Tuesday, December 2, 2008 at 1:07 pm
Today In Troubling Financial News
(In the interest of sanity, this will not be a regular feature.)
--Currency fluctuations in China seem to signal a coming political crisis. "[D]omestic and global economic weakness could test the grip of the ruling Communist party. 'This is clearly a reference to the fact that weak growth is likely to lead to significant social unrest,' said Steve Barrow at Standard Bank."
--Bill Gross, the bond wizard at Pimco, warns that the stock market of tomorrow is unlikely to be the stock market of yesterday. "We will not go back to what we have known and gotten used to. It's like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people's money."
--The U.S. Treasury lacks a "coherent plan" for distributing the bailout money.
--The home price slide ain't done sliding. "Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years."
--The credit crisis is moving "away from financials" into the rest of the corporate world, with market predictions of ever-greater corporate bond defaults.
--On the upside, Fed Chairman Ben Bernanke, a scholar of the Great Depression, says we are experiencing an "order of magnitude" different kind of event when compared to the Great Depression. So we have that going for us.
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Senior Writer Karen Tumulty has been TIME's National Political Correspondent since 2001, and has also covered the White House and Congress for the magazine. A native of San Antonio, she is a graduate of the University of Texas at Austin and Harvard Business School, where her career choice has significantly lowered the average salary of her graduating class. But she gets lots of free magazines. Read More »
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Joe Klein is TIME's political columnist and author of six books, most recently Politics Lost. His weekly TIME column, "In the Arena," covers national and international affairs. In 2004 he won the National Headliner Award for best magazine column. Read More »
Michael Scherer is the White House correspondent for TIME. He previously worked for Salon.com, Mother Jones, and the Daily Hampshire Gazette. A native of San Francisco, he graduated from U.C. Santa Cruz and Columbia University's Graduate School of Journalism. Read More » Follow Michael Scherer on Twitter
Jay Newton-Small is the congressional correspondent for TIME. Born in New York, she spent time growing up in Asia, Australia and Europe following her vagabond United Nations parents. A graduate of Tufts University and Columbia’s Graduate School of Journalism, Jay previously covered politics for Bloomberg News. And, yes, despite the misleading name SHE is a she. Read More » Follow Jay Newton-Small on Twitter
Amy Sullivan is a senior editor at TIME magazine, and author of the book The Party Faithful: How and Why Democrats are Closing the God Gap (Scribner, 2008). A Michigan native, she holds degrees from the University of Michigan and Harvard Divinity School. She writes about religion and politics for TIME, but no longer answers to the name "Bible Girl." Read More »
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Tuesday, December 2, 2008 at 1:10 pm
Dont know MS.
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A freind of mine came back from the Mucleshoot reservation with a deck of cards. Guess what brand they were?
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Paulson...
Tuesday, December 2, 2008 at 1:12 pm
I think you missed the biggest financial news of the day:
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Want to see the economy shut down for a few years? Here it comes...
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Wait... You mean we have to pay for all this stuff?
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I bet we bail out the banks (again).
Tuesday, December 2, 2008 at 1:13 pm
And what about the other $3,916,000,000,000?
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Where the hell did that money come from?
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Inflation, here we come!
Tuesday, December 2, 2008 at 1:19 pm
Oh, yeah.
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To elaborate:
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We can account for $125,000,000,000 'cause that was from the sneaky Paulson tinkering with 382. And, actually, I have to toss back $350,000,000,000 because George "I'm Sorry" Bush says he left it for Obama to spend.
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Wow, so lets do some artihmetic here:
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4,616,000,000,000
..-350,000,000,000
..-125,000,000,000
-----------------
4,141,000,000,000
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Hmmmm.
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That means there's a whole lotta money that came from somewhere.
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Did Uncle Sam wake up with an envelope from the tooth fairy?
Tuesday, December 2, 2008 at 1:27 pm
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
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Does anyone else see anything wrong with this state of affairs? It sounds to me like Oppenheimer & Co. are acting like credit cards are completely independent of job income. Like a card you sign up for, and it gives you free money.
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That notion, plus this one:
The U.S. Treasury lacks a "coherent plan" for distributing the bailout money
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makes me ask: Who the hell are these people? And why are they so goddamn stupid? Why do they have to do the stupidest possible thing every goddamn second of the day?
Tuesday, December 2, 2008 at 1:29 pm
Hey 53_3, I don't think the 382 tinkering counts, since it is about future tax revenue. The best explanation of all the federal commitments, promises, loans, gifts, etc., can be found here, thanks to the New York Times:
http://www.nytimes.com/imagepages/2008/11/26/business/20081126_FED_graph1.html
Tuesday, December 2, 2008 at 1:34 pm
When did all the financial problems start? I was at lunch.
Tuesday, December 2, 2008 at 1:39 pm
gysgt213,
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The problems started late yesterday. It was announced that we're in a recession.
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They will be announcing the New Depression© as soon as the soup lines completely encircle one city block.
Tuesday, December 2, 2008 at 1:49 pm
Palininatowel-Well thank goodness they made an annoucement.
Tuesday, December 2, 2008 at 1:51 pm
Well this is important.
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Two things stoked Erin Nash's anger when she trolled the malls last year. First, most stores trumpeted their “holiday” sales. Second, every sales clerk robotically wished their customers “Happy holidays.” The word “Christmas,” Nash felt, had been discarded by the retailers like a wad of crumpled wrapping paper.
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So the Fort Benning, Ga., resident took a yuletide stand.
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“It became a test to me: I began wishing cashiers a ‘Merry Christmas' to see if anyone would actually wish me a ‘Merry Christmas' back,” Nash said.
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http://www.msnbc.msn.com/id/27890640/
Tuesday, December 2, 2008 at 1:54 pm
Very weird that TIME's deal with WordPress includes WordPress logo in place of TIME.
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We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people's money."
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It's weird that MS highlights this, because it makes absolute no sense. Perhaps the two clauses are meant to be entirely independent? The second one does indeed seem to be the case, or rather, should be. That is, credit markets should be regulated. But I don't understand where the first one comes from. There's no 'invisible hand' involved in fraud.
Tuesday, December 2, 2008 at 1:55 pm
“It became a test to me: I began wishing cashiers a ‘Merry Christmas' to see if anyone would actually wish me a ‘Merry Christmas' back,” Nash said.
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Nash continued, "And when they didn't I left a special mark on the door. For later"
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Honest to Pete, why are people so anxious to feel slighted?
Tuesday, December 2, 2008 at 2:01 pm
Gem from John Cole's comment section. Michael should appreciate this:
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THE TRAGEDY OF THE AMERICAN AUTOMOBILE INDUSTRY:A Play in Three Acts
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Dramatis Personae
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BIG THREE, a manufacturer of automobiles
UAW, Big Three's employee
MITT ROMNEY, an idiot
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ACT ONE
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BIG THREE: I have plans to build automobiles, but I need labor to do so!
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UAW: I will labor for you if you will pay me $40 per hour.
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BIG THREE: I will not pay you $40 per hour.
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UAW: But I need to save for my inevitible retirement, and any health concerns that may arise.
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BIG THREE: I will pay you $30 per hour, plus a generous pension of guaranteed payments and health care upon your retirement.
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UAW: Then I agree to work for you!
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ACT TWO
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UAW: I am building cars for you, as I have promised to do!
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BIG THREE: I am designing terrible cars that few people want to buy! Also, rather than save for UAW's inevitible retirement when I will have to pay him the generous pension of guaranteed payments and health care that I promised, I am spending that money under the dubious assumption that my future revenues will be sufficient to meet those obligations.
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ACT THREE
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UAW: I have fulfilled my end of the deal by building the automobiles that you have asked me to build.
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BIG THREE: Oh no! I am undone! My automobiles are no longer competitive due to my years of poor planning and poor judgment!
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MITT ROMNEY: This is all UAW's fault!
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http://www.balloon-juice.com/
Tuesday, December 2, 2008 at 2:08 pm
MS: Thanks for the NYT link. It doesn't explain my stupidity question, though.
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Gunny: Very nice, I could hear the warbly melodrama piano music playing in the background as I read it.
Tuesday, December 2, 2008 at 2:14 pm
The question we should be asking ourselves isn't why Erin Nash feels a need to impose her religious faith on strangers. The question we should be asking is why MSNBC is giving her a platform to validate her intolerance to millions of other readers who might otherwise not even think of it.
In other news:
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
Here's where the real rip-off started. The same companies that proudly squeeze every ounce they can from their labor force, promote payday loans, rent-to-own schemes and 18% interest lines of credit as a way to compensate for the missing living-wage salary and then are utterly surprised when the whole house of cards come crashing down. Notice that it's the banks who end up first in line at the Federal teat and laborers who get maligned for their outragous desire to be able to retire.
Tuesday, December 2, 2008 at 2:27 pm
Jay, I think that sentence would pass grammatical muster (though I have a poor record on such things). It is essentially a list of three clauses, with the last clause having three sub-parts. As for invisible hand, it is an Adam Smith reference:
http://www.investorwords.com/2633/invisible_hand.html
As for the play script, it's funny. Though I still think there is a bit of knee jerk is summarizing Romney's bankruptcy plan as it's-all-labors-fault, and then accusing me of holding that view, which i don't. Everyone who has been talking about this issue, including the people I have linked to like Romney, points clearly to the failure of management (Romney says they must be fired) and the other structural problems like the dealer system. The bottom line is that the Big 3 must be competitive. The uncompetitiveness is not the union's fault; the union inherited the legacy system too, and has tried to cope with it. And management did fail horribly, though less so in the case of Ford, it seems. But the unions have to be part of the solution.
Tuesday, December 2, 2008 at 2:27 pm
TPM highlights this excellent PBS NOW video on the ratings agencies role in this mess. Must see.
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A Standard & Poor's internal email (pdf) from December 2006, in which an employee states: "rating agencies continue to create [an] even bigger monster - the CDO [collateralized debt obligation] market. Let's hope we are all wealthy and retired by the time this house of cards falters."
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http://www.pbs.org/now/shows/446/index.html
Tuesday, December 2, 2008 at 2:29 pm
"Hey 53_3, I don't think the 382 tinkering counts, since it is about future tax revenue."
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Thanks, MS.
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Holey Moley, Batman!
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Where the pluperfect hell are we going to get this 7.something Godzillion dollars from? Borrow it? Print it?
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So, we've spent about $1,400,000,000,000 that we don't have, and we still have to pony up 5 Godzillion more. So we reduce future revenues by not only the $125,000,000,000 (middle), but we are giving it back as refunds a la ECAP.
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Hells bells! That's half a years GDP, we've already borrowed from nearly everyone on the rest of the planet, so how in holy hell are we supposed to get our hands on that kind of money?
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To me, it seems there is only two ways, barring some "theoretically sound" shell game concocted by some economist somewhere:
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1. Taxes
2. Printing Press
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Now if we aren't going to do #1, that leaves #2, which, uh, I hate to say, but do I really need a degree in economics to figure out what's going to happen here?
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I'm guessing it ain't going to be "deflation"...
Tuesday, December 2, 2008 at 2:33 pm
The MSNBC reporter coulda saved a lot of time by just going and asking NBC management why they don't say "Merry Christmas" on their holiday promos.
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Me, I'm gonna go to some mall in Jersey and walk around saying "Satan rules."
Tuesday, December 2, 2008 at 2:33 pm
"Though I still think there is a bit of knee jerk is summarizing Romney's bankruptcy plan as it's-all-labors-fault, and then accusing me of holding that view."
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Michael-Just so we are clear. I didn't accuse you of holding any view other than this strange appreciation for Romney has Auto Czar. Not that you blame it on the unions. I do think though that Mitt Rommeny would not work well with a union.
Tuesday, December 2, 2008 at 2:38 pm
"But the unions have to be part of the solution."
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Michael-By the way this is a good point. Did any of the big 3 bring union members to the hearings? Do you think it would have been a good idea to include them? I would have used them as human shields at the first hearing if I was in the hot seat and had them to deploy.
Tuesday, December 2, 2008 at 2:39 pm
And I'm willing to say also MS that I was wrong too about you and anti-union kneejerk sentiments.
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So you have my apology on that.
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Orgainized labor has it's place, though, and lest one forget, that the middle class of the '50s and '60s was built by the labor activists. Their reign, however, ended with the less-than-illustrius "trickle down" theory and the demise of the SWE family...
Tuesday, December 2, 2008 at 2:40 pm
Maybe Romney's history of anti-employee "management" and layoffs at Bain make people a tad suspicious.
Tuesday, December 2, 2008 at 2:42 pm
MS--
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You realize it's Gross's sentence I'm talking about.\
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It's grammatical. It just doesn't make any sense.
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the government fist is being substituted for the invisible hand
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Or maybe what I mean is that it is just stupid. If he's only talking about financial markets, then it makes no sense. There's no invisible hand operating here:
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leverage, cheap financing and the rather mindless ability to make a deal with other people's money.
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What happened was fraud. AIG, in particular, took money to insure the creditworthiness of instruments that it didn't have the capital to insure. That's no more invisible hand than a Ponzi scheme (no, I am not saying this WAS a Ponzi scheme.)
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The idea that regulating financial markets has something to do with government fiat is ridiculous. Not allowing Merril, Goldman, Lehman, and the other two investment banks to adopt 30-1 leverage would not have been ruling by fiat. Nor would going back to Glass-Steagall amount to government fiat.
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Jamming the two unrelated sentences together is jarring, but I think that's mostly because the first one doesn't make any sense.
Tuesday, December 2, 2008 at 2:42 pm
Maybe so, but people should remember that the Republicans, as we knew them, are extinct and I don't see why we need to please them.
Tuesday, December 2, 2008 at 2:45 pm
gunny
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lol
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It looks like the dealer network, and associated state laws is also part of the problem.
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I've never seen a more striking example of management crossing its fingers and wishing. There's nothing that's not messed up here.
Tuesday, December 2, 2008 at 2:49 pm
Jay, Gross's crime is being a bond man who dallies in poetry. Government fist substituted for invisible hand is just a fancy way of saying government regulation will increase, restricting the free market. But I guess your point is different, that the free market was never free, but corrupt. Even so, Gross's point is also right: More government regulation is ahead. And I don't get the sense that he finds this a terrible thing. It just changes investment math.
Tuesday, December 2, 2008 at 2:54 pm
MS:
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Has anyone yet asked just where this money is going to come from?
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All the articles are geared toward what to do with this money, but as yet unanswered is where will it come from because just shuffling that tweensy little problem into next week doesn't really solve the problem:
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If you spend 7.someting Godzillion dollars, you have to get 7.something Godzillion dollars.
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And further, it will have to be real money, not just Monopoly money...
Tuesday, December 2, 2008 at 3:15 pm
But I guess your point is different, that the free market was never free, but corrupt.
I'm wondering if the mythology that surrounds the concept of 'free markets' would have quite the power it still seems to hold if it hadn't been developed with the Soviet Union in place to act as a counterweight and villain. Certainly a truly 'free' market is an illusion since we rely on the State for not only currency but the force of arms necessary to defend property against 'improper' encroachment. We also rely on it for protection against fraud and all sort of other 'regulations' which have the effect of greasing commerce. The notion that government has no proper role in commerce is not only a false ideal, but as we have seen, adherence to it in the face of contrary evidence has caused serious and lasting harm.
We never had an 'invisible hand' so much as 'the hand that shall not be named'!
Tuesday, December 2, 2008 at 3:16 pm
53_3,
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The answer to your question is a course in macroeconomics, which I didn't take either. (Somehow it was not a priority at UC Santa Cruz.) I can suggest to you a book, A Concise Guide to Macroeconomics, by Harvard's David Moss, which is short, consisting of a few lectures he prepared for incoming business school students, and which I read over Thanksgiving.
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I am still no expert, but I am able to summarize: Currency value is no longer pegged to anything real, like gold. Rather it is controlled by the federal government. If the fed wants to add more dollars into circulation, it can do just that, by crediting banks with more money. (Since most of the trillions in discussion are only promises or insurance, it has not had to do that for most of the 7 plus trillion that people talk about.) see here: http://www.slate.com/id/2205574/
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The reason the money is good is because people have faith in the future output of the U.S. economy. The danger of such a policy is hyperinflation that would come if people began to lose faith in U.S. currency and countries like China decided they no longer wanted U.S. money. (Under this scenario, everyone would have too many dollars, prices would skyrocket, and people would start buying groceries with silver coins or euros or bails of hay.) Right now the smart economists of the world are not so worried about inflation, though the threat is there. They are concerned about an even more insidious threat: sustained deflation, in which prices would go down because demand goes away, causing people to stop buying until prices dropped, reducing demand further, etc. etc. If this happens, then lots of people will lose their jobs, no one will go to stores or buy houses, etc., and the economy will fall apart.
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The lesson that everyone seems to be using is the general theory of Keynes, which argues that when a nation enters a severe recession the best thing to do is get the government spending lots of money to jump-start everything again. (See here for the debate in action: http://everydayecon.wordpress.com/2008/11/12/keynesian-policies-and-the-depression/ )
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The goal is to get the nation producing more by any means necessary, and then deal with the fallout later, because the fallout is much less bad than an economy in a downward spiral. That is why we are going to get a gargantuan stimulus package from Obama next year. For more reading, Krugman's blog is a good resource: http://krugman.blogs.nytimes.com/
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And if someone who understands this stuff better than me sees a flaw in what I have written, please let me know. By comparison, campaign politics is like tic-tac-toe.
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m.
Tuesday, December 2, 2008 at 3:16 pm
"It could be worse..."
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"How?"
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"It could be raining."
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(thunderclap...)
Tuesday, December 2, 2008 at 3:39 pm
That is why we are going to get a gargantuan stimulus package from Obama next year.
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Gargantuan like $13,200? (That's 4.616 trillion divided by 350 million; or roughly what we would get if all these bailouts were divided evenly among the populace.)
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I mean, as long as we're spending money foolishly...
Tuesday, December 2, 2008 at 3:46 pm
Cliff, that's another tricky one. First, 4.6 trillion has not been spent yet. It has been "committed," or promised if needed, depending on how one counts, in lots of ways, some of which should actually make the taxpayers money if and when everything gets better. But it gets at another big distinction that is lost in a lot of this: There is a difference in saving the credit markets, and saving parts of the U.S. economy. Not that i want to deny you your justified anger for the Wall Street traders who messed everything up, but if there is no way to get credit -- loans, plastic, etc. -- then the damage will actually be much greater than a few thousand dollars for each citizen. (Though again, the treasury has not actually paid that many trillion out yet.) Or at least that's what the economists tell us.
Again, this is a nice chart of how and where the money is going:
http://www.nytimes.com/imagepages/2008/11/26/business/20081126_FED_graph1.html
Tuesday, December 2, 2008 at 4:06 pm
GAO Report on Troubled Asset Relief Program.
http://www.gao.gov/new.items/d09161.pdf
Tuesday, December 2, 2008 at 4:08 pm
Also a lot (or just some?) of the bailout money is either loans, or the gov't buying up assets, right? So it's not just "expending" money in the same way as, say, misplacing entire forklift pallets of $100 bills in Iraq.
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Isn't the proposed auto bailout also a loan?
Tuesday, December 2, 2008 at 4:09 pm
MS: Thanks for replying again. I looked at the graph when you posted it before (I believe I posted my thanks for that right after Gunny's union drama play).
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My last post was born purely out of greed. I figure, as long as they're promising preposterous amounts of money, I might as well get in on the action. I've got some student loans burning a hole in my pocket.
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Also:
(Though again, the treasury has not actually paid that many trillion out yet.)
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One trillion counts as "that many trillion" in my book.
Tuesday, December 2, 2008 at 4:10 pm
53_3,
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It is my understanding that the money is going to come from the sale of treasury bonds. Other countries such as China already hold much of our debt and many of the bonds would be sold to foreign governments.
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Our government cannot simply print more money. This would cause inflation to skyrocket.
Tuesday, December 2, 2008 at 4:20 pm
MS--
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(I was gonna read the whole thing for context but the link is wrong.)
Government fiat substituted for invisible hand is just a fancy way of saying government regulation will increase, restricting the free market.
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Well that is the part that doesn't make sense. If he is referring only to the financial sector, that has been heavily regulated since the depression, with regulations relaxed beginning late in the Clinton administration, and then not applied at all to what Krugman calls the "shadow banking system," but there is no free market involved here. (I'm reminded of an essay by PJ O'Rourke, who went to Wall Street to see how it really worked, and was very surprised to see how intensively regulated the NYSE is.) This idea that there has ever been a "free market" in the US is a shibboleth. The whole basis of capitalism is state acquisition, ownership, distribution and regulation of real property.
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The later "wild wild west" characterization is a fairly accurate metaphor, for the CDO/CDS markets. But this period was about six-eight years long. Not the normal free market state of affairs, but rather like the period preceding the S&L crisis, a cases of the government dumping honey all over the picnic table, and the ants arriving in droves.
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But I guess your point is different, that the free market was never free, but corrupt.
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No, my point is that unregulated financial markets don't exist, don't work. They rely on the participants trusting verbal agreements made in short spans of time. It's impossible to maintain such a market without regulation.
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The corruption came in regulators permitting agents who did not have ability to fulfill their contracts to make those verbal contracts as if there were a regulatory agency in place to enforce them, when there was not, when they were no good, and when anybody who had been paying attention, since at least mid-2006, was aware of this situation. Very latest point where there is no excuse was November 10, 2007 when some guy with a sucky blog coined the "Big Sh!tpile."
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Even so, Gross's point is also right: More government regulation is ahead. And I don't get the sense that he finds this a terrible thing. It just changes investment math.
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He says:
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We will not go back to what we have known and gotten used to. It's like comparing Newton and Einstein: both were right but their rules governed entirely different domains.
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First he's wrong about Newton and Einstein, but that's okay. We are indeed going back to what we have known and are used to, in about 5 years. I doubt we go back as far as Glass-Steagall, which seems to be what everybody thought was still operating.
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For example, what "too big to fail" used to mean that there were some money center banks, like Citi, that in the event of failure would not be treated the way other failed banks would be treated. If a regular bank failed, then the depositors would be paid off up the FDIC limits, the Fed would take over the bank's assets, and dispose of them in an orderly fashion.
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Now, in this very recent, unsustainable new order, "too big to fail" turned out to mean "too disruptive to credit markets to fail." That's an entirely new idea.
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Why he's not making sense is he is treating the aberrant as a norm.
Tuesday, December 2, 2008 at 4:26 pm
The notion that government has no proper role in commerce is not only a false ideal, but as we have seen, adherence to it in the face of contrary evidence has caused serious and lasting harm.
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No, Paul, it's false to fact. The US has a "mixed economy." The only 'free markets' that have arisen have been small, local and brief. Think of Deadwood.
Tuesday, December 2, 2008 at 4:31 pm
All the articles are geared toward what to do with this money, but as yet unanswered is where will it come from because just shuffling that tweensy little problem into next week doesn't really solve the problem
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It will come from future taxes. The argument for borrowing against future taxes for this purpose is that it will lead to faster economic growth (i.e, more factories operating with workers making stuff, rather than both lying idle). This rests, though, on the premise that giving money to these agents will lead them to lend. At this point, it looks as if a wiser course would have been outright nationalization, with the shareholders stripped and the government opening up credit markets by lending directly.
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You did hear about the AIG "retention payments" right?
Tuesday, December 2, 2008 at 5:01 pm
Just to add to the bad news, Krugman is now less sure we're not heading towards a depression: http://www.huffingtonpost.com/2008/12/02/paul-krugman-interview-it_n_147674.html
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The goal is to get the nation producing more by any means necessary, and then deal with the fallout later, because the fallout is much less bad than an economy in a downward spiral. That is why we are going to get a gargantuan stimulus package from Obama next year.
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I'm worried it won't be big enough. If he proposes 300 billion, everyone will be talking about how it's such a huge (and progressive) stimulus measure. But actually 300 is not enough. Obama's in a catch-22: A sufficiently large stimulus package will displease Wall Street, but if he pleases Wall Street we will end up in a depression.
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But it gets at another big distinction that is lost in a lot of this: There is a difference in saving the credit markets, and saving parts of the U.S. economy. Not that i want to deny you your justified anger for the Wall Street traders who messed everything up, but if there is no way to get credit -- loans, plastic, etc. -- then the damage will actually be much greater than a few thousand dollars for each citizen.
The problem is that we have no guarantee that Wall Street will use the money to expand consumer credit. It would be cheaper to nationalize and directly fuel consumer credit. http://www.nytimes.com/2008/10/21/business/21sorkin.html?_r=2&ref=business&oref=slogin
Tuesday, December 2, 2008 at 5:06 pm
OT- The Supremes just ruled that federal law does not pre-empt California's medical marijuana laws.
Tuesday, December 2, 2008 at 5:10 pm
Along these lines, here is Ben Bernanke back in 2002, describing his plan to head off deflation if it ever occurred, which he thought was unlikely at the time.
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
Tuesday, December 2, 2008 at 5:15 pm
Rose thanks for the Krugman interview link.
This topic is always hard for me to understand and Krugman is excellent at speaking to people like me.
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I do wonder why you say this-
"Obama's in a catch-22: A sufficiently large stimulus package will displease Wall Street"
Wouldn't investment please Wall Street? And investment in infrastructure is money going into business' hands.
Tuesday, December 2, 2008 at 5:26 pm
OK Mr. Bernanke, you can print money and create inflation, but does that necessarily stimulate actual economic growth & activity?
I'm thinking of places like Zimbabwe here -- no matter how much currency you got, there's still nothing to buy.
Tuesday, December 2, 2008 at 5:29 pm
P-NNTO, Wall Street is not "business" in a traditional sense. It's tied to the financial services/imaginary/pyramid scheme side of the economy. So money going to infrastructure investment is just money that's not going to bail out the derivatives crash. Actually Erin Burnett was talking about this on MTP recently, saying how happy Wall Street was to hear that Obama was only talking about creating 2.5 million jobs and totally not seeing the implications of Wall Street being happy that fewer jobs were going to be created.
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Of course there are many business elements that would be helped by a stimulus package. But the financial services sector has a disproportionate influence over the economy. For example, all the prospective Treasury Secretaries I heard about have made at least a hundred million dollars through this crazy financial system. People like Romney who made his money the old-fashioned way - taking over dying companies, slashing their labor forces and then making a huge profit by reselling - would gain by a stimulus package. But no one's talking about making Romney or one of his colleagues Treasury Secretary.
Tuesday, December 2, 2008 at 5:31 pm
"The Supremes just ruled that federal law does not pre-empt California's medical marijuana laws."
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Well lite em if you got em. Helps with recession-depression.
Tuesday, December 2, 2008 at 5:32 pm
"Well lite em if you got em. Helps with recession-depression."
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Should also help understand what Michael and Jay are talking about too.
Tuesday, December 2, 2008 at 5:37 pm
Thanks for the response Rose. It points me in a direction to do some research.
Time will tell what the stimulus package size will be and what Wall Street really responds to. If the choices are as you put them my guess is that it will be scenario #2.
Krugman sounded a little less pessimistic. A little.
Tuesday, December 2, 2008 at 5:41 pm
Thanks for the deflation link, MS. That's scary stuff. I'm thinking Japan in the 1990s, but worse.
Rose, I think you are right about those agents being displeased with a huge stimulus package. They will argue that expansionary fiscal policy calls for huge, mythic, magical tax cuts instead.