Sunday, November 30, 2008

Mosler's Law

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

This makes sense to me.

Thursday, November 27, 2008

Fed Creates Money

My suggestion that the Federal Reserve Bank create money for public use without incurring an obligation to pay interest (Zero interest public debt) is now being used.
“Instead of having the Treasury borrow the cash to fund these programmes through the Tarp, we’re just going to crank up the magical printing presses and expand the Fed’s balance sheet,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “For those not connecting the dots, the Treasury has essentially just outsourced the purchase of troubled assets to the Fed, with lots of leverage.”
Financial Times, Nov. 25, 2008

Now if they would just extend it to credits for General Motors and the like.

Tuesday, November 25, 2008

Financing Bail-Outs and Other Job Creating Projects

In my blog of Sept 22, I suggested that the Federal reserve Bank and Treasury simply write checks on themselves rather than borrowing and paying interest. Since then, I read where the Fed is now paying banks interest on their deposits at the Fed. I wrote to the Fed and asked how this was financed. They replied that they would credit the banks' accounts at the Fed. That sounds like direct money creation by the Fed. If they can do it for paying the bank's interest on their deposits, they can do it for paying banks and Freddie Mac for their bad loans or General Motors or individuals whose unemployment checks are stopping.
The question that I frequently receive from those who I tell about zero interest public debt is "Wouldn't that be inflationary?" My answer is that it could be, but no more so if the money is created by any other process, including buying government bonds from banks, which they now do as part of their open market monetary policy. The Federal Reserve has the job of deciding if the economy has unused capacity. That is the judgment they make when they use monetary policy to stimulate the economy. They could continue to be responsible for this estimate and provide a limit for any Congressional job creating appropriations.

Thursday, November 13, 2008

Greenspan and self-regulation

Those who understand the fragility of the capitalist system (such as the late Hyman Minsky) based on human tendency to follow the leader (even if it leads over a cliff, were not surprised at the current financial collapse. But I do not think anyone understands psychology well enough to predict the exact tipping point (or the exact point of eventual recovery of investor and business confidence).
If Greenspan had had a little behavioral economics in his background, he would have known that if is impossible for the financial sector to police itself. Any financial manager who had seen these new pieces of paper for the casino that it was would have lost customers. They would have been right, but out of a job. Both school districts and so-called sophisticated investors like Swiss Banks can not afford individually to opt out while others are seen as making out like bandits. That is why we have collective institutions like government so that we can be ruled by our cool moments of macro vision and not our emotions in the rough and tumble of the daily market.