National debt clock

Some fellow with more money than insight has a National Debt Clock on a building in New York City. It announces that your family’s share is $74,090. The Associated Press story says, “The mountain of debt could become the next full-fledged economic crisis without firm action from Washington.” The firm action they have in mind is a reduction in the Federal budget. The real problem is not the size of the Federal budget. We will actually need more spending to put all of our labor to work. The problem is the way we finance government.
There is no reason to borrow and incur an interest payment obligation. The government could borrow from its own bank (the Federal Reserve) rather than sell bonds. Remember, there is no opportunity cost when resources are unemployed. No one needs to save or divert their private spending to taxes. To understand this, think what a primitive economy without money would do if it had unused resources. The chief or shaman would just order the unemployed to work making useful things. The missing ingredient is simply the signal to work, not a scarcity of resources. In a modern economy, the signal to work is a newly created dollar. When the private sector does not want to borrow to create dollars and jobs, the government must do it.
We are mired in the past with obsolete institutions. It would be a shame if we don’t spend enough to get out of this recession because of a reliance on the outmoded belief that government spending in a recession must be financed with government bonds.

Bernie Madoff & Greed

After listening to Frontline on PBS, I made the following observations:
1. The rich are no wiser than the rest of us-- witness the French aristocrat who invested his entire fortune with Madoff and advised his royal friends to do the same.
2. Greed blinds.
3. Madoff used the social capital (affinity) of his friends, but offered none to them.
4. When the unregistered investment adviser, Michael Bienes, was asked if he ever questioned himself about earning millions just forwarding checks to Madoff he replied,”I’m a little too lucky. Why am I so fortunate? Then I came up with the answer ... God wanted us to have this and to be a conduit for good causes. .... God gave us this ,,,,”
5. Madoff was a marketing genius who understood how the human brain works. When any investor asked him any questions about his investment strategy, he simply offered to give them their money back. Few did, reasoning that there was no other place where they could earn as much. Their faith in Madoff’s black box strategy is akin to a child’s belief in Santa,
6. The failure of the SEC is emblematic of Bush’s public policy. So much for the “sophisticated investor” theory that was used to justify no regulation of hedge funds, etc.
7. In the end, Madoff's Ponzi scheme was brought down by large investors taking their money out faster than new money came in-- not because they questioned Madoff’s investments, but because they needed cash to cover their other bad investments.
8. What punishment is appropriate for Madoff? Perhaps he should be placed in the stocks in front of the NY Stock Exchange Building every day for the rest of his life. George Bush could be assigned guard duty to keep Madoff from being killed.

"The Fed now has a very large and very risky balance sheet and it must rely on the Treasury for a potential bailout and recapitalization," so writes Tyler Cowen writes in the New York times, June 9.
This is not true. The Fed balance sheet is simply an accounting device that never needs to balance. No one worries when the Fed buys Treasury bonds to affect bank reserves, and no one needs worry if it buys other bank assets or whatever. Being a professor of economics is no guarantee of economic literacy stuck in historic myth.

Consumer Credit Plunges

The Federal Reserve announced that consumer borrowing dropped 5.2 percent in March Consumers are the weak link in recovery. Even if the banks were sound, business may not borrow and invest if they think consumers won't buy. What to do?

When there are massive unused resources in the economy, there is no need for consumers to save or borrow to put them to work. The government should increase consumer wealth. First step, eliminate payroll taxes for social security. But, that will not be enough. The Treasury should write everyone a sizable check, especially to the poor. And, there is no reason for the Treasury to borrow either (see earlier blogs on government finance). Writing checks is the civilized way to increase consumer wealth, but to make the point, it cash could be dropped from airplanes. I think Bernake suggested this once and earned the title of "helicopter Bernake."
I have mixed feelings about consumerism, maybe people will learn they do not need a lot of stuff to be happy. The millions of rental storage units across the country filled with stuff people bot, but really do not use, is witness to excess. But, this is a poor time to reduce consumer spending greatly.

Lawyers May Exploit GM Bankruptcy

If GM is forced into bankruptcy, Weil Gotshal & Manges LLP may charge 230 million for its legal services. They already charged $209 million advising Lehman Bros. in its bankruptcy. (DFP April 8) The greedy vultures seem to grow fat regardless of others distress. With this kind of transaction costs, it is a wonder that our economy does as well as it does. It certainly contributes to the growing skewness in the nation's income distribution.

House Approves Budget

Senate Republican leader, Mitch McConnell objected to the budget and said, "The administration budget simply taxes too much, spends too much and borrows too much at a moment when we can least afford it." LSJ April 3,2009.

However, this is the moment when we particularly can afford it. When resources are unemployed, there is no opportunity cost to using them. Why are so many rooted in myth and superstition? McConnell is partly correct, but I doubt if he knows why. We do not need to tax or borrow, the Federal Reserve and the Treasury can simply write checks. Remember, if commercial banks can create money by making loans, so can the Federal Reserve.

CBO predicts $2.3 trillion more deficit

The Congressional Budget Office predicts that the public deficit over a decade will be $2.3 trillion more than earlier estimates as a result of Obama's budget.
This does not need to be. When stimulus funds are paid to our auto companies and others, there is no reason for the treasury to first borrow more from China and others. If the Federal Reserve can bail out banks by writing numbers after the bank's accounts at the Fed, it could write numbers after the Treasury Department accounts, and the Treasury could then write checks to keep businesses going. Remember, there is no opportunity cost to putting unused resources to work. No one need save first and defer consumption.
Of course, there is one reason to keep doing things as done in the past--myth and superstition!