New Deal 2.0 Mon 2010-07-12 16:51 EDT

The Unlearned Lesson of the 1987 Crash

Henry Liu revisits the stock market crash of 1987 to dispel free market fundamentalism and the neo-conservative lust for deregulation...The Federal Reserve's actions under Greenspan in 1987 led market participants to conclude that the Fed would emphasize domestic market objectives with accommodative monetary stance, if necessary at the cost of a further decline in the dollar. By year-end, the dollar's value had fallen 21% against the yen and 14% against the mark from its levels at the time of the Louvre Accord while Greenspan, the wizard of bubble-land, was on his way to being hailed as the greatest central banker in history. Two decades later, by 2007, the Greenspan put was called by the market and trillions of dollars were lost.

0; 1987 crash; new dealing 2; unlearned lessons.

billy blog Mon 2010-06-14 18:13 EDT

The OECDs perverted view of fiscal policy

...the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks...

Billy Blog; fiscal policies; OECDs perverted view.

Wed 2010-06-09 18:39 EDT

billy blog >> Blog Archive >> The comeback of conservative ideology

Bill Mitchell

Today I have been writing about the resurgence of the conservative ideology...Ever hear the term Ruthanasia? You should have because she is still at it berating us about the wrongs of fiscal policy and the need for radical reform. Ruth Richardson was New Zealand's minister of finance from 1990-93...As an historical episode ``Ruthanasia'' followed ``Rogernomics'' as increasingly radical reform programs that were inflicted on the New Zealand population from 1984 onwards -- for the next few decades...Unemployment became a policy tool (for disciplining inflation) rather than a primary policy target. The inflation-first monetary stance (and undemocratic reforms of the central bank) combined with a harsh fiscal policy contraction to drive up unemployment and significantly reduce per capita income...Successive right-wing governments (which not only included the conservatives but also the Lange Labour Party government which started it all) used the concept of a "strategic deficit". David Stockman, the budget director under President Reagan, was the person to coin this term which is taken to mean using a budget deficit as a "political weapon". The strategy was to hand out huge tax cuts to allegedly "incentivise" (the word that was used at the time) private entrepreneurs even though there has never been any convincing research evidence to suggest that there are major losses of activity arising from taxation. The resulting deficits were then paraded as evidence of the need for dramatic public spending cut backs...The experience of New Zealand during those years of being ruthanased by the free market zealots should serve as a warning to all of us...

Billy Blog; blogs Archive; comeback; Conservative ideology.

billy blog Mon 2010-06-07 19:00 EDT

Central bank independence -- another faux agenda

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. ...Today, I am looking at another faux agenda -- the demand that central banks should be independent of the political process...The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy...I find it ironical that the freedom mongers have very limited appreciation of what freedom actually is. Allowing the unemployed to be ``bullied'' by amorphous bond markets is not a path to freedom...inflation targeting countries have failed to achieve superior outcomes in terms of output growth, inflation variability and output variability; moreover there is no evidence that inflation targeting has reduced inflation persistence...Central banks operating under this charter have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities have further worsened the situation with complementary austerity...The conclusion that I have reached from studying this specific literature for many years is that there is no robust relationship between making the central bank independent and the performance of inflation...From a MMT perspective, the concept of CBI is anathema to the goal of aggregate policy (monetary and fiscal) to advance public purpose. By obsessing about inflation control, central banking has lost sight of what the purpose of policy is about...under the CBI ideology, monetary policy is not focused on advancing public purpose. Fighting inflation with unemployment is not advancing public purpose. The costs of inflation are much lower than the costs of unemployment. The mainstream fudge this by invoking their belief in the NAIRU which assumes these real sacrifices away in the ``long-run''...

Billy Blog; Central bank independence; faux agenda.

Credit Writedowns Thu 2010-06-03 17:56 EDT

Guest Post: The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America's "Wealth"

Frederick Sheehan

The Federal Reserve releases transcripts of the Federal Open Market Committee (FOMC) meetings with a five-year lag (as required by law, the Fed would like to burn them). Transcripts for 2004 meetings were released on April 30, 2010...FOMC transcripts in 2004 confirm the Fed was afraid of markets...The FOMC seemed most concerned that higher rates might interfere with the carry trade. In the sad tale of The Financialization of the United States, the carry trade deserves a chapter...By 2004, the carry trade was a mammoth enterprise of hedge funds and banks. The too-big-to-fail banks were, by now, leveraging their own internally managed hedge funds, managing their own proprietary trading desks, and also lending to highly leveraged hedge funds. Leverage, and, the belief that access to rising levels of credit would never end, pushed up asset values on bank balance sheets -- whether real estate, bonds, stocks, or private-equity. This increased the banks' lending capacity which encouraged banks to lend more...Markets believed asset prices would only go up for many silly reasons. Belief in the Greenspan Put may have been the silliest but also the most influential...Federal Reserve Governor Donald Kohn...told his confreres that Federal Reserve policy was to distort asset prices. He also said this was deliberate and desirable. In other words, distorted asset prices were not an unfortunate consequence of such-and-such Fed policy. The Fed's goal was to distort asset prices...Consumer spending exceeded consumer income...This strategy of fixing asset prices at an artificially high rate to fool the American people into spending money they did not have was diabolical...The manipulation of markets and of the American people has grown worse under Bernanke's chairmanship...

2004 Fed Transcripts; America's; credit writedowns; Diabolical Destruction; Guest Post; Method; wealth.

Tue 2010-06-01 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

Credit Writedowns Sat 2010-05-22 20:38 EDT

Out of control US deficit spending [MMT introduction]

Regular readers know that, while I have a little of what Marshall Auerback calls deficit terrorism in my DNA, I fully support fiscal stimulus as a means to arrest a deep downturn...the US economy will not be able to sustain recovery for long without stimulus. The likely result of withdrawing stimulus is a recession that is deeper than the last one aka a major depression...a lot of talking heads are trying to bamboozle people with tales of woe about hyperinflation and sovereign bankruptcy in the US to support specific claims about what deficit spending can and can't do. Deficit hawks, in particular, are on the warpath...I am throwing in the towel on policy makers because it's clear that Obama has been captured by the deficit hawks and we are headed for a painful recession within the next two years...The policy debates aren't working because the actual mechanics of a fiat monetary system are being obscured by ideological political debates. So, what I want to do is lay the foundations of modern money with you so we can strip away the politics and ideology from the economics...

control; credit writedowns; deficit-spending; MMT introduction.

Sat 2010-05-22 19:56 EDT

36,000 firms at high risk of collapse: Dun & Bradstreet - Business news, business advice and information for Australian SMEs | SmartCompany

James Thomson

Credit agency Dun & Bradstreet has delivered a blunt warning to SMEs about the patchy state of the economic recovery, warning it downgraded the risk profiles of a staggering 80,000 firms during the March quarter -- a greater number of firms than were downgraded during the first quarter of 2009. D&B now has 36,000 firms rated as being at "high risk" failure over the next 12 months, with the majority of those being smaller and young firms (less than four years of operation). D&B's director of corporate affairs Damian Karmelich, says the spike in risk downgrades is particularly worrying when compared to last year, when the economy was performing much worse...

000 firms; 36; Australian SMEs; Bradstreet; business advice; Business news; Collapse; dun; high-risk; inform; SmartCompany.

The Wall Street Examiner Sat 2010-05-22 19:50 EDT

Merkel Does Mahathir and Martin Luther: Tilting the Market Table

...I'm very interested in Germany's policy shift because it's the first time in decades a mature industrialized nation has protested the allocation of profits decreed by financial orthodoxy. At core, German bans of "naked" (held by those who don't own the securities) shorts, paraphrasing Ms. Merkel- perhaps unsurprisingly the daughter of a Lutheran Minister- stops people profiting from the destruction of their neighbor's house at cost of less liquidity in the restricted markets...500 years ago, the Germans defied orthodoxy and ushered in a revolution which moved the center of Europe from South to North. They are defying orthodoxy again, and I can't wait to see what happens next.

Mahathir; Market Table; Martin Luther; Merkel; tilting; Wall Street Examiner.

winterspeak.com Sat 2010-05-22 14:02 EDT

Richard Koo, who is so close, is still wrong

winterspeak

...Richard Koo, who understands the situation in Japan (which is very very similar) quite well still makes suboptimal recommendations because he too does not understand how the financial system works...He's correct in saying that massive fiscal stimulus saved Japan. They really were on the brink of their Great Depression in the 80s, and have avoided it without going to War. This is good, but none of it was necessary, so really represents a massive failure. Koo thinks that the Govt is spending the money the private sector has saved. In fact, Govt spending is what is giving the private sector its savings! Government is not borrowing anything. Japan should really just massively slash taxes and fund its private sector. Let the balance sheets heal already! Koo does not talk about all the terrible malinvestment that the Governments fiscal spending did. The US should simply implement a payroll tax holiday until inflation starts to tick up. Right now, the US's savings desire is not as high as the Japanese's, but a double dip might get it closer. That just means the US will need even higher deficits. It took Japan 20 years to start getting comfortable with sufficiently large deficits. Now might be a good time to go long the Nikkei, actually.

closed; com; Richard Koo; Winterspeak; wrong.

zero hedge Sat 2010-05-22 13:41 EDT

Albert Edwards: Europe Is On The Edge Of A Deflationary Precipice That Will, Paradoxically, Usher In 20-30% Inflation

A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation."...

20 30; Albert Edwards; deflationary precipice; edge; Europe; Inflation; paradox; usher; Zero Hedge.

The Money Game Fri 2010-05-21 13:30 EDT

Sorry, We're Not Weimar Or Zimbabwe, And Gold Is Never Going To Be A Currency Again

Gold is hotter than ever...As an asset class gold has outperformed just about everything over the last 10 year period. It's been an impressive run. But is it all justified? Bear with me for a bit while I take a long-term macro look at gold as an asset class...the fiat currency system is here to stay (or at least some form of it). The odds of reverting back to a purely gold based system is next to zero in my opinion. The truth is, the gold standard as a currency system is a barbarous relic. It is a currency system that worked well in the old world economy, but simply does not have the flexibility to meet the demands of the growing global economy. The global economy has become too complex and too intertwined to be constrained by the gold standard. The fiat currency system is a product of economic evolution and the growing demands and strains of international trade. Famous examples of the break-down of the gold standard and its inflexibility to meet trade demands include the UK in 1931 and the U.S. government's destruction of the gold linked currency system under the Bretton Woods agreement...

currency; Go; gold; Money game; Sorry; Weimar; Zimbabwe.

Wed 2010-05-19 11:40 EDT

Community Development Job Guarantee

CofFEE - Centre of Full Employment and Equity

The Centre of Full Employment and Equity has developed a sustainable path to full employment, which it calls the Job Guarantee program. A major focus of our work is on articulating this program - explaining how it works, the urgency of it, and the reasons why it is the only way to achieve full employment with price stability, a combination that has evaded most economies in the last 25 years. Under the Job Guarantee policy, the government continuously absorbs workers displaced from private sector employment. The Job Guarantee employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector. The approach generates full employment and price stability. The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure. CofFEE's latest work in this area has been developed into a proposal for a Community Development Job Guarantee (CD-JG) focussing on the long-term unemployed (people who have been unemployed longer than 12 months) and youth unemployed. These two groups have been targeted because of the severe economic and social costs that result as the period of unemployment lengthens, or when unemployment occurs at the beginning of a person's working life...

Community Development Job Guarantee.

Wed 2010-05-19 11:39 EDT

The Job Guarantee Program

CofFEE - Centre of Full Employment and Equity

The Centre of Full Employment and Equity has developed a sustainable path to full employment, which it calls the Job Guarantee program. A major focus of our work is on articulating this program - explaining how it works, the urgency of it, and the reasons why it is the only way to achieve full employment with price stability, a combination that has evaded most economies in the last 25 years. This is the Job Guarantee program resource page and you can read all about the solution to unemployment in the documents contained here...

Job Guarantee Program.

Dr. Housing Bubble Blog Sun 2010-05-16 15:17 EDT

Housing never really improved -- 10 charts showing the United States housing market is entering the second wave of problems. 1 out of 4 people with no mortgage payment in the last year are still not in the foreclosure process.

To put it bluntly, the U.S. housing market today is in deep water. Nothing exemplifies the transfer of risk to the public from the private investment banks more than the deep losses at Fannie Mae and Freddie Mac. Fannie Mae announced a stunning first quarter loss of $13.1 billion while Freddie Mac lost $8 billion. At the same time, toxic mortgage superstar JP Morgan Chase announced a $3.3 billion profit for Q1. This reversal of fortunes has been orchestrated perfectly by Wall Street. Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market). In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government...

1; 10 Charts Showing; 4 people; Dr. Housing Bubble Blog; enters; Foreclosures process; Housing; mortgage payments; problem; really improving; United States housing market; wave; years.

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.