Too Big To Fail

Kudos to Senators McCain and Mark Cantwell who have introduced legislation to breakup large financial organizations. I am quite tired of Too Big to Fail. If that is true, they are simply too big.
McCain would restore the Glass-Steagall law prohibiting banks being in the brokerage business. This was a lesson we learned in the Great Depression and then forgot it under the slogan of one-stop shopping. It is time to restore it before the next financial crisis hits us again.

Old growth forests

Good news!
December 17, 2009, New York Times
Foes Unite to Support Bill on Old-Growth Forests

By LESLIE KAUFMAN
Calling a truce in a long and bitter battle, timber executives and environmentalists united Wednesday in supporting legislation to codify and expand current protections for old-growth forests on federal land in eastern Oregon.

After nearly eight months of talks, representatives of both groups joined Senator Ron Wyden, Democrat of Oregon, at a news conference in Washington as he introduced a bill that would ban cutting of trees more than 21 inches in diameter and protect delicate watershed areas.

Such prohibitions are already in place in many forests but are administrative in nature rather than mandated by law, and subject to rollback at any time.

In return for their support for such limits, which they had previously fought, timber groups were promised steady, unimpeded access to younger trees as part of a broader program to assure the health of the forests and fire prevention.

The bill will also limit construction of permanent and temporary roads, while seeking to cut the overall number in forested areas. The legislation applies to six national forests spanning nearly 10 million acres east of the Cascades.

Environment & jobs

The standard response to proposed environmental improvement such as CO-2 limits, is that it raises cost and reduces jobs. Cost of any action is always there, and new laws don't create them, they just change who bears them. As for jobs, markets are designed to allocate resources to their best use. We have been substituting natural resources for labor for a long time. If we increase the cost of natural resources, it should result in more demand for labor over time.

Obama's Peace Prize

If the Nobel committee hoped that Obama could rise to deserve the prize, they must be greatly disappointed as I am. When will we learn that our wars create more terrorist? Our economy needs more stimulus, but we waste resources on senseless wars.

Afghanistan

Our top General in Afghanistan says unless we send more troops, we are in danger of losing the war. We lost the war in Afghanistan the day we sent the first troops. Only vain glory could lead us to think we could do what the Russians had failed to do. When will we learn that the outcome of a guerrilla war with a nationalistic bent can't be determined by outside intervention. The French could not do it in Viet Nam and neither could we. We have not controlled anything but the capital city for some time. We create more determined enemies by these efforts than friends. We are seen as the terrorists.

Symbiogenesis vs. Darwinism

Economics utilizes metaphors and ways of thinking from the natural sciences. Neo-Darwinism provides convenient support for the story of the beneficent outcome of something called free market competition. Darwinism holds that adaptations occur exclusively through random mutation that sometimes produces genes with useful attributes that give the organism an advantage in competition with other organisms. This view is being challenged by the research of Lynn Margulis, who observes that complexity at the level of the cell is not the result of lethal competition, but rather symbiotic relationships between gene sets.
Prof. Margulis argues that even new species occur over time when symbiotic partners fuse. She says, “we are all walking communities of bacteria.”
Consider what an economics built on both cooperation and competition would look like. Is it coincidence that my latest book is entitled, “Conflict and Cooperation.”

Health Care REform

There is nothing on the table now that can cover the uninsured and keep taxpayer costs reasonable. What would it take? First two key facts. About 25 % of Medicaid and Medicare funds are spent in the last year of recipients' lives. Second, the clever medical researchers will continue to invent ever more costly technologies and drugs to increase life a few more months or years. The nation must face the tradeoff between the ideal and what we want to spend. The only way that we can improve the care of those whose only option now is hospital emergency rooms is to insure them for basic medical care-- no open heart surgery, etc.
Senator Kennedy was diagnosed with cancer, and even with the best of treatment, his life was extended only a few months at a cost of hundreds of thousands of dollars. Those dollars could have paid the annual health insurance for 47 million uninsured.
There could be a list of medical procedures that simply are not available at public expense, such as is now operative in Oregon. The slogan-makers who obfuscate the unavoidable tradeoffs will throw smoke on this suggestion railing about making the the poor and uninsured second class citizens, but of course they are third class now and since few want to pay substantially more in taxes, they will remain such. Here, the unobtainable ideal is the enemy of substantial improvement. It would be nice for everyone to have the latest technology and drugs to extend their lives for a few more months. But, few including seniors during their tax-paying years want to pay for it. And, they know there is no end to ever more costly medical wonders.
Setting aside the scare words of “death panels,” these are the tradeoffs that could improve care for many and not break the bank. A public option that might reduce insurance administrative costs is a good idea, but the bitter debate over it is diverting attention from more essential tradeoffs.
If Obama is to make good on his promise to keep spending near present levels, then he must cap medicare and medicaid spending and divide the pie differently. Cover more people at reduced, less grandiose levels.

Cash for Clunkers--A Poem

A man losses his job.
Nobody has money
to buy what he makes.
And, he has no money
to buy what they make.

Who has the money?
Has it blown away,
leaving many destitute?
Have our factories rusted,
leaving labor no machines?

If it takes money
to make things,
then let’s make
more of it.

Can’t do that, old sages say.
We must suffer for past excesses.
But, those suffering
are not those who
made silly paper.

Can do it, new voices say.
If banks only want to play at the casino,
let the government write numbers
after the names of the homeless,
Joe the plumber and Sarah the unemployed.

Only blind superstition stops it.
We won’t be the first civilization
to worship old gods while
they perished from the earth.

Cash for Clunkers

Great idea. let's do more of it. The real weakness in the economy is consumer spending. The last expansion was fueled by ever increasing consumer debt, but that could not go on forever. How about cash for old water heaters and refrigerators? Let's turn them in for more energy efficient ones. How about any essential item made in the US that would put more people to work?
The only thing wrong with the cash for clunkers program is the means of finance. There is no reason except superstition to finance it with government borrowing. It could be done with funds created by the Treasury or Federal Reserve. News programs are asking "Where will the money come from?" The implication of the question is that the money supply is fixed and if we are to have cash for clunkers it has to come from savings rewarded by payment of interest. But, in a recession when all resources are not being used, there is no reason to save. There is no opportunity cost.
New money can come from where it always has come from--new credits created by banks. Our banks are now mostly solvent, but few want to borrow money to make things when consumer demand is weak. When the banks don't want to create more money to put all of our resources to work, the government should do it. There is no reason other than myth and superstition that we allow people to be unemployed and citizens to cut back on their living level. Our plants did not rust or our engineers lose the formulas. We just need to understand the essentials of money creation. Money is made when a bank writes numbers after a borrowers name. Of course they charge interest for the loan. If government has given banks the right to create money, then government can certainly do the job itself and without paying itself or anyone else interest.
Incidentally, you may have read that some banks and Goldman Sachs made millions (or was it billions) last quarter and payed their executives absurd bonuses after being bailed out by the government previously. They did not make profits loaning money to business to make things, but rather they profited from financial trades in the equivalent of a giant casino--buying and selling paper. We saved their butts for this??

Sotomayor and the Law

There is no such thing as THE law. In spite of this Sotomayor is being grilled as whether she will be guided by the law or utilize a set of social values in her future decisions. The questioners don’t really care about her answers, but rather hope to establish the dichotomy in the mind of the public. It is a false dichotomy--the words of the Constitution or precedent cases do not speak for themselves. They must be selected from among various possible candidates, interpreted and extended often to situations that the Constitutional writers could not have imagined.
The implication of the dichotomy is that some of the justices are not guided by social values, but only by a superior cool logic. This is false. Justices such as Scalia and Thomas most certainly have a social agenda. Bush’s nominees were picked with a view to having abortion made unconstitutional, among other things. Have no doubt that the Court found constitutional language that supported their ruling in Roe vs Wade, and will find words to support its repeal if they decide to reverse.
Instead of pretending that justices should not be guided by a social ideology, the Senate should inquire deeply into the nominee's values.

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.

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!

How Does the FED Do It?

Finally our daily newspapers accurately describe how the Federal Reserve puts $1.7 trillion into the economy:
"Are Tax Payers on the hook?
No, the Fed prints money. Not literally--the Treasury ... makes the nation's paper currency. Instead the Fed creates the money to buy the Treasury bonds and other securities. It then adds those securities to its balance sheet .... "

The Associated Press, LSJ, March 20, has this part right, but could do the public a service if it added that it is the same basic process that adds to the money supply when a commercial bank makes a loan.

"Are there any downsides to this? The main risk is that the flood of new dollars will increase inflation as more dollars chase the same amount of goods."

Here the AP goes wrong--the new dollars will create new output, maintenance of state and local roads, schools, etc. The amount of goods is not fixed.

The FED always faces the difficult task of adjusting the money supply (in normal times via monetary policy) to the capacity of the economy to produce. But, does anyone think we can't produce more if we put the unemployed to work?? Sure, they could make a mistake and maintain the stimulus when we again reach full capacity. But, we are far from that now. The greatest danger is that because of old myths and superstitions, we will not put in enough new money. The danger of deflation is greater than the danger of inflation.

Fed to Buy $1 trillion in Securities

The New York Times writer keep labeling the FED's purchase of securities as "creating money out of thin air." Of course it is, but this is nothing different than when a commercial bank makes a loan and writes a credit besides the borrowers name. All money is debt and and created. There is no other kind. If our government gives commercial banks the power to create money, surely the government's own bank, the Federal Reserve, can do it also when private borrowers will not borrow enough to use all of the economy's resources.

Galbraith on Bank Policy

Bank Policy Suggestions of Jamie Galbraith, Sept. 25, 2008, Washington Post
"With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor."

Wouldn't it be simpler to change the FED rule requiring that banks take a charge against capital for bad loans?

Galbraith on Bank Policy

Bank Policy Suggestions of Jamie Galbraith, Sept. 25, 2008, Washington Post
"With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor."

Wouldn't it be simpler to change the FED rule requiring that banks take a charge against capital for bad loans?

Citi Group

The government has already loaned Citi Group a ton on money. Now, it is considering taking common stock in exchange. Here is the supposed reason as suggested in the Washington Post:

"Many investors concluded that the government money did not count as part of Citigroup's capital reserve against future losses, because the investment looked like a loan. The company was required to issue the government shares of preferred stock, which carried an interest rate that spiked after five years to encourage repayment.

By allowing Citigroup to issue common shares to replace those preferred shares, the government hopes to convince investors that the company has a sufficient capital reserve to survive its problems."

If the FED changed its rule requiring that loan losses be a charge against capital, the above would not be necessary.

Banks & Toxic Assets

When a bank makes a loan, it creates money. If the loan can't repaid (inevitable if housing bubble breaks), under current rules this is a charge against the bank's capital and given the size of the revaluation, it can bankrupt the bank. But this charge against capital is merely a rule that can be changed. In these extreme circumstances, this rule should be suspended and let the banks start over with new loans and get the economy going.
There is no reason to buy these bad loans and put them in a toxic bank at great taxpayer exposure to loses. Let the banks substantially write them off and start over.

Schooling the Chicago School

John Cochrane, University of Chicago economist was quoted in a story in Bloomberg Muse of December 23, 2008

“We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”

(Sure. like nothing to do as in unemployed. Spoken like a man with a secure job!)

Diedre McCloskey now an economist at the University of Illinois, Chicago, remembers laughing with fellow Harvard undergraduates in 1963 at Friedman’s claim that free markets allocate resources better than governments. She says Harvard-trained bureaucrats enjoyed prestige following World War II. She switched her support to Friedman after the Vietnam War destroyed her faith that such bureaucrats knew what they were doing.
(The problem is that Wall Street may not know what it is doing!)

ON The Other Side:
On Oct. 14, 2007,about 250 students and professors debated an administration-backed plan for a $200 million research center to be named for Friedman. The protesters argued that the institute would enshrine policies that have brought economies near collapse.

“When Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed -- whose remedies, ironically, entail countermeasures of nationalization,” Marshall Sahlins, an emeritus professor of anthropology, said during the debate, speaking in a room adorned with murals of female students parading through the campus in medieval gowns.
Sahlins, 77, noted a few weeks later socialist and capitalist countries alike are regulating or nationalizing financial institutions in a rebuff to Friedman.
Off campus, the global meltdown is stirring anti-Chicago economists, who were voices in the wilderness during decades of lax government oversight of markets.

Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.
“The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.
University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.
“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.

Robert Lucas, Chicago economist who won a Nobel in 1995 for a theory that argued against governments trying to fine-tune consumer demand, says deregulation may have gone too far.
Depression-era laws that separated commercial and investment banks helped depositors decide if they wanted secure accounts or riskier investments. Today, without these distinctions, people can’t be sure if their investments, or those of their customers, are safe.
“I’m changing my views on bank regulation every week,” Lucas, 71, says. “It was an area I saw as under control. Now I don’t believe that.”
Lucas says he voted for Obama, the only Democrat besides Bill Clinton he’d supported in 44 years.
(There is hope, some people learn!)

Spending or Tax Cuts

The REpublicans are like a broken record--they want more tax cuts and not so much spending to solve the recession. Not collecting taxes or government spending are the same thing in regard to impact on the Treasury. There is, however, a big difference in who benefits. The REpublicans gave the rich the largest share of past tax cuts, which apparently they want to enlarge. Spending on the other hand, has the possibility of providing the unemployed with a job.
The old saw about infrastructure investments being too slow should be ditched. State and local governments have lots of maintenance projects that are ready to go and do not require big lead times to design.

Child safety

There are many social problems that I don't have an answer for. But, when solutions are obvious and cry out for implementation, I find it maddening. Take for example, the following numbers: "The overall annual death rate for boys is 19 per 100,000 (youths). For girls, it is just 10 per 100,000. Sex and age combine to produce a death rate of 45 per 100,000 among boys 15 to 19."
I don't have an answer for behaviors rooted in custom and culture. But, experience suggest some policies that would reduce the deaths. Kansas, Mississippi, Montana, and Wyoming have the highest motor vehicle death rates for people younger than 19. Kansas allows 16-year-olds to drive without nighttime or passenger restrictions. A child can get a license with nighttime restrictions at 14 1/2 in South Dakota and at 15 1/2 in MIssissippi."
Daa! How tough is that to figure out?
Until these states learn something from experience, I am not going to drive there.

I think our drug policy is of the same kind. The present policies of penalties for sellers here and producers in foreign countries do not work. What are your examples?

Data for the above from The Washington Post, December 23, 2008, p.F5.

Mistakes or Disappointments?

President Bush in his last press conference said,
"There have been disappointments. Abu Ghraib obviously was a huge disappointment during the presidency. Not having weapons of mass destruction was a significant disappointment. I don't know if you want to call those mistakes or not, but they were -- things didn't go according to plan, let's put it that way."
This sound like a child who is disappointed with his Christmas presents. There is a huge difference between admitting a mistake and describing events following a decision as disappointments. He still doesn't get it. People who can't learn are a huge disappointment.

Is This Financial Instrument Safe to Use

It is now widely accepted that part of the financial meltdown was due to the invention of financial instruments that few understood, including many who used them. We have a Food and Drug Administration to investigate whether a drug or food additive is safe of use. Maybe we need a new security administration to certify that after some period of testing, that the invention is safe to use.