creating effective local labour markets: a new framework for regional employment policy...productive is not confined to contributing to the profit bottom-line of a capitalist enterprise. There are many things that deliver social returns that will never spin a private profit. Even mainstream economics says optimality should be defined in terms of social costs and benefits. It is just that they never get to that level and slip back always into the private returns mould...It also seems that conservatives in the US are starting to take to modern monetary theory. My colleague Warren Mosler has been giving modern monetary talks to the arch-conservatives in the US at the Tea Party meetings... would advocate that banks be regulated into going to back to being banks and outlawed from being merely commission recipients for securatised package deals etc. I would prevent banks from doing anything other than taking deposits and making loans. All the rest of the behaviour that the banks have been involved in would be outlawed...

Billy Blog; blogs Archive; Debate; reply Part 3; Spirit.

Mon 2010-05-24 10:11 EDT

Hussman Funds - Weekly Market Comment: Don't Mess with Aunt Minnie - May 24, 2010

John P. Hussman

...Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications....Treasury Secretary Eddie Haskell/Timothy Geithner has scheduled a trip to Europe this week to urge European leaders "to pay better attention to potential market reactions to policy moves, and to accelerate the European rescue program." This promises to be a fiasco. What could European leaders possibly find more arrogant than to be lectured on bailout policy - not simply by the U.S., but specifically by a one-trick pony bureaucrat whose chief trick is the ability to smoothly talk the language of prudence while simultaneously pillaging the fiscal stability of an entire nation for the benefit of bondholders who made bad loans?...Providing Greece (and possibly some of its neighbors) a graceful exit from the Euro requires greater courage but lower ultimate cost - particularly to the citizens of Greece itself - than a policy of forcing heavy austerity, dislocations, and internal deflation within Greece. The effect of austerity policies will be to damage the revenue side of the Grecian economy enough to leave the deficits little changed in any event. One would like to go back a decade in time and choose different policies that would have allowed Greece to maintain the Maastricht deficit limitations, but it is far too late to push a full-grown genie back into an itty-bitty bottle...

2010; 24; Aunt Minnie; Hussman Funds; Mess; weekly market comments.

Sat 2010-05-22 20:00 EDT

"Drop Dead Economics": The Financial Crisis in Greece and the European Union

Michael Hudson

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. The Greek bailout should be thought of as a TARP for German and other European bankers and global currency speculators. Almost $1 trillion is being provided by governments (mainly Germany, at the cost of its own domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.) This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The ³sanctity of debt -- sacrificing the economy to pay bondholders -- is to be used as an excuse to slash Greek public services, pensions and other government spending...

Drop Dead Economics; European Union; Financial Crisis; Greece.

The Wall Street Examiner Sat 2010-05-22 19:56 EDT

Imagine There's No Credit Market: Another Look At German Controls

...Thus, when people speak of "rescuing the credit markets" they really mean to say rescuing the liquidity providers who failed to assess lending risks so profoundly they can't make required payments. When people talk of German restrictions killing the credit markets, they really mean killing the middle-men (which may or may not have a deleterious effect on government borrowing). German restrictions on certain types of equity and credit transactions are not aimed at reduced government borrowing. They are aimed at reducing the amount (and means of capture) of profit "earned" by middle-men in the transaction- profits, mind you, as per our model, in the case of government borrowing, come either as a result of the money's original owner getting less interest than a direct deal would generate, the government paying more interest (which only comes from higher tax revenues) than a direct deal would generate, or some combination thereof. ...liquidity providing actions of "credit market" middle-men has run amok. As per J.S. Mill, that credit markets are exerting a distinct and independent influence of their own means they are out of order. With increasing frequency, credit is mispriced or unwisely extended and liquidity, the raison d'être of these people, dries up when it is needed most. Yet the middle-men who fail in their tasks expect to be rescued from their failures, and given even more ways to profit from lending other people's money, while the pool of available savings shrinks. ...In one sense I'm quite happy about all of the financial sector bail-outs governments have provided these credit-market middle-men. Before the bail-outs, one had to argue that finance was like a tax on monetary exchange, now this point is clear, finance is, in fact, a tax- and a growing one at that.

credit markets; German-Controlled; imagine; looking; s; Wall Street Examiner.

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.

zero hedge Thu 2010-05-20 15:41 EDT

Perspectives From Rosenberg On Hyperinflation As A Loss Of Faith In A Currency

In today's note by David Rosenberg, the economist quotes a reader letter which provides a unique perspective on how hyperinflation arises: ...Where I disagree is that you can't have inflation with such a significant slack in the economy. For those of us that lived or worked in the hyperinflationary South American zone of the seventies and eighties, inflation comes when people lose faith in the currency and see material goods as a store of value. Because commodities rise and the goods can no longer be expected to be made at the same cost structure, people assume that they will be worth more in the future creating a self fulfilling upward spiraling effect. You can anticipate that these state governments will introduce price controls as well as potentially fixing exchange rates worsening the situation...

currency; Faithful; Hyperinflation; losses; perspective; Rosenberg; Zero Hedge.

Jesse's Café Américain Tue 2010-05-18 15:10 EDT

The US Intelligentsia and Middle Class Are In the Firm Grip of Fear, Fraud and Denial

Jesse

The lie is comfortable, an illusion easy to live with, familiar, and safe. Writing from the 'disgraced profession' of economics, James K. Galbraith speaks of the unspoken, the many frauds and deceptions underlying the recent financial crisis centered in the US...``the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case...''

denial; fears; firm grip; fraud; intelligentsia; Jesse's Café Américain; middle class.

Fri 2010-05-14 15:21 EDT

Of ideology, recession, and policy paralysis >> The Berkeley Blog

Richard Abrams

...The current financial calamity does not ``threaten the key ideas'' that have dominated economic policy in the United States and abroad for the past 35 years or so. By all empirical evidence it absolutely shreds the economic theology that prevailed and unhappily still underlies the effectiveness of the resistance to any meaningful remedial action by bankers, by other purveyors of financial services, and by their congressional and media agents...Every time I see or hear the phrase ``free market,'' I have mixed feelings -- a mix of anger and exasperation. Why? Because there is no such thing as a ``free market;'' there has never been any such thing, and never will be. What's more: it is hard to believe that those otherwise intelligent people who prattle about ``the free market'' don't know that...

Berkeley Blog; ideology; policy paralysis; Recession.

Thu 2010-05-13 13:39 EDT

The People v. the Bankers

Michael Hudson

Financial lobbyists here in the U.S. are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. Let's call the ``Greek bailout'' what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks...This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity...

bankers; people.

zero hedge Fri 2010-04-23 20:02 EDT

An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility

Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent...

equity markets; Fed's interventions; overview; Primary Dealers Credit Facility; Zero Hedge.