I am attempting to get a petition on Downing Street Web site, to be signed by those who wish to repeat THE LONG MARCH of the 30s in todays format. I am looking for help from prominent people, newpapers, and TV media, to publish the links for people to i-walk on an e-march. I will need help to log the people, both from the UK, and from all over the world (showing the source) so that it will influence the talk at the UK cabinet, and the worldwide forum called to address the financial system to replace Bretten Woods.
Any help to launch this would be most welcome
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14 comments:
THE Government has on its own ruled in the Keynsian Tools. This is welcome news and will lead to confidence.
See the following articles in the Financial Times.
FT Headlines that government will use public spending.
http://www.ft.com/cms/s/0/95eee1ae-9cab-11dd-a42e-000077b07658.html
FT Leader Comment: hold your fire until needed.
http://www.ft.com/cms/s/0/ff12dae4-9c7b-11dd-a42e-000077b07658.html
The Sunday Telegraph:
Headlines:
Big government projects to prop up the economy • Latest figures expected to show UK heading for recession
ALISTAIR DARLING says the Government will boost its spending to help the economy weather the impending recession.
The Chancellor told The Sunday Telegraph that he would increase borrowing to spend billions of pounds to help struggling home owners and to protect jobs.
“This is a time when you have to support the economy,” he said. Mr Darling’s comments came at the start of a week in which key indicators are expected to show the economy entered “negative growth” during the last quarter. If that negative growth continues for a second quarter then the country will officially be in recession.
Mr Darling said France, Germany and Italy had already experienced negative growth and effectively admitted that Britain was heading into the same territory. “It’s a classic example of external shocks to the system hitting all countries,” he said. “It will affect us.”
He spoke approvingly of plans to prop up the economy by embarking on big government projects, an interventionist policy in the style of the economist John Maynard Keynes.
Mr Darling singled out housing, energy and small businesses as areas that would benefit from a “reprioritising” of spending plans.
He also signalled that proposals for two new aircraft carriers and a replacement for the Trident nuclear deterrent would go ahead, as well as London’s £16billion Crossrail project and the 2012 Olympic games, for which the budget is £9.3billion.
“What I want to avoid is getting ourselves in a position governments have done in the past where you face an immediate problem and cut back on the things the country will need in the future,” he said.
The Treasury is also understood to be “fast-tracking” construction projects – including schools, medical buildings, social housing and leisure centres – using money earmarked for future years.
He admitted that government borrowing would have to rise ....
for Copyright reasons i cannot publish any more, and unfortunately the Telegraph do not allow an article to be linked so that readers can read themselves.
REQUESTED Help or copied from their website relevant informaton.
http://www.economicshelp.org/
http://www.personal.u-net.com/~n-space/BillyMcShane.htm
Randall Parker
Currently a Professor of Economics at East Carolina University in Greenville, NC.
Paul Krugman the Nobel Peace Prize Winner
More postings on this issue on :
Professor Randall Parkers Blog:
http://randallparker.blogspot.com/2008/10/insolvency-credit-freeze-recession-and.html
Also Requested Andrew Neil: former editor of Sunday Times who must remember John Major ignore him when he laid out plans of what he could do with examples and estimated cost to spend out of the early 90s depression!
No reply todate!
One of the reasons why I decided not to go ahead with the i-walk e-march is the natural support for Keynes's thinking from Paul Krugman.
See his article and the same arguments opposing him within the comments posted... a selection shown below, and my own comment - No 463 of the day - repeated here.
November 14, 2008
OP-ED COLUMNIST
Depression Economics Returns
By PAUL KRUGMAN
The economic news, in case you haven’t noticed, keeps getting worse. Bad as it is, however, I don’t expect another Great Depression. In fact, we probably won’t see the unemployment rate match its post-Depression peak of 10.7 percent, reached in 1982 (although I wish I was sure about that).
We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.
To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered).
But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.
And with no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. Rising unemployment will lead to further cuts in consumer spending, which Best Buy warned this week has already suffered a “seismic” decline. Weak consumer spending will lead to cutbacks in business investment plans. And the weakening economy will lead to more job cuts, provoking a further cycle of contraction.
To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices.
One of these prejudices is the fear of red ink. In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice. F.D.R.’s premature attempt to balance the budget in 1937 almost destroyed the New Deal.
Another prejudice is the belief that policy should move cautiously. In normal times, this makes sense: you shouldn’t make big changes in policy until it’s clear they’re needed. Under current conditions, however, caution is risky, because big changes for the worse are already happening, and any delay in acting raises the chance of a deeper economic disaster. The policy response should be as well-crafted as possible, but time is of the essence.
Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little. The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.
What does all this say about economic policy in the near future? The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now. Indeed, Goldman Sachs predicts that the unemployment rate, currently at 6.5 percent, will reach 8.5 percent by the end of next year.
All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.
So the question becomes, will the Obama people dare to propose something on that scale?
Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.
Some of the comments - variety of opinion on this.
487.November 14, 2008 2:41 pm
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Just one question Paul. Take out the statistical mumbojumbo and use just plain maths... do you really think that less that 10% of our workable public are without jobs.
Another way: Do you think that of all the people unable to find work, account for less than 10% of the workable population?
It is my belief that the % is really higher but is covered up by the manipulation of statistics. But thats just me, long-time unemployed.
— David, Ft Lauderdale
Recommend Recommended by 0 Readers 486.November 14, 2008 2:41 pm
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When I graduated from medical school my father (a physician) gave me a book on the history of medicine and on the inside cover he wrote: "Only with an eye towards history can one avoid the mistakes of the past" - germane to this discussion. Depression politics indeed. Accountability and Keynesian deficit spending is the gamble we need to take.
I hope you, Mr. Krugman, are on the economics advisory team for the Obama transition.
— Phillip, San Francisco
Recommend Recommended by 0 Readers 485.November 14, 2008 2:41 pm
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I hope President Obama simply brings Professor Krugman into the administration, so he can actually do something and not just write wish-lists.
— Michael, Pasadena, CA
Recommend Recommended by 1 Reader 484.November 14, 2008 2:41 pm
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A couple of weeks ago you suggested spending as a way out of this morass due even though it feels counter-intuitive to follow this advice.
The needed frame that this is even more true because we're following the depression economics playbook instead of the healthy economics one is a much appreciated clarification. Now I'm on board; thank you.
This reminds me of pilots in a storm - pilots train to rely on their instruments under extreme circumstances and not their instincts namely because of the crippling impossibility to determine one's location based upon a false yet heightened sense of navigable abilities.
— Jane, Michigan
Recommend Recommended by 1 Reader 483.November 14, 2008 2:41 pm
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Thank you for the insightful commentary on the economic problem.
My question is are we also at the end of our fiscal stimulatory rope as we are with monetary policy? In short, will increased borrowing by the government crowd out private investment as some economists predicted with previous deficit spending? Isn't the real problem one of income distribution?
The Bush administration has already been stimulating this economy to the tune of $5 trillion over the last 8 years. So the first mistake made was to consider that we had ever really recovered from the 2001 recession. The federal government pumped enormous demand driven stimulus into the economy back in the 1980s as well with very low taxes and the recovery was as slow as molasses in December. Since World War II the military industrial complex has provided a huge stimulus so some would even contend we never really recovered from the last depression.
— craig, Springfield, Missouri
Recommend Recommended by 1 Reader 482.November 14, 2008 2:41 pm
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Professor Krugman,
Is it possible this economic crisis is structural? That the bubbles of the past masked fundamental problems within our economic system itself?
Consider: The rise of multiple intermediaries taking their cut of any actual goods or services produced as opposed to actually producing goods and services (e.g., lobbyists, insurance companies layering paperwork between patients and healthcare, marketing, etc.). Consider: The extraordinary multiplier between executive compensation and that of the lowest workers, which effectively cripples the marketplace by concentrating too much buying power in the hands of too few. Consider: The off-shoring of whole areas of production, leaving consumers without the very jobs necessary to sustain the consumption of goods and services that forms the ultimate basis of corporate profit. Consider: The often incredibly wasteful and inefficient systems we have in place for the generation, distribution, and consumption of energy, water, health services, and even food.
Changing any one of these will involve a wrenching shift in the current alignment of political, capital, and social forces. Successful change on this scale is a thing that only governments can do - if its leaders are bold and bright enough.
— Kenji, NYC
Recommend Recommended by 1 Reader 481.November 14, 2008 2:41 pm
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I keep reading suggestions that jobs need to be created (a la WPA, infrastructure, etc) and relief provided to those with mortgages. I can't help but feel that those 'solutions' leave a whole section of the working poor & middle class out. I live in NYC and don't have a car or mortgage, don't spend excessively, have low credit card debt (but a huge grad school loan to repay). However, because the cost of living (rent primarily) is so high in NYC, coupled with the fact that I have spent the past decade working in non-profits for salaries that have not kept pace with cost of living and weren't really enought to live on to begin with, has made me quite worried about how I am going to survive this recession/depression.
The job creation through manufacturing, green technology, etc. is not going to help the non-profit sector nor create jobs there; I will not feel relief from mortgage bailouts or lower gas prices. So where is my help going to come from? A stimulus check *would* help me. I am not asking for a handout, I have an MA, am very bright, and a hard worker--I am fortunate enough to have found a temp job after being laid off from my museum job, but because I have such a specialized degree, I am only finding entry-level administrative jobs for which I am terribly overqualified (which scares potential employers as well) and don't pay enough for me to get ahead. (And that's if I can even get an interview or job offer.)
Employees NEED to earn liveable wages that will enable them to both save for future economic downturns, yet still have some disposible income to put back into the economy.
— DP, New York
Recommend Recommended by 2 Readers 480.November 14, 2008 2:41 pm
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Clueless, absolutely clueless. The Federal government cannot solve this problem anymore than it solved the crisis back on 1973-75. I don't mean to be personal, but, you actually did win the Nobel Prize for Economics? Or was that some other Paul Krugman? You cannot solve a Free Market disaster with a government solution. It didn't work for FDR, it didn't work for Jimmy Carter and it won't work for Barack Obama. One of the probelsm with economics is that it obviously doesn't pay attention to history. Cut taxes, both on corporations and individuals. Reduce government regulation across the board and get the the goddamn eggheads like yourself out of the equation and solution will progress nicely. The smartest people in the room are responsible for this crisis, who's betting on them to get us out of it?
— thlrlgrp, NJ
Recommend Recommended by 4 Readers 479.November 14, 2008 2:41 pm
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when government spending on WWII pulled the economy out of a depression, it was due to the direct, centralized command and control spending that could never occur at the level of individual rational actors, who expected nothing but more of the same, whose collective expectations in the aggregate could only be reversed by a huge external shock of government spending in the aggregate sufficient to offset declines in private spending on investment and consumption
"who will pay for this" is an absurd claim that spending $600B would not create one dime of ADDITIONAL output from idle resources, because in the fantasy world of free-market ideologues, the gyroscope of full employment equilibrium always returns to its natural center if the government would just stay out of it ... free markets (read "deregulated") could not possibly generate instability of this scale on their own in this fantasy world ...
... for example, as demonstrated in the election, it's all about those taxes that keep knocking the gyroscope off center ... just get those taxes down and it'll all come back ... which is like pushing on the same string of lower interest rates which can no longer induce investment - recessions and depressions break the link between relative prices and aggregate demand, which free-market ideologues refuse to accept and insist instead that the economy be allowed to free fall until it restores itself, no matter how far the gyroscope needs to tilt over before reversing direction
a true aggregate stimulus in the Keynesian sense is not a "bailout" but rather a government policy designed to mitigate the consequences of markets in the aggregate which fail to maintain full employment via adjustments of relative prices, i.e., falling house and oil prices or interest rates did not induce sufficient demand to maintain full employment
now that the shadow financial sector and its hordes of enriched free-market ideologues have been rescued on a "too big to fail" basis, the economic problem has expanded from the confines of a credit freeze to trillion dollar losses in lost output everywhere, for which a primary solution is direct government spending - the straight up fiscal version of Keynesianism scorned by free-market ideologues to "crowd out" private resources
bailing out the financial and housing sector is not the same thing as "bailing out" the entire economy ... the former is concerned with dysfunctional markets and relative prices which the Bush administration denied until it became a crisis, while the latter involves that aggregate demand necessary to employ idle resources, which the Bush administration recently put into practice with "military Keynesianism" via a surge in defense spending to offset the contraction in GNP
the free-market ideologues picked themselves as winners among losers on the way up as they chanted that all regulation is socialism and all deregulation is competition ... reversing themselves on the way down that too-big-to-fail requires government rescue to avoid market collapse
in the midst of the carnage, the free-market ideologues have turned on each other, out-denying each other's reliance on government while out-testifying each other's faith of free markets as they dance between tortured sound bites of economic theory and which bailouts to condemn or support
like Greenspan, who systematically destroyed transparency as a cornerstone of competition, then gapes with "shock" and attempts to explain it away as a once-in-century random chance of when markets fail
— barry payne, ohio
Recommend Recommended by 0 Readers 478.November 14, 2008 2:41 pm
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Why can't we compromise on doing a little now and the rest next year? Why are we still doing partisan wrangling over how much and what kind of stimulus when both candidates advocated cooperation? Can't we agree on doing a little something next week...? I don't understand waiting for a multi billion dollar omnibus package if everyone agrees on some components now. This is frustrating.
— Neal, Perkasie, PA
Recommend Recommended by 0 Readers 477.November 14, 2008 2:41 pm
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If it were possible to "stimulate" an economy by massive inflation as Krugman demands, then Robert Mugabe would be a hero, and Zimbabwe would be the richest country on earth.
— Some Guy, California
Recommend Recommended by 4 Readers 476.November 14, 2008 2:41 pm
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The problem will ultimately hinge on restoring consumer confidence. All these bailout programs are simply welfare for the rich.
I will feel my confidence returning when I start seeing some of these executives stripped of thier assets and the money used to aid the recovery. Guantanemo will soon be available - it would make a suitable home for greedy executives who have done far more damage to our country than Al Qeada could. These crooks can be marched naked down Wall Street and tarred and feathered. There large homes can be used to provide low income housing. Change the color of the money (beter yet do away with hard currency) and put a cap on how much any individual will be reimbursed.
These are some of the things that would boost my confidence.
— Jared, New Jersey
Recommend Recommended by 0 Readers 475.November 14, 2008 2:41 pm
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A Summit With A Perilous View
A group of world leaders known as the G-20 will meet this weekend in Washington, D.C. The meeting was called by French President Nicolas Sarkozy, and President Bush agreed to play host.
This meeting has the potential to be quite historic.
World leaders are, understandably, attempting to portray the current economic situation as a “crisis”, which is true enough. However, they are also attempting to portray it as solvable within the basic structure of capitalism. In his Wall Street speech yesterday in anticipation of the “summit”, President Bush said this:
This is a decisive moment for the global economy. In the wake of the financial crisis, voices from the left and right are equating the free enterprise system with greed, exploitation, and failure. It is true that this crisis included failures - by lenders and borrowers, by financial firms, by governments and independent regulators. But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system. It is to fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people around the world.
Among the pillars defining the agenda for the meeting, number 5 out of 5 is this:
Reaffirming our conviction that free market principles offer the surest path to lasting prosperity.
“Lasting prosperity” for who?
The billions who live on this planet with no access to basic services? The billions who toil in labor every day and still don’t have economic security? The many millions who want work but can’t find work? The many millions who, today, have work, but are in severe danger of losing those jobs - through no fault of their own?
“Consumerism” was a neat trick. They’ll write about it in history books some day. How to get as filthy rich as possible? Sell as many gadgets and trinkets to people as you can. Use extremely cheap labor, so you can sell the stuff at a price which is still affordable to many, and allows you to make a tidy profit.
Fuel the whole thing with debt. Keep creating more consumers, so your markets keep expanding and you can service that debt.
Except…when the whole thing implodes. When that happens …Whoops! Capitalism has no plan!
Darn the luck. We picked a plan that has no backup plan.
Read the rest at:
Bennett Blog
"...bring your informed opinion..."
— Walt Bennett, Harrisburg PA
Recommend Recommended by 2 Readers 474.November 14, 2008 2:41 pm
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As much as I admire reading your column I'm afraid it's becoming too depressing. Didn't people watch movies alot during the depression to escape the pain around them? I'm gonna go watch a movie.
— George Machun, San Francisco
Recommend Recommended by 0 Readers 473.November 14, 2008 2:41 pm
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The Treasury is now changing course, merely weeks after the first attempt to help banks and finding out there were no strings attached. This way, the banks can keep the money without lending to the people.Corporate socialism, anyone? Then AIG, Lehman, and all the other big businesses that want to borrow from the taxpayers. Why not just give the money directly to the taxpayers and let us pay the mortgages, car loans, student loans,and credit cards? This way, everybody gets paid.
— Cyril Price, Millsboro, Delaware
Recommend Recommended by 0 Readers 472.November 14, 2008 2:41 pm
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The world does not have to suffer a recession. We can end all of this mayhem. But to do so the leaders must think anew. The question is whether they can or not? That will determine the direction and outcome. This writer was among the first to call for an economic Summit. It is what occurs at this Summit that is important. This juncture in history affords us an opportunity to reboot the entire global system while we tackle worldwide debt. We have to reboot. Throwing money to fix the system will not fix the system. Merely putting into effect new regulations will not fix the system. We need to reboot the system and implement new regulations. We need a fresh start. Nothing does this like debt and mortgage realignment. For this 100 year event we need a 100 year fix. Instead of making deals we have to fix the system. We need to reboot the system. It can be seen at www.debtrealignment.com Thank you.
— Samuel Margolies, Las Vegas
Recommend Recommended by 0 Readers 471.November 14, 2008 2:41 pm
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I think it's interesting that the 600 billion figure is very close the to 571 billion we have spent on the Iraq War. Forget the CEO's. We have had incredibly incompetent management of our military, starting with the commander-in-chief.
— Kevin Griffith, Columbus, OH
Recommend Recommended by 0 Readers 470.November 14, 2008 2:41 pm
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You want us to spend more? Isn't that what got us into this problem in the first place. The line between want and need is indeed blurry. Let's go back to basics, become less materialistic and less of conspicuous consumers.
— Paolo, Freedom, CA
Recommend Recommended by 2 Readers 469.November 14, 2008 2:41 pm
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It's all about the consumer. The consumer is the market:
http://media.economist.com...
Give me (and other consumers) 700bln, and we'll save the economy!
— Alexandra, Washington D.C.
Recommend Recommended by 2 Readers 468.November 14, 2008 2:41 pm
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Unemployment calculations lie in a murky area. Although the formula for calculating the Unemployment Rate is simple (Unemployment Rate = (Unemployed Workers)/Total Labor Force) x 100%), the definition of terms in the equation is not. During various periods in our history it was not uncommon for a president, unwilling to have the highest rate on his watch, to change the definition of "Unemployed Workers." In addition, presently, each month where more people are added to the unemployed rolls, there are people taken off the unemployment rolls for various reasons (benefits run out, etc.). Yet, there are still people unemployed, looking for work, but not counted. In some cases the rate might remain the same from month to month (e.g., the unemployment rate this last September stayed the same although additional people were fired).
I'd be interested to see what the unemployment rates would be presently using the same criteria as used to calculate the post-Depression peak of 10.7 percent. In other words, let's compare apples to apples. Better yet, let's compare people out of work who are looking for work to the available workforce, period.
— Don Johnson, Beulah, MI
Recommend Recommended by 0 Readers 467.November 14, 2008 2:41 pm
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Why do economists see so bright a line at the interest rate of Zero? Mathematically there's nothing special about that point.
Sure, with negative interest, investors could make more by stuffing money in their mattresses. Until you consider the risk. Anyone investing at tiny positive interest rates isn't doing it for the interest, but for the safety. They may even be investing at negative interest already, considering inflation.
Since the U.S. can offer relative safety, why shouldn't it benefit -- and borrow at negative interest to build stimulus and infrastructure, while taking on debts that will gradually go down over time instead of up?
— John S. James, Philadelphia, PA
Recommend Recommended by 0 Readers 466.November 14, 2008 2:33 pm
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Lend and spend are bites of the same poisoned apple if the same failed corporations are bailed out to continue to outsource labor and productivity in the race for short term profits in financial credit.
Automobile and energy industries have failed to innovate or become more efficient. They became outmoded and noncompetitive with the consent of Congress.
Financial Services have developed scam technology and legal oversight that the mafia would envy.
Change in regulations must precede any bail out. Investment in alternate sources of energy, alternate transport, alternate education and health services, alternate insurance and government representation by lobbyists must be made if new jobs and new industry will replace the decaying body of the elephant in the room.
— Morton Kurzweil, Margate, Florida
Recommend Recommended by 1 Reader 465.November 14, 2008 2:33 pm
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I wonder what criteria the editors use for their picks - Masako's comment which was selected is nothing but a rant and sounds almost like a personal attack on Mr. Krugman.
Of course people can disagree with Mr. Krugman's prescription and of course people can challenge the assumptions behind it. But flaming the writer from the anonimity of an internet post is simply wrong. Masako has the right to do whatever, but that a NY Times editor picks his rant and a worthwhile read is flabbergasting.
By the way Masako, I would like to expose some flaws in your reasoning.
1) You say that the opposite of exercising prudence and caution is gambling. I think you are oversimplifying. Krugman calls for bold measures because prudent fiscal policy tends to undershoot, hence the fiscal policy should be a less prudent one. But that is not the same as an irresponsible one. Assuming calculated risks in a conscious way is not the same as gambling which is an irrational expectation that some magical factor called luck will offset the odds stacked against the player. hardly what Mr. Krugman suggests we do.
2) You say that there is no scientific evidence that Mr Krugman's prescriptions would work. Well - we need a philosophical clarification here: are you considering Economics a science or not? If yes, then there is indeed scientific evidence that Keynesian theories work - the famous New Deal that propped the US out of the Great Depression is the best example. Of course, if you are on the Chicago School side of things (markets solve everything and government only gets in the way type of thinking), you're likely to disregard all that evidence, but disregarding evidence doesn't mean the evidence does not exist. Oh, an by the way, by the same token, if you can disregard evidence supporting Keynesian economics, then you can just as easily disregard any evidence supporting Friedman economics. On the other hand, if you don't think Economics is a science, then the current economic model is no less of a gamble than the one you oppose.
— Flavius24, Barcelona, Spain
Recommend Recommended by 2 Readers 464.November 14, 2008 2:33 pm
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Mr. Krugman is letting the Fed off the hook too easily. The Fed according to Mr. Bernanke's last testimony before Congress is not doing anything inflationary. In fact as the Fed has been adding liquidity with one hand, it has been taking it away with the other. While it puts money into the system via taking in commercial paper and assets of questionable value, it sells 1 and 3 month treasury bills to take money out of the system. Thus, it is not monetizing the debt. Monetizing the debt is always considered inflationary. However what we need is exactly what the Fed did during the World War II. Then the Fed monetized the debt by buying treasury bonds.
The Fed should expand its balance sheet not by favoring large corporations but by buying ultra safe 30 year treasury bonds. With direct intervention there is a good chance that the yield on the 30 treasuries will drop and then the yield on the 30 year mortgage will follow suit and fall. All housing gets a lot more affordable if Americans can get 30 year mortgages at 4% interest rates. After World War II our parents, boomers’ parents, regularly obtained mortgages at this rate.
The Fed got us into this problem by keeping short term rates higher than long term rates.
http://home.comcast.net...
The Fed should get us out of this problem by monetizing long term treasury bonds.
— Thomas Costagliola, Salem MA
Recommend Recommended by 0 Readers 463.November 14, 2008 2:33 pm
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My own comments: you will see a strand of each of these points in the reader comments......
This piece is the most eloquent explanation of what man feels in his guts as the solution, but conventional wisdom, the story from the intellectuals in power, and the fear of being called a fool stops him from stating the obvious - very similar to the King is Naked story, and Elihu Justifies His Right to Answer Job (The Holy Bible: King James Version. 2000. The Book of Job 32 ).
Yes Professor, expound the views, but four important issues need to be addressed intellectually in the current circumstances that you could help explain with your intellectual power. I feel certain from what I have seen, that the Lord will give you the wisdom to address our current problems better by doing so.
The first is debt: When people look at this subject in a vacuum - i.e. without the asset it finances, the story one gets is unsound. Even a student loan is an acquisition of an asset. A more developed society is able to protect and sell property rights in finer detail, so that car sales for example are enabled, and it enables the fruits of capitalism (I like the term free market) to reach further (e.g. Heineken reaches parts other beers cannot reach!) to those who are not able to save and then spend on these goods. It is my submission that all things being equal, a more developed society will have higher level of debt (use of resources more efficiently). Further - understanding of debt is enhanced by looking at per capita amounts, compared to assets held on average, and per capita incomes. There are also issues with regard to personal, corporate, and government debt.
The second is saving: Excessive savings and excessive borrowing both have similar effects on creating a recession, and both have the same remedy - of substituting Government spending. Moods of the populace and intellectuals change without remembering the near past - for example the Clinton end years were dominated by discussion of who should be responsible for savings of huge Government surpluses - that is whether the Government should invest for the future pensions to its citizens or the people be given this surplus back in tax rebates for them to make a better savings decision.
The third is unemployment and the benefits of capitalism: Free markets are not able to deliver its benefits to the lowest in society because they are not in any way normal people; they have been damaged in some way by being an underclass. So they will make bad financial decision - for example they will not consider the effects of unemployment or increases in interest rates - when making a simple consumption/investment decision. Normally they are also the payers of the highest rates for the goods, (being the highest rate profit opportunities for the business class). The beneficiaries of the free market system have to ensure that these factors are mitigated by a process where the Government takes a responsibility of ensuring they run the economy where a normal job market operates, and if it fails for any reason, then a support system exists, that should include a mortgage payment. Even if there is a mistake by financial institutions to give 125% mortgages to the very poor, by taking over their payments in periods of unemployment, and leading them back into employment by some hand holding if necessary, we are ensuring a greater stability of the market system, less distressed assets, and many more benefits.
I have on the back of envelopes calculated - many times - that the cost of such support to the underclass, in times of such difficulty, is vastly smaller than the trillions we have seen being thought of to support the institutions who should have known better and are manned by the most intelligent of our society. If valuations as a whole are supported in this process, there is less downside speculation, and more normality.
The fourth is Regulations: The market proponents tend to think that regulations are a burden that are unnecessary and a burden on the system. If one were to minimise this it would be best. I say – that western intellectuals are being dishonest, and mixing up anarchy with free markets. I remember reading in Newsweek/Time magazines in the 60’s that there were more regulations being made in the NYSE in one year than in the whole of the period since the Russian communist revolution! When Estonia joined the EEC, they signed a document running to some 170,000 pages of A4! These facts indicate that regulation is the extension of the free market! Now the only thing we have to ensure is that the regulation is appropriate and current among other requirements, (perfect knowledge is an Adam Smith assumption!) especially with regard to disclosure to ensure the investor in these financial institutions is telling the investor why he giving a 125% mortgage at loss leading rates etc.
— Mehdi Fazal, London
Illustration of ignorance - mixup of anarchic solution to free market solutions - posted comment on Prof Paul Krugman's article.
Note a number of readers agree!
If ignorance prevails, what else do you expect? Intellectuals all round have to help build a knowledgable populace.
Clueless, absolutely clueless. The Federal government cannot solve this problem anymore than it solved the crisis back on 1973-75. I don't mean to be personal, but, you actually did win the Nobel Prize for Economics? Or was that some other Paul Krugman? You cannot solve a Free Market disaster with a government solution. It didn't work for FDR, it didn't work for Jimmy Carter and it won't work for Barack Obama. One of the probelsm with economics is that it obviously doesn't pay attention to history. Cut taxes, both on corporations and individuals. Reduce government regulation across the board and get the the goddamn eggheads like yourself out of the equation and solution will progress nicely. The smartest people in the room are responsible for this crisis, who's betting on them to get us out of it?
— thlrlgrp, NJ
Recommend Recommended by 4 Readers 479.November 14, 2008 2:41 pm
REGULATIONS
REGULATIONS
REGULATIONS
Here is the Guru who did it all;
Noteworthy is the following: (See full article shown below that)
“Nobody was looking at the holes of the regulatory structure.”
The arrangement was a compromise required to get the law adopted. When the law was signed in November 1999, he proudly declared it “a deregulatory bill,” and added, “We have learned government is not the answer.”
November 17, 2008
THE RECKONING
A Deregulator Looks Back, Unswayed
By ERIC LIPTON and STEPHEN LABATON
WASHINGTON — Back in 1950 in Columbus, Ga., a young nurse working double shifts to support her three children and disabled husband managed to buy a modest bungalow on a street called Dogwood Avenue.
Phil Gramm, the former United States senator, often told that story of how his mother acquired his childhood home. Considered something of a risk, she took out a mortgage with relatively high interest rates that he likened to today’s subprime loans.
A fierce opponent of government intervention in the marketplace, Mr. Gramm, a Republican from Texas, recalled the episode during a 2001 Senate debate over a measure to curb predatory lending. What some view as exploitive, he argued, others see as a gift.
“Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action,” he said. “My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.”
On Capitol Hill, Mr. Gramm became the most effective proponent of deregulation in a generation, by dint of his expertise (a Ph.D in economics), free-market ideology, perch on the Senate banking committee and force of personality (a writer in Texas once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the financial crisis that has rattled the nation.
He led the effort to block measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home foreclosures that would undermine the financial markets. He advanced legislation that fractured oversight of Wall Street while knocking down Depression-era barriers that restricted the rise and reach of financial conglomerates.
And he pushed through a provision that ensured virtually no regulation of the complex financial instruments known as derivatives, including credit swaps, contracts that would encourage risky investment practices at Wall Street’s most venerable institutions and spread the risks, like a virus, around the world.
Many of his deregulation efforts were backed by the Clinton administration. Other members of Congress — who collectively received hundreds of millions of dollars in campaign contributions from financial industry donors over the last decade — also played roles.
Many lawmakers, for example, insisted that Fannie Mae and Freddie Mac, the nation’s largest mortgage finance companies, take on riskier mortgages in an effort to aid poor families. Several Republicans resisted efforts to address lending abuses. And Congressional committees failed to address early symptoms of the coming illness.
But, until he left Capitol Hill in 2002 to work as an investment banker and lobbyist for UBS, a Swiss bank that has been hard hit by the market downturn, it was Mr. Gramm who most effectively took up the fight against more government intervention in the markets.
“Phil Gramm was the great spokesman and leader of the view that market forces should drive the economy without regulation,” said James D. Cox, a corporate law scholar at Duke University. “The movement he helped to lead contributed mightily to our problems.”
In two recent interviews, Mr. Gramm described the current turmoil as “an incredible trauma,” but said he was proud of his record.
He blamed others for the crisis: Democrats who dropped barriers to borrowing in order to promote homeownership; what he once termed “predatory borrowers” who took out mortgages they could not afford; banks that took on too much risk; and large financial institutions that did not set aside enough capital to cover their bad bets.
But looser regulation played virtually no role, he argued, saying that is simply an emerging myth.
“There is this idea afloat that if you had more regulation you would have fewer mistakes,” he said. “I don’t see any evidence in our history or anybody else’s to substantiate it.” He added, “The markets have worked better than you might have thought.”
Rejecting Common Wisdom
Mr. Gramm sees himself as a myth buster, and has long argued that economic events are misunderstood.
Before entering politics in the 1970s, he taught at Texas A & M University. He studied the Great Depression, producing research rejecting the conventional wisdom that suicides surged after the market crashed. He examined financial panics of the 19th century, concluding that policy makers and economists had repeatedly misread events to justify burdensome regulation.
“There is always a revisionist history that tries to claim that the system has failed and what we need to do is have government run things,” he said.
From the start of his career in Washington, Mr. Gramm aggressively promoted his conservative ideology and free-market beliefs. (He was so insistent about having his way that one House speaker joked that if Mr. Gramm had been around when Moses brought the Ten Commandments down from Mount Sinai, the Texan would have substituted his own.)
He could be impolitic. Over the years, he has urged that food stamps be cut because “all our poor people are fat,” said it was hard for him “to feel sorry” for Social Security recipients and, as the economy soured last summer, called America “a nation of whiners.”
His economic views — and seat on the Senate banking committee — quickly won him support from the nation’s major financial institutions. From 1989 to 2002, federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. He and his staff often appeared at industry-sponsored speaking events around the country.
From 1999 to 2001, Congress first considered steps to curb predatory loans — those that typically had high fees, significant prepayment penalties and ballooning monthly payments and were often issued to low-income borrowers. Foreclosures on such loans were on the rise, setting off a wave of personal bankruptcies.
But Mr. Gramm did everything he could to block the measures. In 2000, he refused to have his banking committee consider the proposals, an intervention hailed by the National Association of Mortgage Brokers as a “huge, huge step for us.”
A year later, he objected again when Democrats tried to stop lenders from being able to pursue claims in bankruptcy court against borrowers who had defaulted on predatory loans.
While acknowledging some abuses, Mr. Gramm argued that the measure would drive thousands of reputable lenders out of the housing market. And he told fellow senators the story of his mother and her mortgage.
“What incredible exploitation,” he said sarcastically. “As a result of that loan, at a 50 percent premium, so far as I am aware, she was the first person in her family, from Adam and Eve, ever to own her own home.”
Once again, he succeeded in putting off consideration of lending restrictions. His opposition infuriated consumer advocates. “He wouldn’t listen to reason,” said Margot Saunders of the National Consumer Law Center. “He would not allow himself to be persuaded that the free market would not be working.”
Speaking at a bankers’ conference that month, Mr. Gramm said the problem of predatory loans was not of the banks’ making. Instead, he faulted “predatory borrowers.” The American Banker, a trade publication, later reported that he was greeted “like a conquering hero.”
At the Altar of Wall Street
Mr. Gramm would sometimes speak with reverence about the nation’s financial markets, the trading and deal making that churn out wealth.
“When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place,” he said at an April 2000 Senate hearing after a visit to New York.
That viewpoint — and concerns that Wall Street’s dominance was threatened by global competition and outdated regulations — shaped his agenda.
In late 1999, Mr. Gramm played a central role in what would be the most significant financial services legislation since the Depression. The Gramm-Leach-Bliley Act, as the measure was called, removed barriers between commercial and investment banks that had been instituted to reduce the risk of economic catastrophes. Long sought by the industry, the law would let commercial banks, securities firms and insurers become financial supermarkets offering an array of services.
The measure, which Mr. Gramm helped write and move through the Senate, also split up oversight of conglomerates among government agencies. The Securities and Exchange Commission, for example, would oversee the brokerage arm of a company. Bank regulators would supervise its banking operation. State insurance commissioners would examine the insurance business. But no single agency would have authority over the entire company.
“There was no attention given to how these regulators would interact with one another,” said Professor Cox of Duke. “Nobody was looking at the holes of the regulatory structure.”
The arrangement was a compromise required to get the law adopted. When the law was signed in November 1999, he proudly declared it “a deregulatory bill,” and added, “We have learned government is not the answer.”
In the final days of the Clinton administration a year later, Mr. Gramm celebrated another triumph. Determined to close the door on any future regulation of the emerging market of derivatives and swaps, he helped pushed through legislation that accomplished that goal.
Created to help companies and investors limit risk, swaps are contracts that typically work like a form of insurance. A bank concerned about rises in interest rates, for instance, can buy a derivatives instrument that would protect it from rate swings. Credit-default swaps, one type of derivative, could protect the holder of a mortgage security against a possible default.
Earlier laws had left the regulation issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who argued that too many restrictions would hurt financial activity and spur traders to take their business overseas. And while the Commodity Futures Trading Commission — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation, there was still concern that step was not enough.
After Mrs. Gramm left the commission in 1993, several lawmakers proposed regulating derivatives. By spreading risks, they and other critics believed, such contracts made the system prone to cascading failures. Their proposals, though, went nowhere.
But late in the Clinton administration, Brooksley E. Born, who took over the agency Mrs. Gramm once led, raised the issue anew. Her suggestion for government regulations alarmed the markets and drew fierce opposition.
In November 1999, senior Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by the Federal Reserve chairman, Alan Greenspan, and Arthur Levitt Jr., the head of the Securities and Exchange Commission, issued a report that instead recommended legislation exempting many kinds of derivatives from federal oversight.
Mr. Gramm helped lead the charge in Congress. Demanding even more freedom from regulators than the financial industry had sought, he persuaded colleagues and negotiated with senior administration officials, pushing so hard that he nearly scuttled the deal. “When I get in the red zone, I like to score,” Mr. Gramm told reporters at the time.
Finally, he had extracted enough. In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Mr. Gramm dominated the Senate debate.
“This legislation is important to every American investor,” he said at the time. “It will keep our markets modern, efficient and innovative, and it guarantees that the United States will maintain its global dominance of financial markets.”
But some critics worried that the lack of oversight would allow abuses that could threaten the economy.
Frank Partnoy, a law professor at the University of San Diego and an expert on derivatives, said, “No one, including regulators, could get an accurate picture of this market. The consequences of that is that it left us in the dark for the last eight years.” And, he added, “Bad things happen when it’s dark.”
In 2002, Mr. Gramm left Congress, joining UBS as a senior investment banker and head of the company’s lobbying operation.
But he would not be abandoning Washington.
Lobbying From the Outside
Soon, he was helping persuade lawmakers to block Congressional Democrats’ efforts to combat predatory lending. He arranged meetings with executives and top Washington officials. He turned over his $1 million political action committee to a former aide to make donations to like-minded lawmakers.
Mr. Gramm, now 66, who declined to discuss his compensation at UBS, picked an opportune moment to move to Wall Street. Major financial institutions, including UBS, were growing, partly as a result of the Gramm-Leach-Bliley Act.
Increasingly, institutions were trading the derivatives instruments that Mr. Gramm had helped escape the scrutiny of regulators. UBS was collecting hundreds of millions of dollars from credit-default swaps. (Mr. Gramm said he was not involved in that activity at the bank.) In 2001, a year after passage of the commodities law, the derivatives market insured about $900 billion worth of credit; by last year, the number hadswelled to $62 trillion.
But as housing prices began to fall last year, foreclosure rates began to rise, particularly in regions where there had been heavy use of subprime loans. That set off a calamitous chain of events. The weak housing markets would create strains that eventually would have financial institutions around the world on the edge of collapse.
UBS was among them. The bank has declared nearly $50 billion in credit losses and write-downs since the start of last year, prompting a bailout of up to $60 billion by the Swiss government.
As Mr. Gramm’s record in Congress has come under attack amid all the turmoil, some former colleagues have come to his defense.
“He is a true dyed-in-the-wool free-market guy. He is very much a purist, an idealist, as he has a set of principles and he has never abandoned them,” said Peter G. Fitzgerald, a Republican and former senator from Illinois. “This notion of blaming the economic collapse on Phil Gramm is absurd to me.”
But Michael D. Donovan, a former S.E.C. lawyer, faulted Mr. Gramm for his insistence on deregulating the derivatives market.
“He was the architect, advocate and the most knowledgeable person in Congress on these topics,” Mr. Donovan said. “To me, Phil Gramm is the single most important reason for the current financial crisis.”
Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets.
“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”
But many experts disagree, including some of Mr. Gramm’s former allies in Congress. They say the lack of oversight left the system vulnerable.
“The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of A.I.G.,” Christopher Cox, the chairman of the S.E.C. and a former congressman, said Friday.
Mr. Gramm says that, given what has happened, there are modest regulatory changes he would favor, including requiring issuers of credit-default swaps to demonstrate that they have enough capital to back up their pledges. But his belief that government should intervene only minimally in markets is unshaken.
“They are saying there was 15 years of massive deregulation and that’s what caused the problem,” Mr. Gramm said of his critics. “I just don’t see any evidence of it.”
Griff Palmer contributed reporting from New York.
A Big question: How do you spot this in the free economy?
November 26, 2008
Op-Ed Columnist
All Fall Down
By THOMAS L. FRIEDMAN
I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.
Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.
Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.
These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences — many, many, many.
Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.
“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”
Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.
“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”
Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”
That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.
More money put in! or is it to be put in?
Without Approval from Senate???
U.S. Details $800 Billion Loan Plans
By EDMUND L. ANDREWS
WASHINGTON — The Federal Reserve and the Treasury announced $800 billion in new lending programs on Tuesday, sending a message that they would print as much money as needed to revive the nation’s crippled banking system.
The gargantuan efforts — one to finance loans for consumers, and a bigger one to push down home mortgage rates — were the latest but probably not the last of the federal government’s initiatives to absorb the shocks that began with losses on subprime mortgages and have spread to every corner of the economy.
In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.
Those obligations include about $1.4 trillion that has already been committed to loans, capital infusions to banks and the rescues of firms like Bear Stearns and the American International Group, the troubled insurance conglomerate. But they also include additional trillions in government guarantees on mortgages, bank deposits, commercial loans and money market funds.
The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent.
But analysts said the program would do little to reduce the tidal wave of foreclosures. That is because most of the foreclosures are on subprime mortgages and other high-risk loans that were not bought or guaranteed by government-sponsored finance companies like Fannie Mae.
Stock investors reacted coolly to the announcements. The major stock indexes initially fell. The Standard & Poor’s 500-stock index later edged up, closing at 857.39, up 0.66 percent. The Nasdaq closed down 0.5 percent, at 1,464.73.
The long-term risks are enormous but difficult to estimate. They begin with the danger of a new surge of inflation, at least after the economy comes out of its current downturn. Beyond that, taxpayers will have to pick up the losses from loans that default or guarantees that have to be made good.
But the most troublesome unknowns are how the maze of protections for investors and consumers will change economic and political behavior in the future.
“The Federal Reserve has a lot of levers of influence with consequences for individual industries,” said Vincent R. Reinhart, a former Fed official and now a senior fellow at the American Enterprise Institute. “Now that it has used those levers, don’t you think Congress will want it to start using them again? The Fed could become the go-to place for bailouts.”
Administration and central bank officials contend that the risk of doing nothing is a full-blown depression in which unemployment climbs above 10 percent and the country needs years to recover. Many private economists agree.
“They are doing whatever it takes,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisers, an economic forecasting firm. “The problem is, the more you go in this direction, the harder it is to turn around and the harder your exit strategy is.”
Most economists agree that the United States is in the worst financial crisis since the Great Depression, and that it has already fallen into a severe recession that is likely to be one of the deepest in decades.
“What they are doing is trying to limit the damage to something consistent with a severe postwar recession, but not something worse than that,” Mr. Meyer said.
Indeed, the government reported on Tuesday that the economy contracted by 0.5 percent in the third quarter, slightly worse than previously estimated. But private forecasters predict that economic activity will fall by 4 to 5 percent in the fourth quarter and continue to contract for much of next year.
In the first of two new actions announced on Tuesday, the Treasury and the Fed said they would create a $200 billion program to lend money against securities backed by car loans, student loans, credit card debt and even small-business loans.
The Treasury would contribute $20 billion to the so-called Term Asset-Backed Securities Loan Facility and assume responsibility for any losses up to $20 billion. The Federal Reserve would lend the new entity as much as $180 billion.
The new facility would then lend money at low rates to companies that post collateral based on securities backed by consumer debt or business loans. The new program would be allowed to accept only securities with Triple-A ratings, the highest possible, from at least two rating agencies.
The Treasury secretary, Henry M. Paulson Jr., made it clear that the new lending facility was just a “starting point” and could be expanded to many other kinds of debt, like commercial mortgage-backed securities. “It’s going to take awhile to get this program up and going, and then it could be expanded and increased over time,” he said at a news conference.
Separately, the central bank announced that it would try to force down home mortgage rates by buying up $600 billion in debt tied to home loans guaranteed by Fannie Mae, Freddie Mac and other government-controlled financing companies.
The actions on Tuesday represented two milestones in the government’s expansion into private markets.
It was the first time that the Fed and the Treasury have stepped in to finance consumer debt. The $200 billion program comes close to being a government bank.
But the new programs also represented a new level of commitment by the Federal Reserve. Instead of trying to strengthen the economy by reducing short-term rates, which is the usual policy tool, the Fed is now pumping vast amounts of money directly into specific markets for mortgages — and anything else it believes needs help.
Over the last year, the Fed and the Treasury have bailed out major Wall Street firms, rescued the world’s biggest insurer, taken over Fannie Mae and Freddie Mac, and guaranteed hundreds of billions of dollars in bank transactions.
As big as the two new lending programs are, Mr. Meyer cautioned that they were only going to reduce the pain that lies ahead, not eliminate it. Unemployment, at 6.5 percent in October, is still likely to climb to 7.5 or even 8 percent next year, he predicted. But it may not shoot up to 9 or 10 percent, a level that economists often consider the unofficial dividing line between a recession and a depression.
The new actions are unlikely to be the last. Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.
“They are using every tool at their disposal, and they will move from credit market to credit market to reduce disruptions,” said Richard Berner, chief economist at Morgan Stanley.
The Federal Reserve has now moved to a radical new phase of its effort to shore up the economy. Until now, it has carefully distinguished between two goals — reducing the panic and turmoil in financial markets, and propping up the economy itself, which has been battered as the supply of credit has dried up.
To tackle the first goal, the Fed expanded its lending programs to banks and Wall Street firms, and organized the rescue of failing firms like Bear Stearns.
To bolster the general economy, it relied on its traditional tool: reducing the overnight Federal funds rate, the interest rate that banks charge for lending their reserves to one another. Normally, a lower Federal funds rates leads to lower long-term rates, like those for mortgages.
But the central bank has already lowered the rate to 1 percent, and it cannot reduce it below zero. Instead, policy makers are buying up other kinds of debt securities, which has the effect of driving down the rates in those parts of the market.
The move amounts to what economists refer to as “quantitative easing,” which means having the Fed pump staggering amounts of money into the economy by buying up a wide range of debt instruments.
In a conference call with reporters, Fed officials insisted their goal was not to pursue a policy of quantitative easing, but simply to unfreeze the mortgage market.
But for practical purposes, the actions lead to similar results.
The problem in ensuring a stimulus that works is to ensure a multiplier effect, a public works and a sizable amount - discussed in the below article.
However without inviting opinion from all sectors of life, We cannot be sure that this cannot be done.
A few simple items in USA: Green and Investment. Most can be done by private sector; with inititiation and perhaps a subsidy from public sector.
Squeezing the Most From a Stimulus Plan
By LOUIS UCHITELLE
Now that the government has spent nearly $1.4 trillion to stabilize the financial system, economists and policy makers — and the president-elect — are trying to figure out how much must be invested in a stimulus package to stop the recession, and what that money should be spent on.
The size of a possible stimulus plan rises as the economy contracts, and that is happening at a 4 percent annual rate, according to current estimates, or eight times as fast as it was this summer. Just offsetting that contraction requires a federal infusion of at least $400 billion, many economists calculate. And even that would not restore a healthy economy.
“The hope is that the next stimulus package will be large enough to move the economy from big negatives to zero growth,” said Mark Zandi, chief economist at Moody’s Economy.com. “That is the benchmark today: zero growth.”
President-elect Barack Obama has not stated what the stimulus plan might cost, though Congressional leaders have cited figures of $500 billion and higher. Mr. Obama has given a hint, though. He speaks of a recovery that would generate 2.5 million jobs in the first two years of his administration. That would require not just zero economic growth, but a fairly robust expansion — a swing in effect from the present 4 percent contraction to a growth rate of 2.5 to 3 percent a year.
Achieving such a swing would mean adding nearly $1 trillion in annual output to the economy. The private sector normally does this, stepping up its spending as a recovery takes hold. But if that does not happen this time, the Obama administration would have to step in, via a stimulus package that generated the additional $1 trillion in output, most likely through a mix of federal spending and tax breaks.
No policy maker or economist has publicly suggested such a huge sum. Trillions of dollars is a commonplace reference in talking about the financial bailout, but not yet the stimulus. The debate instead revolves around the proper mix for a stimulus package — that is, the most effective combination of outright spending and lower taxes.
Prominent economists argue that more than 50 percent of the next package, whatever its size, should be devoted to spending — on public infrastructure like highway and school repair, and on items like food stamps and stepped-up aid to state governments, subsidizing their spending.
Mr. Zandi, who advised the Republican presidential candidate, John McCain, said in testimony last month before the Senate Budget Committee that nearly every dollar spent in this fashion generates $1.50 or more in economic activity. Repairing a road, for example, means hiring workers who spend their new salaries at supermarkets, which in turn hire more store clerks and stock more groceries to handle the extra spending.
This “multiplier effect” is missing, however, when the stimulus comes as a tax break. A $750 billion stimulus package devoted entirely to spending could achieve, through the multiplier effect, more than the $1 trillion rise in output that the Obama administration apparently seeks to generate the 2.5 million new jobs.
A stimulus devoted entirely to tax breaks, in contrast, would require the entire $1 trillion in rebates or lower taxes, and probably more, to create those jobs, in part because taxpayers getting this windfall might not spend all of it.
“The multiplier effect is clearly less than $1,” said Nigel Gault, chief domestic economist for Global Insight, “and perhaps as low as 30 cents if only some of the tax break is spent.”
The one stimulus enacted by Congress — a $168 billion package that the president signed early this year — consisted entirely of tax breaks, mainly in the form of rebate checks mailed to millions of Americans.
Some of that windfall was saved or was spent on imports rather than on goods and services produced in this country. Spending on domestically produced goods and services adds to the nation’s economic output, but imports do not, helping to explain why this first stimulus failed to arrest the contraction.
The problem with a stimulus package weighted heavily toward public spending is that there is a shortage of projects on which spending could begin in two or three months. The labor-oriented Economic Policy Institute, for example, has listed $360 billion in ready-to-go work, a third of it highway and school repair. Mr. Zandi offers a similar estimate.
“Still,” he said, “if you don’t pick a big enough number for a stimulus package now and you have to announce another number next year, people will say: ‘Oh, the stimulus didn’t work. What makes you think this one will?’ ”
Until now, big numbers have been noticeably absent from the stimulus debate. The House approved a $60 billion package in late September, sending it to the Senate, which has not voted on the measure. The House action was followed in mid-October by talk among Democratic Congressional leaders of upgrading the $60 billion to as much as $200 billion in a lame duck session.
And then a week ago, Senator Charles E. Schumer, the senior Democrat from New York, suggested that any package should be $500 billion to $700 billion — numbers that begin to approach the $1.4 trillion already spent to resurrect the financial system.
“By our estimates,” Jan Hatzius, chief domestic economist for Goldman Sachs, said in a newsletter last week, “the private sector retrenchment could subtract an annualized 4 percentage points or about $600 billion from economic growth through the end of 2009.”
The financial sector bailout does not address this decline. Rescuing banks and other lenders has little direct impact on economic growth or job creation. The chief goal of the bailout is to get credit flowing again from reluctant and damaged lenders.
The stimulus package, in contrast, puts up government money as a substitute for the spending and investment that is no longer taking place in the private sector — despite low interest rates — so that the economy can grow again, or at least stop shrinking.
That makes the stimulus package ever more important if the economy continues to deteriorate at its present pace. Not since the first quarter of 1982, in the midst of a severe recession, has the gross domestic product contracted at a 4 percent annual rate in a single three-month period, as a growing number of forecasters say it is now doing, according to Blue Chip Economic Indicators.
In America’s $14.4 trillion economy, that means the output of goods and services has been declining by nearly $50 billion a month since September — a decline the government will find itself under ever more pressure to reverse if demand in the private sector does not revive.
The Washington Post anylyses how we got there! Lack of regulation!
http://www.washingtonpost.com/wp-srv/business/risk/index.html
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