Posts filed under 'The New American Socialism'
For almost a year now, Democratic pollsters have been pointing out how much the public hates the bank bailout and despises Wall Street. But there was no reason for Democratic leaders in Congress or the White House to pay much attention. After all, it was a Republican president and a Republican Congress that came up with the bank bailout plan to begin with. Some stalwart Republicans had grumbled about it, of course, but Republicans have always been on the side of Wall Street and big business and weren’t likely to call for strong measures to prevent the Street from getting into trouble again.
Larry Summers and Tim Geithner scuttled Paul Volcker’s plan to separate the banks’ commercial and investment functions, and didn’t want to limit the size of banks or the risks they could take on. Summers and Geithner have wanted to get the banks back to profitability as soon as possible. And Dems in Congress have had no stomach to take on Wall Street, a major source of campaign funding.
But suddenly the winds are blowing in a different direction over the Potomac. The 2010 midterms are getting closer, and the Dems are scared. Their polls are plummeting. The upsurge in mad-as-hell populism requires that Democrats become indignant on behalf of Americans, and indignation is meaningless without a target. They can’t target big government because Republicans do that one better, especially when they’re out of power. So what’s the alternative? Wall Street.
Perhaps I’m being too cynical. Maybe the Obama and congressional Democrats are now ready to give up Wall Street trickle-down economics and focus on Main Street trickle-up. “There are two ideas of government,” said William Jennings Bryan at the Democratic National Convention in Chicago in 1896. “There are those who believe that you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.” He couldn’t have said it better.
January 23rd, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
January 16th, 2010
My essay in today’s American Spectator Online looks at why Ben Bernanke should not be confirmed to a second term as Chairman of the Federal Reserve:
Two planks in Bernanke’s recovery strategy: Expand the money supply like a banana republic dictator and throw sackfuls of cash at failed companies with a proven track record of mismanaging their assets. The justification? According to the late John Maynard Keynes, this is supposed to restore the “animal spirits” of the cowed consumer, the benighted creature who foolishly imagines that after a period of prodigality and mismanagement, maybe a country should rediscover its inner Dave Ramsey.
The full essay is here.
December 19th, 2009
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
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December 13th, 2009
In recent months, there has been a good deal of discussion of change in the United States. Sadly, over the last two centuries, the direction in which this country has been changing seems to be away from liberty and towards more control. The present changes are hardly unprecedented and certainly not unforeseen. In this essay I will examine two authors, Hilaire Belloc and F.A. Hayek, who present a useful analysis of our present situation.
In 1912, Hilaire Belloc published The Servile State, in which the Englishman prophesied that the world was moving to a reestablishment of slavery. This book made quite an impression on a number of thinkers, including F.A. Hayek. Hayek makes favorable mention of Belloc’s work in The Road to Serfdom, which depicts the modern world as reversing its advance from slavery to liberty.[1]
Belloc defines the Servile State as “that arrangement of society in which so considerable a number of the families and individuals are constrained by positive law to labor for the advantage of other families and individuals as to stamp the whole community with the mark of such labor.”[2] Belloc notes that “the servile condition remains … an institution of the State”[3] and that
the free man can refuse his labour and use that refusal as an instrument wherewith to bargain; while the slave has no such instrument or power to bargain at all, but is dependent for his well being upon the custom of society, backed by the regulation of such of its laws as may protect and guarantee the slave.[4]
Throughout history, until about the middle of the 18th century, mass poverty was nearly everywhere the normal condition of man. Then came capitalism. read more…
December 5th, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
November 21st, 2009
Myths of Our Times
By Paul Craig Roberts
Humanity has endeavored for millennia to control evil with morality. In the American “superpower,” this effort has collapsed and failed. Continue
November 14th, 2009
One of the federal government’s most opaque methods for bailing out the banking system allowed a handful of giant institutions to save up to $25 billion on their borrowing costs, a Congressional panel estimated on Friday.
Seven companies received about 82 percent of those benefits, the panel estimated. General Electric Capital was able to reduce its borrowing costs by about $1.9 billion, while Goldman Sachs saved an estimated $606 million. The other big beneficiaries were Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo & Company.
The savings came in the form of federal guarantees on more than $300 billion of bonds issued by banks and other financial institutions, and they were merely one component of a $4.3 trillion safety net of guarantees orchestrated last year by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation.
In one of the first systematic efforts to analyze the maze of guarantees and hidden subsidies, the Congressional panel that oversees the Treasury’s $700 billion rescue program said the guarantees had provided a cheap but risky tactic for fighting the financial crisis last year.
The good news for taxpayers, the panel said, is that the government has actually turned a profit thus far on the guarantees. The government has collected $9 billion in fees for guaranteeing bonds issued by the big financial institutions and a total of $17 billion in fees for all its emergency guarantees. Thus far, it has lost only about $2 million.
At the height of the financial crisis late last year, the government provided guarantees to financial institutions, from money-market funds to expanded deposit-insurance for banks and $300 billion in troubled assets held by Citigroup. By providing guarantees instead of direct loans, the Treasury could avoid spending money upfront.
But Elizabeth Warren, director of the oversight panel, warned that the guarantees also exposed taxpayers to potentially huge costs and had created new risks by encouraging financial institutions to count on future bailouts and take bigger risks.
“The guarantees, when they work, provide big market stability at very low cost,” Ms. Warren said. “But they come with a very high risk to the taxpayer and a powerful distortion of market pricing and moral hazard.”
The panel’s most striking finding was about the size of the effective subsidy that G.E. Capital and Wall Street giants like Goldman reaped in the form of below-market borrowing costs.
The panel estimated that the federal guarantees lowered those firms’ borrowing costs by about 39 percent. Using two different approaches to measure the value of the subsidy, the panel said the savings ranged from $12.8 billion to $25 billion.
The oversight panel said it found “no significant flaws” in how Treasury officials and banking regulators designed the guarantees. But Ms. Warren warned that they were a “dangerous tool,” adding that “next time we may not be so lucky.”
Big Breaks for Companies in Bailout’s Fine Print – New York Times
November 14th, 2009
We live in ludicrous times of rewarding good appearance for evil action. President Obama is awarded the Nobel Peace Prize while his war efforts intensify. But those who are true promoters of peace need attention, for they will never likely receive such ostentatious recognition for their noble efforts. Such individuals are those who take risks in a world of uncertainty, and who save or borrow capital to start a business. Such entrepreneurs promote peace by serving the customer better than the next entrepreneur through voluntary transactions in the market, rather than commanding bureaucracy in government.
As part of my entrepreneurship courses, I have students who want to start their own business listen to new entrepreneurs discuss their background, their reasons for starting the business, and of their effort to establish the business. Students usually find these speakers fascinating and inspiring, but also come away with a sense of the enormous amount of effort, capital, risk, and uncertainty that is involved in starting a business. Many of these students decide they no longer want to start their own business. They realize that entrepreneurs, too, have a boss: the customer. Mises put it this way: “Ownership of the means of production is not a privilege, but a social liability.”
[VIEW THIS ARTICLE ONLINE]
November 7th, 2009
As political pressure has reduced the price tag of expanding coverage to below $1 trillion over ten years, many observers assumed Democrats would react by trimming financial assistance for the middle class–that is, people making between twice and four times the poverty line, or between $44,000 to $88,000 for a family of four.
The assumption was that if Democrats had to make tough choices about what to cut, they’d protect the the poor and most vulnerable. After all, they’re Democrats.
But now it appears that assumption may be wrong–or, at least, not entirely right.
October 31st, 2009
I have a column in Financial Express today on the rationale for independence of the central bank, and how this is operationalised in democracies.
The rationale for central bank independence
The starting point of modern thinking on monetary policy is the issue of central bank independence. Watching the world across the centuries, a pattern has been found that non-independent central banks distort monetary policy to support the incumbent political party. When elections are approaching, rates tend to be dropped. This makes households feel a bit happier and more inclined to vote for the incumbent. This threatens the fairness of elections. And after elections, it tends to kick off higher inflation. Non-independent central banks are thus associated with election-induced fluctuations. Instead of monetary policy being a force for stability, it becomes (to some extent) a source of shocks for the economy, and of unfairness in elections.
Major countries have chosen a remarkable solution: politicians relinquish control over the central bank. This is a truly rare feature in public administration. In almost all other elements of government, democracies work by holding politicians accountable in elections, and giving politicians the reins in public administration. In this one area, the world has done something unusual.
This requires accountability mechanisms
Two issues follow hard on the heels of independence. First, independence goes with a narrowing of the functions of the central bank. There is no economic case for having independence from politicians for functions such as running the payments system, regulating or supervising financial markets or banks, running a bond exchange and depository, manning a system of capital controls, etc. The rationale for independence is limited to one specific problem: that of setting the short-term interest rate of the economy. Hence, giving RBI independence requires narrowing down its functions to the core where economic logic suggests independence. All other functions need to be placed in conventional agencies, with control in the hands of accountable politicians.
The second issue is that of accountability. The standard route of accountability through elections is being eschewed in this unique problem. But a central bank cannot be handed over to a set of unelected officials with no accountability. This would induce abuse of power, where the agency will focus on its own interests at the expense of the country.
The solution involves transparency, predictability and inflation targeting. The agency must be fully transparent about everything that it does. It must use rules rather than discretion, so as to limit the extent to which discretionary power is wielded by unelected officials. They must write down a monetary policy rule, discuss this in public, and live by it. The third element of accountability is inflation targeting. Independent central banks must have a quantitative monitorable target. Setting an inflation target for the medium term binds the agency to achieving a goal, as opposed to arbitrary exercise of power without accountability.
Commen sense and monetary economics come together
All this reasoning is rooted in the basic hygeine of good public administration. Once we accept the starting premise — that central bank independence is desirable — then careful thinking about public administration leads us to the remaining conclusions: narrow the functions placed in an independent central bank to only those where independence is required (i.e. setting the short-term interest rate), have full transparency, have a monetary policy rule, and require inflation targeting.
In historical sequence, the above reasoning led the way in monetary policy reform. It was a bit later that the best monetary economists started closing their models by putting in an inflation targeting central bank. They found it works very well. So in this strategy for monetary policy reform, we have a happy consensus between the common sense of good administrators and the state of the art of monetary economics. The central banks of the bulk of OECD GDP are now de facto or de jureDe jure inflation targeting is particularly important in countries with weak institutions, where the behaviour of an agency that is not tied down by law can be more erratic. inflation targeting, and the emerging markets with high standards of governance have also made the switch.
Indian monetary policy reform
The Indian monetary policy debate is about the key ideas of the successor to the RBI Act of 1934, which was drafted by the British in the 1920s. The authors of this act never envisioned the conditions of 2009, either in terms of the Indian economy, or our knowledge of monetary economics. In this debate, RBI staff are interested parties and have to recuse themselves.
Operationalising inflation targeting involves addressing many practical problems. A focus on these practical problems is premature. All these practical problems can be solved – as has been done myriad times in other countries – once the principle is accepted. The existence of these practical problems does not invalidate the basic strategy.
One periodically encounters criticism of low inflation as the prime goal of monetary policy. However, anyone who proposes that inflation targeting is not the answer has to come up with an alternative accountability mechanism, for no democracy can have an independent central bank without accountability. In addition, advocates of novel schemes have to explain why India should be a guinea pig for something not found in good countries.
October 25th, 2009
Unemployment will almost certainly in double-digits next year — and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work or working part time who’d rather have a full-time job or else taking home less pay than before (I’m in the last category, now that the University of California has instituted pay cuts). And there’s yet another person who’s more fearful that he or she will be next to lose a job.
In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).
Unemployment of this magnitude and duration also translates into ugly politics, because fear and anxiety are fertile grounds for demagogues weilding the politics of resentment against immigrants, blacks, the poor, government leaders, business leaders, Jews, and other easy targets. It’s already started. Next year is a mid-term election. Be prepared for worse.
So why is unemployment and underemployment so high, and why is it likely to remain high for some time? Because, as noted, people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don’t have customers aren’t going do a lot of new investing. And foreign nations also suffering high unemployment aren’t going to buy a lot of our goods and services.
And without customers, companies won’t hire. They’ll cut payrolls instead.
Which brings us to the obvious question: Who’s going to buy the stuff we make or the services we provide, and therefore bring jobs back? There’s only one buyer left: The government.
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.
When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn’t even know what a debt was, but it kept me up at night.
My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.
You see? The most important thing right now is getting the jobs back, and getting the economy growing again.
People who now obsess about government debt have it backwards. The problem isn’t the debt. The problem is just the opposite. It’s that at a time like this, when consumers and businesses and exports can’t do it, government has to spend more to get Americans back to work and recharge the economy. Then – after people are working and the economy is growing – we can pay down that debt.
But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.
The Truth About Jobs That No One Wants To Tell You by Robert Reich
October 3rd, 2009
Sept. 21 (Bloomberg) — The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.
The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”
Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”
“It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. “The Fed was created by Congress and it is not part of the executive branch.”
U.S. lawmakers have also called for a review of the Fed’s power and structure, saying Fed Chairman Ben S. Bernanke overstepped his authority as he bailed out creditors of Bear Stearns Cos. and American International Group Inc. while battling a crisis that led to $1.62 trillion in writedowns and losses at financial firms.
No Work Done
While the report requested by the Treasury hasn’t been formally scrapped, no work has been done on the project, which was due Oct. 1, the people said. Treasury spokesman Andrew Williams declined to comment, as did Fed spokeswoman Michelle Smith.
The central bank is performing its own reviews of possible operational changes following the financial crisis. Fed Governor Elizabeth Duke is leading an internal study of the roles of the directors that serve on each of the boards at regional Fed banks.
“The institution is trying to keep a low profile,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and the former director of Division of Monetary Affairs at the Fed Board. “To publish a report now invites comment on that report.”
‘Associated Costs’
The Senate passed 96-2 a nonbinding budget amendment in April supporting “an evaluation of the appropriate number and the associated costs” of the district banks. The measure was sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the senior Republican on the panel.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has also called for more scrutiny of the central bank, saying last year he aims to probe how the 12 regional Fed presidents are appointed and their role in setting interest rates. The Fed banks are semi-private entities, each overseen by a nine-member board of directors.
Legislation in both houses of Congress would allow for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced in the House by Representative Ron Paul of Texas, a Republican. Frank has scheduled a committee hearing on the issue for Sept. 25.
Lessons Learned
Along with the study by Duke, the Fed is reviewing how to overhaul supervision based on lessons learned from the financial crisis.
The Treasury interest in a Fed structural review partially stems from the administration’s proposal to make the central bank the lead regulator for the largest, most inter-connected financial institutions.
Fed Governor Daniel Tarullo, an Obama appointee, is working on changes to the supervisory process that are preparing the central bank for a larger role in tracking risks across the financial system.
Tarullo is focusing on bank-to-bank comparisons and quantitative scenario testing of bank portfolios. The Fed is currently examining the vulnerability of banks with assets under $100 billion to falling commercial real estate values.
Congressional leaders have balked at the notion of giving the Fed more power and are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators.
Supervisory Council
“There will be a council,” Frank told Bloomberg Television Sept. 14.
The review led by Duke followed the resignation in May of Stephen Friedman as New York Fed chairman because of ties to Goldman Sachs Group Inc. Friedman is a director on Goldman Sachs’s board.
Goldman Sachs became a bank holding company in September 2008, a change that would have normally barred Friedman from continuing to serve in his New York Fed post. Officials gave him a waiver so he could remain in the job, which has mostly an advisory role.
Friedman, chairman of Stone Point Capital LLC, said at the time of his resignation that he had complied with all the Fed’s rules and his service on the board was “mischaracterized as improper.”
Some analysts said a Fed revision of the role of directors is overdue.
“Allowing local bankers to play a leading role in selecting reserve bank presidents is the most worrying aspect of the current system,” Lou Crandall, chief economist at Wrightson ICAP LLC, wrote to clients in July.
District bank presidents are nominated by committees made up of people whose institutions the nominees may have supervised.
“The conflicts of interest inherent in the current system are glaring,” Crandall said.
Fed Rejects Geithner Request for Study of Structure – Bloomberg
September 23rd, 2009
Pittsburgh protesters demand G20 do more for jobs
Forbes
“We’re not going to accept a jobless recovery,” said Larry Adams, a postal worker who came from Jersey City, New Jersey, for the protest. …
September 21st, 2009
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee
Sept. 4 (Bloomberg) — The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.
“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.
Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.
Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn — an occurrence that economists call a “W-shaped’ recovery.
“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”
Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.
Big Banks
“These institutions are not only too big to fail, they are too big to be managed,” he said.
Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system…
With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.
Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.
While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.
The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.
Dollar ‘Weakness’
“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”
Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.
The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.
“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”
While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”
Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.
September 4th, 2009
I have mentioned this in the past, but its one of those absurdities that refuses to die:
“Whether it’s a matter of ignorance or greed, people are still buying General Motors stock, even though the company and the government have warned that the shares will someday be worthless.
Investors are picking up millions of shares every day, thinking they’ll profit from what is really a hodgepodge of outdated factories and a pile of debt left behind when the new General Motors Co. exited bankruptcy court protection. Instead, they could end up losing money very quickly. The price of the shares, currently under $1, has ratcheted up or down as much as 50 cents in one day.
On Thursday, investors traded 13.9 million shares, and the stock closed at 85 cents, down 4.1%. The old GM stock had a higher trading volume than big, viable companies like retailer CVS Caremark, banker Capital One Financial Corp and consumer products maker Procter & Gamble.”
Irrational seems to be the standard (and we didn’t even have to write a book to prove it).
Don’t come crying to me when they halt GM trading on a permanent basis.
August 29th, 2009
From the Mises Institute:
August 8th, 2009
New York Fed President William C. Dudley served 10 years as Goldman Sachs’s chief economist. (By Kevin Clark — The Washington Post)
By
Washington Post Staff Writer Monday, July 20, 2009
NEW YORK — The low-slung cubicles wrap around the ninth floor of a building three blocks from Wall Street, each manned by a young staffer staring at flashing numbers on a flat-screen computer monitor and working the phones to gather the latest chatter from financial markets around the world.
It could be any investment bank or hedge fund. Instead, it is the markets group of the
Federal Reserve Bank of New York, which has been on the front lines of the government’s response to the financial crisis. Federal Reserve and Treasury Department officials make the major decisions, but the New York Fed executes them. The information gathered there provides crucial insights into the financial world for top policymakers. But the bank is so close to Wall Street — physically, culturally and intellectually — that some economic experts worry that the New York Fed puts the interests of the financial industry ahead of those of ordinary Americans. “The New York Fed sticks out as being not just very, very close to Wall Street, but to the most powerful people on Wall Street,” said Simon Johnson, an economist at MIT. “I worry that they pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.” Even some former insiders at the Fed say the bank does not pay enough attention to the fundamental flaws in the country’s financial system or to the risks associated with bailing out financial firms — for instance, the chance that banks will be encouraged to take more unwise gambles. These experts worry that the New York Fed has adopted the mindset of a trading floor: well attuned to ripples in financial markets but not to long-term trends and dangers. Last month, for instance, Wall Street bond traders wanted the central bank to ramp up its purchase of Treasury bonds, which would help the traders by driving up prices. But Fed officials in Washington and around the country concluded that such a move would be counterproductive in the longer run, in contrast to some New York Fed staffers, whose views more closely mirrored those on Wall Street. New York Fed employees “play a very valuable role, day in, day out, with detailed contacts with the big financial firms,” said William Poole, a former president of the Federal Reserve Bank of St. Louis who is now at the Cato Institute. “What I think is missing is a longer-run perspective. They tend to be sort of short-term in their outlook, which is true of a lot of the financial firms. Traders have a horizon of a few hours or a few weeks, at most.” The New York Fed’s home is a fortresslike building, with bars securing the windows on lower floors. Its main lobby resembles a Gothic cathedral: dim, quiet, with stone walls, as if to inspire a mix of fear and awe. Like the other 11 regional Federal Reserve banks, the New York Fed is a curious mix of public and private, part of a system Congress created in 1913 to avoid concentrated power in Washington or New York alone. Its board of directors is composed of bankers, businesspeople and community leaders, who select the bank president with approval from Fed governors in Washington. Banks in New York, Connecticut and parts of New Jersey own shares in the New York Fed, though its profits are returned to the U.S. Treasury. The man in charge is a soft-spoken economist named William C. Dudley, who took over as president in January, replacing Timothy F. Geithner when he became Treasury secretary. With a proclivity for button-down Oxford shirts and rumpled suits, Dudley does not fit the mold of a Wall Street executive. He has won fans across the Federal Reserve System for a collaborative style, as well as a talent for explaining complicated problems in the financial world and drawing up solutions to them. It is his résumé that alarms some critics, who see an example of a too-cozy relationship between financial firms and their lead regulator. One of several bank officials who have worked in the private sector, Dudley was at
Goldman Sachs for two decades, including 10 years as chief economist, before joining the New York Fed in 2007.
Some Fear N.Y. Fed Too Influenced by Wall Street – Washington Post
July 24th, 2009
The reason that the savings gauge has leapt is not that Americans are saving more, but only that they are paying off their past, huge borrowings because of financial distress. Americans actually cut savings in the form of financial assets held by 0.5 per cent of their incomes in the first quarter, while cutting borrowing even more aggressively, by 5 per cent of income. This telling data leads to two important conclusions.
First, it suggests that immediate US recovery prospects may be even more frail than supposed, and than Mr Bernanke is liable to admit. With Americans now battling to pay down debt against a backdrop of still-plunging house prices and soaring unemployment, while shoring up spending power with cuts in their savings, the resurgence of consumer demand on which recovery hopes are pinned may well prove elusive. The position could grow worse still once the boost to US personal incomes from the Obama Administration’s fiscal giveaway also fades, as it soon will.
Second, and critically, it is clear that America has yet to begin to address the real roots of this crisis and embark on the long road to a more sustainable economic future. Until it does so, the future will remain a hostage to fortune.
The U.S. Is Not Yet Free of Economic Peril – Gary Duncan, Times of London
July 21st, 2009
William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world’s most secretive gentlemen’s club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
And now this.
White is wearing his pinstriped suits again. He has just returned from California, where he gave a talk at a large mutual fund company. Then he packed his bags again and jetted to London, where he consulted with the Treasury. After that, he returned to Switzerland to speak at the University of Basel, and then went on to Frankfurt to present a paper at the Center for Financial Studies. From there, White traveled to Paris to attend a meeting at the Organization for Economic Cooperation and Development (OECD). Finally, he flew back across the Atlantic to Canada. White is clearly in demand, including in North America.
Since the economy went up in flames, the wiry retiree has been jetting around the globe like a paramedic for the world of high finance. He shows no signs of exhaustion, despite his rigorous schedule. In fact, White, with his gray head of hair, is literally beaming with energy, so much so that he seems to glow.
Perhaps it is because someone, finally, is listening to him.
Listening to him, that is, and not to his rival of many years, the once-powerful former chairman of the US Federal Reserve Bank, Alan Greenspan. Greenspan, who was reverentially known as “The Maestro,” was celebrated as the greatest central banker of all time — until the US real estate bubble burst and the crash began.
Before then, no one in the world of central banks would have dared to openly criticize Greenspan’s successful policy of cheap money. No one except White, that is.
The Economist Who Predicted the Crisis – Balzli & Schiessl, Der Spiegel
July 11th, 2009
What’s the best way to express just how bad the job market is? You could look at the soaring unemployment rate, or perhaps the ever-shortening work week. How about this: Total nonfarm payrolls, notes economist James Hamilton, are now back to where they were in mid 2000, and in a few months they’ll certainly be back to pre-2000 levels. 21st century job creation: gone.
All Jobs Created in the 21st Century Are Now Gone – Clusterstock
July 10th, 2009
t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.
Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.
When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph
July 9th, 2009
President Obama’s visit to Moscow this week may turn out to be a very good thing. Forget all this jibber-jabber about nuclear disarmament.
There is no better reminder than the former Soviet Union for how the fantasies of a few collectivist zealots can turn into unending nightmares for its people — and for how a state-run economy ends up with no economy at all.
If we’re lucky, a little Russian history on this trip will turn into a welcome wake-up call for Mr. Obama.
It’s not that Mr. Obama is some radical who carries a warm nostalgia for the Soviet Union from his university days. He’s way too young and too smart for that.
But the president believes in the state, certainly more than any other recent American president. He believes the state must actively intervene in the economy and that the state can bring about a better future. And it seems he believes it is his destiny to lead the state to that future.
In that way — and others — Obama reminds me of Vladimir Lenin, the founder of the Soviet state.
CNBC’s Jim Cramer made the Obama-Lenin comparison back in February. And the more I’ve thought about it, the more it holds.
Associated Press
A painting made during the Russian Revolution, showing Vladimir Lenin surrounded by revolutionaries, date unknown.
Of course, Obama is a reformer, not a revolutionary. And he’s certainly no communist.
But just like Lenin, Obama is a supremely self-confident leader — an intellectual heavyweight and a clever political tactician — an elitist moralizer and a populist champion. And just like Lenin, Obama carries the true-believers’ righteous fervor for “change.”
I was thinking of Lenin as I watched the president’s Rose Garden remarks on energy and innovation last Thursday.
After his eight minutes in front of the teleprompter, the president turned to walk away, and a reporter blurted out a question, “Mr. President, do you have a message for the small businesses on health and economy?”
The president should have just walked away. But it was as if he couldn’t stop himself as he launched into a rambling, haughty answer that I found…well, a bit scary.
It was scary because it demonstrated that Mr. Obama — almost half a year in office — still has no grasp of the everyday realities faced by America’s small businessmen. They can’t make payroll, but the president is directing them to buy LED lightbulbs and urging them to contact “clean energy” CEOs.
And it was scary because it showed that the president is still possessed by an unshakable conviction in the power of the state over the individual and of the future over the past.
As he put it in the Rose Garden, we have to change the health-care system. We have to change how we use energy. We have to change how we “train our young people.” “We are not folks who are scared of the future or look backwards. We always meet the challenges by moving forward.”
Political clichés? Of course.
But the president seems to actually believe his clichés. And some of his Rose Garden remarks could have been lifted from Lenin’s speeches circa 1918 – the same hectoring tone and the same mockery of opponents who long for the “status quo”.
Even Mr. Obama’s call to move “forward.” “Forward!” in fact was one of the Soviets’ favorite slogans.
The good news for those of us who are a little freaked out by Mr. Obama is that even Lenin did an about-face after the utter failure of his initial hard-left economic policies.
By early 1921, faced with the ruin and famine wrought by nationalization of the economy, the Bolsheviks re-instituted a quasi-capitalist economy with its New Economic Policy. Ironically, the NEP was aimed to help small businessmen — the very same people that the Obama economy so desperately needs nowadays.
Lenin called the NEP taking “one step backward to take two steps forward.” While he’s in Moscow, President Obama may want to ask someone at the Kremlin, just what Lenin meant by that.
Editor’s Note: Mr. Newmark was a student in Moscow in 1984, worked with George Soros on Russian economic reform in 1988-89 and ran the Goldman Sachs Moscow office from 1992-1994.
Why Barack Obama Is Like Vladimir Lenin – Evan Newmark, Deal Journal
July 7th, 2009
How a Loophole Benefits GE in Bank Rescue
Industrial Giant Becomes Top Recipient in Debt-Guarantee Program
General Electric Co. CEO Jeffrey Immelt, center, is applauded by Michigan Gov. Jennifer Granholm during a news conference Friday, June 26, 2009, in Birmingham, Mich. Immelt announced GE will build a $100 million manufacturing technology center in Michigan that will eventually employ more than 1,100 workers. At right is Ed Montgomery, President Barack Obama’s director of recovery for auto communities and workers. (AP Photo/Carlos Osorio) (Carlos Osorio – AP)
ProPublica and Washington Post Staff Writer
Monday, June 29, 2009
General Electric, the world’s largest industrial company, has quietly become the biggest beneficiary of one of the government’s key rescue programs for banks.
How a Loophole Benefits GE in Bank Rescue – Washington Post
July 1st, 2009
President Obama’s public health plan, if passed by Congress, would drive America inevitably towards a single-payer system in which all health-care payments are made by “the government,” that is, the taxpayers.
My family and I, originally from England, have experienced the single-payer system first-hand. Our experience teaches that it would radically change the standard of American medicine-for the worse.
National Health Through a Recipient’s Eyes – Diana Furchtgott-Roth, RCM
June 26th, 2009
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