Thursday, December 30, 2010

Foreclosure of mortgaged homes

Randall Wray questions the banks who are foreclosing on defaulted properties because of illegal record keeing a failure to file with local clerks:
"In plain simple language, the banks are royally screwed. They cannot foreclose on the properties. Holders of the "mortgage-backed" securities can turn them back to the banks because they are actually unsecured debt. In previous pieces I have also explained why MERS's recommended practice also violates US tax code -- so back taxes are owed. And we know that the mortgages stuffed into the securities did not meet the "reps" of the PSAs.

So, in short, banks have got to take the whole lot of toxic waste securities back. Trillions of dollars worth. The banks are toast. There is no cooking of the books that will turn this blackened toast back to bread."
see Huffington Post Dec. 30,2010

Tuesday, December 28, 2010

Causes of the Financial Crisis

The end of the year, and more than two years into the Great Recession is a good time to summarize the
Causes of Financial Crisis
The too-big-to-fail banks are blaming the financial crisis and the subsequent Great Recession on greedy home buyers who bought and mortgaged houses they could not afford. The accusation is very convenient because it holds the banks and financial organizations blameless and suggests no need for legislative reform. This is disingenuous. Who offered house buyers non-traditional liar loans with low starter rates that would balloon in a few years? Profits on the difference between home mortgage rates and the lender’s cost of money were too plebian for the high flyers of the financial sector. So the commercial and investment banks packaged mortgages into bonds and resold them to other banks, governments and pensions funds around the world. The market for these derivative bonds was marked by use of absurd levels of leverage, as high as 30 to one. This market was not regulated as are stocks. This allowed unheard of levels of profit as long as the price continued upwards. But, as any finance student knows it creates gigantic losses if the music stops. The losses could be several times larger than the capital reserves of the financial organizations.
The bond rating firms (e.g. Warren Buffet’s Moody’s and Standard and Poor’s) cooperated (co-conspired?) to anoint these bonds with ratings making them suitable for pensions funds, etc. The bond raters reasoned (if we can call it that) that real estate values had increased steadily for years with little volatility. Low volatility meant low risk to them.
If the rating firms had bothered to look at the individual mortgages contained in the bonds, they would have seen that a large number of them were taken out by people with poor credit who could only survive in an environment of rapidly and continuous escalation of housing prices.
The incentives for the players were all wrong and this explains why a lot of smart, calculating people went wrong. The mortgage brokers did not hold the mortgages and were paid on volume and not quality. The investment banks such as Goldman and Lehman did not expect to hold the mortgages either, but rather resell them as packages of derivatives whose value depended on a steady stream of payments by the home buyers. Firms such as Goldman resold the derivatives to Iceland, USB, etc. Everyone wanted in on the golden goose as firms like GE and GM, who formerly made real goods, switched to earning a big share of their profit on leveraged financial contracts. Fannie Mae and Freddy Mac, originally government chartered to support home mortgages, were now private, seeking big returns like all the rest. Paulson of the US Treasury was forced to nationalize them in 2007 or there would be no one to buy home mortgages.
For those it kept, Goldman (and Merrill Lynch, Bear Sterns, CityGroup, etc.) bought insurance against lower prices from AIG, called Credit Default Swaps. Goldman assumed they were fully hedged and safe, but gave no thought to what would happen if everyone headed for the exit at the same time. AIG itself was beguiled by the promise of returns much larger than its conventional insurance business earned.
When Goldman experienced falling prices, it and others went to AIG to recover its looming losses. The Government’s highest purpose during the crisis was to rescue the banks, under the guise that otherwise credit markets would freeze. It had 700 billion to buy troubled assets of banks. The government did nothing for the mortgaged home buyers who were dying as house prices fell and interest rates increased after the sucker rates expired. The unpaid balance on their mortgages soon exceeded the market value of the house. Many walked away leaving empty houses behind. In spite of the trillions government spent, it is no wonder that the prevailing public opinion said it didn’t work as they observed persistent unemployment.
Granted that in 2007 the President , Treasury and Federal Reserve officials were making decisions in an unprecedented financial crisis, nevertheless their failure to insist that the banks and their shareholders take some of the loss and write off some of the amount home buyers owed in inexcusable.
When the big picture is grasped, it is clear that the problem was not greedy home buyers, but super greedy avaricious, (yes, immoral) brokers, banks, and bond raters. The system was rotten and needs fixing, including a return to the Glass-Steagall rules passed in the Great Depression prohibiting combining commercial banks and investment banks. This would prevent the losses in bond trading from destroying the commercial banks. The fix still has not fully happened because the big players are willing to expose the system to cataclysmic failure for their own short-term profit.
This experience is an example of how smart individuals within a faulty system produce an aggregate result few desire. It cries out for institutional change.

Note: Some such as Steve Eisman saw the train wreck coming and figured out how to short newly invented CDOs and made billions. Brooksley Born, chair of the Commodity Futures Trading Commission, tried to write rules for regulating derivatives, but was told to desist by White House advisers Greenspan, Rubin, and Summers who, when the independent agency ingored them, persuaded Congress to prohibit any kind of regulation. They probably thought the profits of the financial sector, seemingly a large portion of economic growth, were too important to risk derailing. But, these profits were just paper. Casinos are not the stuff to build an economy on.

I wish all my readers a Happy New Year, though I fear the economy will not be happy.

Wednesday, December 15, 2010

Command & Control


Command and Control is a prejudicial concept. It implies a contrast with an alternative that is voluntary and free. However, all rights are made effective by legal commands to the non-rights holder to keep out of the way of the rights holder. Without coercion, no market.

A requirement to avoid downstream damage can be implemented by
1. A tort action by the downstream owners threatening an injunction, to sue for damages, (claim damages if infringed upon). This requires individuals to bring a court action and bear the costs thereof.
2. A regulation gives an opportunity to the downstream owner implemented by a public agency who bears the transaction cost of the prosecution and asks for a fine or injunction.

In the case where the rights holders are many with individually small damages, cost of court action may be prohibitive. Regulation with administrative implementation is equivalent to a class action suit for tort liability.

Usually the opportunity created by a regulation can’t be given up by selling the right. Though in some cases, the would-be actor without the right to act, may buy off the rights holders convincing them not to ask the government to prosecute.

The language of “command and control” assumes that there is a market alternative that is wholly voluntary. False! If the so-called “subsidy” is financed with a tax (common for HEC goods), it is hardly voluntary. There may be unwilling riders. This fact is not seen when payments for environmental services are paid for by foundations, NGOs and US AID. Coercion is inherent in HEC goods, no matter the institution, market or otherwise.

The concept of “environmental services” is prejudicial of rights. Much of the scholarship is thereby shifted to how much must be paid to obtain it. Alternatively, research might have focused on how legal alternatives give different opportunities to different interests. There is enough variation in rules out there to measure the effects of alternatives. Environmental interests are not homogeneous. Some, if owners, would sell if the price is right. But, since it is not possible for some to sell and some keep, the rules for deciding to sell are critical. The same issues arise in any cap and trade system. Estimating the supply curve for environmental services makes it sound like an economics question, but exploring the performance of alternative institutions that produce different prices is equally an economics question.

Get Real

Lots of people have not yet adjusted their expectations to today's realities of slow or no growth. This ranges from members of the Detroit Symphony Orchestra striking for higher pay while city services are being cut and the auto companies are not flush with charitable donations any more; Students asked to pay higher tuition in Great Britain, workers in France and Greece. Some have resorted to riots and destruction to insist on what they have come to believe is their right to more.
A bright spot is Michigan State University President Simon who refused a salary increase, in part because there was no money for faculty raises this year. Now if the basketball coach would follow suit, that would be news.

Taxes and Business

Republicans argue that we must give tax breaks to millionaires and business to create jobs. But, the fact is that American Corporations are sitting on $1.5 trillion in cash. Even if tax policy gives them more, they won't invest it when consumer demand and expectations are low! (Source: Harold Meyerson, New York Times, December 8, 2010)
We need fiscal stimulous, not tax breaks for the rich.

Friday, December 3, 2010

European Central Bank buys bonds of sovereign nations

The European Central Bank president, Jean-Claude Trichet, said he would keep giving banks unlimited liquidity well into next year but made no guarantee to step up the bond-buying to combat investor panic surrounding Portugal and Spain. The Guardian, Dec 3, 2010.

"The securities market programme (SMP) is ongoing, I repeat ... ongoing," he said after the ECB's monthly policy meeting left interest rates at 1%. "I won't comment on the observations of market participants."
The ECB started buying bonds through the SMP in May and has so far spent €67bn (£57bn), most of it during the first three weeks of the programme.
Analysts say that the ECB may well have to do so again soon if the eurozone debt crisis threatens to push Portugal and Spain to seek bailouts, as Ireland and Greece already have. "We continue to look for €100bn of purchases by the beginning of next year including Spanish securities," RBS economist Jacques Cailloux said in a note to investors.
It is not clear to me how the ECB pays for the bonds it buys. But, I suspect they make a loan just like a commercial bank would do (if they weren’t scared to finance sovereign nation debt in risk of default. That is, they just write numbers after a country’s name—they don’t borrow from the market first.

So has the banking system come round to my suggestion of zero-interest public debt? I think so, the only difference is that I have advocated that the public debt be used for stimulus type investments such as building public infrastructure. If the ECB can keep Ireland from going broke, it will certainly help public employment from tanking any more that it has. But, it won’t put the unemployed back to work, whose income would bolster consumer demand.
As one might suspect, the central bank is more interested in rescuing banks than in providing employment. Note that the central bank can do what it is doing without any legislative action. An expanded stimulus program, would need legislative authorization, and the western world’s legislatures seem more interested in adopting austerity programs (Ireland is an example) than in providing jobs. Of course, the austerity is likely to impact the relatively poor people rather than the relatively wealthy! So what else is new?

Monday, November 29, 2010

Best Politicians Money Can Buy!

The newly elected gov of Florida, Rick Scott, a mega millionaire, spent $73 million of his own money on the election. In 2009, on an income of $7.87 million, Scott paid Federal taxes at a 13 percent rate, much less than the rest of us. Of course, he wants to continue the tax breaks for the rich.

Why do we let our government do this? Don't tell me that these fat cats create jobs for the rest of us poor slobs.

Sunday, November 28, 2010

Bonuses on Wall Street

Bonuses on Wall Street are not likely to be up much from last year, though they will still be strong. Over all, Goldman, Morgan Stanley, Citigroup, Bank of America and JPMorgan Chase have set aside $89.54 billion this year to pay employees, 2.8 percent less than a year ago, according to data from Nomura.

Total revenue for the five firms, meanwhile, has fallen about 4 percent this year. A study by the influential compensation expert Alan Johnson says broadly that bonuses will be up 5 percent this year across all financial services companies, with employees in some businesses like asset management getting increases of 15 percent.
This is a far cry from 2007, when some firms on Wall Street set records for compensation payouts. That year Goldman Sachs set aside $20.19 billion in compensation and benefits; in 2008, it set aside just half of that amount, $10.93 billion for pay. In 2009, that number climbed to $16.19 billion. These guys were royally rewarded for creating a financial crisis that most other people suffered from.

In the years leading up to the credit crisis some executives became famous for their expenditures, like L. Dennis Kozlowski, the ex-chief executive of Tyco International whose $6,000 shower curtain became a symbol of unnecessary extravagance.

I repeat, and the new Congress wants to extend tax cuts to these people!

Tidbits & Outrages

Profits Soar, Employment lags
(items gleaned from the New York Times)
The nation’s workers may be struggling, but American companies just had their best quarter ever.
American businesses earned profits at an annual rate of $1.659 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or noninflation-adjusted terms.

Return of Conspicuous Consumption
But when it comes to personal indulgences, there are signs that the wallets are beginning to open up. Traders and executives say that jobs seem much more secure. Businesses whose fortunes ebb and flow with the financial markets are thriving again.
“Wall Street is back spending as much if not more than before,” said the New York cosmetic surgeon Dr. Francesca J. Fusco, whose business is booming again after a difficult few years.
Christie’s auction house says investors from the financial world who fell out of the bidding market during the 2008 credit crisis are “pouring” back in.
Expensive restaurants report a pickup in bookings. At the Porter House restaurant in the Time Warner Center across from Central Park, the head chef, Michael Lomonaco, says business is up about 10 percent over a year ago and “people are starting to shake off what happened.” The restaurant is a favorite of A-list Wall Street executives, including Goldman Sachs’s chief executive, Lloyd C. Blankfein.
Real estate agents say Wall Street executives have already begun lining up rentals in the Hamptons for next summer. Dolly Lenz of Prudential Douglas Elliman said the bidding this year was “hotter and heavier” than previous years. “There is a passion now in the market I haven’t seen in a while,” she said.
She said her clients, almost exclusively from Wall Street, were afraid to lose out. Just recently, Ms. Lenz said, she had three people bidding more than $400,000 for a summer rental in Southampton.
And the new Congress wants to extend tax cuts of these people!

Wednesday, November 24, 2010


"Tom DeLay, one of the most powerful and divisive Republican lawmakers ever to come out of Texas, was convicted Wednesday of money-laundering charges in a state trial, five years after his indictment here forced him to resign as majority leader in the House of Representatives." New York Times, Nov. 24, 2010.

I hope that all members of Congress take this to heart; even the most powerful must obey the law. The prosecution chose to accuse him of money-laundering, but he also broke Texas law prohibiting corporations from giving to political candidates. DeLay's tactics resulted in enough law makers to redraw Texas Congressional districts in favor of the Republicans.

Sunday, November 21, 2010


There is only one way to reduce terrorist attacks in the US, and it is not more elaborate airport security. We must stop our own terrorist attacks in Afghanistan. As long as we are occupying the country, we will inspire never-ending hatred that creates martyrs.

Wednesday, November 10, 2010

State Spending and Employment Falls

While the Federal stimulus funds are trying to save and create jobs, they can't keep up with the decline in spending and public jobs. For example:

"The Great Recession of 2008 and 2009 decimated (Michigan)school revenues. State taxes, adjusted for tax restructuring, fell 8.6 percent from FY2008 to FY2009 compared to an income drop of 3.0 percent and inflation of -0.3 percent.
The Great Recession of 2008 decimated state tax revenues from all sources, causing actual year-overyear declines in FY2009 and FY2010." Source:Citizens Research Council.

The State of Michigan, to help solve its looming budget crisis, offered generous early retirement to its employees. 4,755 employees out of a total of 53,000 state employees took the early retirement. The problem will deepen next year if Congress fails to extend stimulus spending, which the Republican house has pledged to do.
Across the country, when many voters said the stimulus did no good, the problem was it never was of a size to offset the decline in state and local budgets and employment occasioned by declines in the state income tax and local property tax (related to the decline in real estate values).

Fed to Buy Treasury Bonds

The Federal Reserve Bank is going to buy many of the Treasury bonds to be issued in the coming months. Good idea. Now the government will be paying the interest to itself. This is the same as zero-interest public debt that I have been advocating.
Now if the Congress would vote a healthy increase in stimulus spending and finance it this way, we might see the end of the recession.

Larry Beinhart writing in The Huffington Post shows that a big chunk of the stimulus went for tax breaks (a poor way to increase jobs he says, especially breaks for the rich).

Tuesday, November 9, 2010

Tea Party

Open letter to my Pennsylvania Tea Party enthusiast friend--

I hope your research turned up lots of political candidates that gave you confidence that government spending can be substantially reduced. Did they promise to do it by reducing social security benefits, medicare, and military spending? That’s where the really big money is.
Did you find state and local government office seekers who will reduce spending on public schools, police and fire, and roads? That’s where the really big money is.
Ten townships in the rural area around Lansing turned down increased property taxes to keep police patrols at the levels they were before tax revenues dropped as a result of falling home values. If they think service is not bad now, wait until next budget year when the Federal stimulus money to the states (who share it with local governments) runs out. Were you one of the voters who reported in exit polls that the stimulus did not do any good? Come next year, we shall find out for sure.

Sunday, November 7, 2010

Burst Bubble policy

What To Do When Big Bubbles Burst?

Capitalism is beautiful. It is a system whereby owners of appreciating assets can sit on their hands and still increase their wealth. For example, for more than a decade, people could buy a house, and with real estate prices increasing faster than incomes in general, the house was worth more that they paid for it. Their wealth increased without any labor. Anticipation of still further increases in asset values fueled still more increases in real estate prices. This is the stuff of bubbles that the world has seen in its history ranging from the South Seas Bubble, Mississippi Land Bubble, the Tulip Bubble, and more recently, the Japanese real estate bubble in the 1990's.
But, what happens when the bubble inevitably bursts, as it did in 2007-8? It does not take much. Just a little slackening in the rate of increase is enough to begin the reverse movement. Investors head for the exit, but the exits will always be overcrowded. Holders of assets find their wealth decreasing, again without any particular action on their part. Across the country, real estate has fallen by 20 percent, and in the hottest markets such as Florida, Arizona, California, and Nevada, the decline was 30 percent. Few can survive this kind of decline, neither home owners nor mortgage holders. Worst off are homeowners and investment firms that bought with immense leverage. When the market was going up, they profited hugely with very little money down, and when the market headed down, they suffered losses that few had the capital reserves to weather.
What can be done? Some don’t want to even think about it—people and businesses must pay for their sins and excesses, even if it brings the whole economy to ruin, the foolish and the cautious as well. However, the Republican government decided it could not live with big banks going bankrupt and further loans and credit going to zero. So, they rescued the banks by buying some of their mortgages and by adding to the bank reserve accounts kept at the Federal Reserve. The result was that most of the big banks survived, but the little guys with mortgages on their houses greater than the present worth of their homes, suffered. Suffered enough to lash out at the party now in power, voting them out of office and putting in the very party that helped created the bubble in the first place.
What could have been done differently? When a commercial bank makes a loan such as to an individual wanting to buy a house, it creates money. Out of thin air, if you prefer colorful language. When the loan becomes non-performing, money is destroyed, again out of thin air. By law, a non-performing loan becomes a charge against the bank’s own capital—its reserves, its building, etc. As already noted, to prevent the bank from bankruptcy and credit freeze, the Fed gave it reserves. There is another alternative that was never discussed. If declines in home values and broken mortgages is ultimately the result of a law, then the law could be changed.
The rule now causing such chaos serves a good purpose in normal times. It makes the banks consider extending credit without good assurance of repayment. It did not work. In the hubris of get rich quick, banks (and their customers) threw caution to the wind. In crisis times, sticking to the rule adds to the chaos. The law could be changed one time to get the economy out of its morass. If loans created money out of thin air, then the financial contracts can be voided in the same way (or at least greatly reduced) and the banks could start over doing what they normally do. This would have been an alternative to the Fed injecting huge amounts of cash into bank reserves. Moral hazard would be created in any case—the banks may act irresponsibly again if they believe that they are will be bailed out—whether bailed out by the Fed or by a change in the rule of non-performing loans being a charge against their capital. This is a problem we have to live with.
The average person does not understand what drove Bush’s Republican Treasury Secretary, Paulson, to bail out the banks, so they are not grateful for something they can’t understand. All they know is that a lot of money was thrown around and they did not see any of it. None of it helped them with their mortgage payments where the mortgage was larger than the depreciated value of their homes. So they are angry with the Democrats who happen to be in power when the pain peaked. When people are angry, they lash out at whatever they can see.
If the Treasury and the Fed had created money for a larger stimulus and mortgage relief, instead of bailing out the banks (when there was a better way to save them by a rule change), people and the economy would be a lot happier today. We are not the first society to destroy itself by clinging to obsolete institutions. The barriers to full employment are symbolic (in the air, if you will), but few economists or politicians are helping the public understand its options. Treating the problem as if it were a moral failure, as Paul Krugman has pointed out, may doom us to the Japanese experience of over a decade of negative and zero growth after a real estate boom so large it can’t be accommodated with old thinking. Capitalism with its inevitable booms and busts can be saved without so much pain, but it will take bold rethinking of our institutions.

Friday, November 5, 2010

Public Debt Accounting

We are bombarded with media stories pointing out the calamity of a large public debt. We may not be able to grasp trillions of dollars, but we know it is ominous. Political analysts suspect that many voters in the recent election regard the public debt as immoral, and now we must pay for our sins with austerity and reductions in public services, excepting the military, of course. The fear and loathing attached to public debt is a product of poor accounting that treats all public spending as consumption. However, much public spending is a long-term investment in human capital that enhances our productivity.
When a business invests in new plant and equipment, it carries it on its books as an asset. This puts its debt into a proper perspective. The Federal government should keep its accounts the same way. This would help the public avoid misguided efforts to reduce public spending on education, health care, and scientific research.
I owe this insight to William Krehm-- (>

Wednesday, November 3, 2010

Quantitative Easing--Fed to Buy Bonds

The Federal Reserve announced today that it would buy Treasury bonds in the open market to lower long-term interest rates. This is billed as something new when it has already driven short-term rates to nearly zero without solving the problem. Instead of buying already existing bonds, I would suggest it buy new bonds from the Treasury as it greatly increases stimulus spending.
Obama should announce that we are gong to build a new high-speed rail system and/or a new electric grid, financed by a new Treasury loan from the government's own bank, the Federal Reserve. When entrepreneurs are discouraged and won't borrow to put people to work even at nearly zero interest rates, the government should borrow and fill the gap.
Note that if entrepreneurs would borrow from commercial banks, new money would be created. The Treasury borrowing is not different and should not be branded with the epithet, they are just "printing money."

French Cry Babies

Some French workers have been demonstrating against the government's plan to increase the retirement age from 60 to 62. (The Greeks were similarly exercised a short time ago.) No country is so rich that it can have its citizens stop working at 60, unless of course they would accept much reduced benefits.
The violence accompanying these protests by youths probably suggest the frustration of high unemployment among hyoung people rather that any deep concern for their retirement age.

Nobel Prize 2010

Peter Diamond and two others were awarded the Nobel Prize for finding that “Most real-world transactions involve various forms of impediments to trade or ‘frictions.’” I thought we already knew that. The Swedish Academy notes that “The question of why unemployment exists and what can and should be done about it is one of the most central issues in economics. Labor markets do not appear to ‘clear’: there are jobless workers who search for work (unemployment) and firms that look for workers (vacancies). It has proven a challenge to formulate a fully specified equilibrium model that generates both unemployment and vacancies.”
The millions of unemployed today must be very grateful that this model has been created! Frictional unemployment is certainly not the problem of today. Diamond is applauded for showing that with friction the only equilibrium is the monopoly price. A surprising finding according to the Academy. This is the conventional plaything of conventional economics--all our problems are due to inefficiencies. Diamond “found” that some workers create externalities for other workers by searching too hard--shame on them!
The Academy notes that optimal search behavior involves a reservation wage, at which a worker is indifferent between accepting a job and remaining unemployed. “The reservation wage is thus set so as to equate the value of unemployment, whose immediate return is any unemployment benefit the worker receives, to the resent discounted value of future wage incomes from the job, which involves the likelihood of keeping the job, the interest rate by which the future earnings are discounted, and any expected wage movements on the job.” I’m sure the unemployed will be glad to learn that this is what they are doing. Why is it that many models turn out to blame the worker for their problems and/or the government being too generous with unemployment benefits?
I would give a prize to anyone with insight into labor markets with fluctuating demand for consumer goods. To do this would require economists to get out of their armchairs and talk to people, both labor and management. Have these people ever visited a state unemployment office with its lines of people looking for work or long lines at any employer advertising hires. Then they might truly discover (not deduce) how expectations work and vicious cycles of lower consumer demand leading to laying off workers, to further decline in income and consumer demand. It is time to study institutions and behavior and quit worrying about blackboard mechanical equilibrium models. These models don’t “find” anything, but are just inevitable deductions from the framework used to create them.

Monday, November 1, 2010

Caretaker of Indonesia's Mt. Merapi Killed by Eruption

quote from AP:
"He was the keeper of Mount Merapi, an 83-year-old man entrusted to watch over the volcano's spirits, believing it could be appeased by offerings of rice, chickens and flowers. When the eruption came, Maridjan was among those who died, along with dozens of villagers who believed him, not seismologists or government officials. .... Maridjan was believed by many to have the ability to speak directly to the volcano, and fellow villagers considered him a hero, trusting his word over local authorities when it came to determining danger levels."
Do you see any parallels with some GOP tirades against climate scientists?

Republicans Attack EPA

Republicans plan to attack the EPA and scientists who link air pollution to climate change. They argue that EPA hurts the nation's economy. Do we really have to destroy our natural resources and our health to have jobs? This sounds a lot like the Easter Islanders who chopped down every tree on their island to have fires for their gods, and then watched their top soil wash away and food production plummet.

One would think that saving our natural resources would create more jobs as labor is substituted for less use of our resource bank.

Tuesday, October 19, 2010

Tea Party anger

What are the Tea Party enthusiasts angry about?

Is it about the fact that 1% of our population has a quarter of the total income?
No, they want to lower all taxes.

Is it because the wasteful, vainglorious war in Afghanistan continues?

Is it because Congress has not passed a new energy bill?

Is it because Congress has not passed a more sizable economic stimulus ( to offset the reduction in lower state revenues and spending at least)?
No, they rail against the size of government.

Is it because the Supreme Court says the rich can spend all they want on political campaign contributions in the name of free speech making a mockery out of democracy?

Sunday, October 10, 2010

Taxes and Jobs

Some Republicans are perpetrating another slogan of weird logic. They argue we must continue the tax breaks for the rich because they are the answer to unemployment. Can you believe that the state of Colorado will vote in November to eliminate all taxes on business. First, the rich argument--the rich will just stick any extra profits in their pockets. Tax policy is working on the wrong end of the income distribution. The problem is the decline in consumer spending. The lower income people would buy things and give investors the necessary incentive to invest to meet consumer demand.
Then the matter of business taxes. Business uses public services such as roads, an educated and healthy workforce. These are inputs into production just as are labor and materials. Why pick on taxes that support necessary inputs? Soon we will hear petitions to restore slavery as that would decrease costs of production, create investment and jobs for the slaves!
We need to remind ourselves that the cost of business credit is at a low point as it was for the Japanese for a decade. Just reducing one cost does not automatically increase investment when entrepreneurs are pessimistic about consumer demand. This is just opportunistic money grabbing that was rampant in the Bush administration when the tax cuts were first implemented.

Thursday, September 30, 2010

Public Debt w/o interest (reposting)

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 stimulus 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??

Wednesday, September 29, 2010

Persisting Unemployment

Firms don't want to hire because they are pessimistic about sales. Consumers don't want to buy because they are pessimistic about their incomes.
There is only one way to break this downward spiral, and that is for the government to directly hire the unemployed as they did in the Great Depression when we built many public works that we enjoy today such as parks, auditoriums, and Hoover Dam. At my own university (MSU) we enjoy WPA built buildings. We certainly have many national needs such as some high speed rail lines and improvements in our national electric grid.

I am aware that fear of government deficits blocks the necessary massive spending. This is stupid. It would not be the first time that slogans and propaganda kept us from acting in our self interest.

I have described in previous blogs how to increase government spending without increasing the debt.

Dumb and Stupid

In my lexicon dumb and stupid are distinguished.
Dumb is inability to accept evidence of a fact.
Stupid is not acting in your self interest.

Examples of dumb are denying evidence of the holocaust, evolution, & global warming.

Examples of stupid are voting for a party whose policies are not consistent with your needs, poor and middle-class support for extending tax cuts to the rich,

I hate stupid.

Does anyone have better terms for this distinction? What examples would you include in each? Where shall we put supporting the war in Afghanistan or the war on drugs?

Monday, September 27, 2010

Pledge to America

The "know-nothing" Pledge to America is a farce and made up of a thin veneer of sound bites, no doubt tested for an emotional surge, but no thought.
1. Slash taxes. This from the people that rail against deficits. The imagined spending cuts are not described.
2. Cut down on government regulation. Remember that every so-called regulation, while a cost for some, is a benefit for others. Do these people really want more oil well and pipeline leaks, untested eggs full of salmonella, unregulated pollution, credit card rip-offs, etc.?
3. Repeal Obama's health care law. This is simple mean-spiritedness by those who do not want to share with the less fortunate.
4. End stimulus program. The stimulus is the only thing that has kept the recession from growing larger. Government spending needs to be expanded, not ended. The net amount of the stimulus was very small considering cutbacks in state and local spending as property and income tax receipts continue to fall.

Sunday, September 19, 2010

Moral Values

The right wing has a point about the decline of moral values, but it is not about gays and abortion. It is about the rise of rampant greed and me-ism and the decline of responsibility. Those most responsible for our recent banking crisis refuse to acknowledge that they did anything wrong (and are doing it again.) Another example--Enbridge, a pipeline company that operates in Michigan has had over 90 violations in the last several years, but no government agency did anything about it. Their latest failure resulted in a spill and pollution of a river near Kalamazoo. In my hometown, real estate sellers use the curb-side public right away to advertise their homes, even if it is against city codes. When I called them on it, their answer was "Well, we have to sell real estate." They are saying that their needs are the only thing that counts, and others be damned. And, they justify it in terms of freedom, theirs!
Far too many people touting support for moral values are missing the point.

recycling plastic and energy policy

How have the Republicans turned policy addressed to climate change into a dirty word? We have no new energy and climate change legislation thanks to the notion that there is no evidence of global warming and no need to take it seriously. Is this the return of the "no-nothings" to political power?
Thomas Friedman writes in the NYT that an American company has developed technology to turn waste computers into usable plastic at low cost. But new factories using the technology are being built in China and Europe. Friedman explains:
"Americans recycle about 25 percent of their plastic bottles. Most of the rest ends up in landfills or gets shipped to China to be recycled here. Getting people to recycle regularly is a hassle. To overcome that, the European Union, Japan, Taiwan and South Korea — and next year, China — have enacted producer-responsibility laws requiring that anything with a cord or battery — from an electric toothbrush to a laptop to a washing machine — has to be collected and recycled at the manufacturers’ cost".
Why don't we follow suit? Answer--because the "no-nothings" regard it as a socialistic plot! Industry screams that such a policy would cost American jobs and slow the economy when exactly the opposite is true.

Saturday, September 11, 2010

Moratorium on Gulf oil drilling

British Petroleum has argued that extending the Gulf drilling moratorium is undesirable because it would hamper its ability to compensate those harmed by its drilling. The irony is deep.

We are number 11

I highly recommend this excerpt from the column by Thomas Friedman of the NYT, Sept 11,quoting Washington Post economics columnist Robert Samuelson. "Why, he asked, have we spent so much money on school reform in America and have so little to show for it in terms of scalable solutions that produce better student test scores? Maybe, he answered, it is not just because of bad teachers, weak principals or selfish unions."

“The larger cause of failure is almost unmentionable: shrunken student motivation,” wrote Samuelson. “Students, after all, have to do the work. If they aren’t motivated, even capable teachers may fail. Motivation comes from many sources: curiosity and ambition; parental expectations; the desire to get into a ‘good’ college; inspiring or intimidating teachers; peer pressure. The unstated assumption of much school ‘reform’ is that if students aren’t motivated, it’s mainly the fault of schools and teachers.” Wrong, he said. “Motivation is weak because more students (of all races and economic classes, let it be added) don’t like school, don’t work hard and don’t do well. In a 2008 survey of public high school teachers, 21 percent judged student absenteeism a serious problem; 29 percent cited ‘student apathy.’ ”
An economist by the name of David McClelland wrote a book years ago containing his case for explaining Differential economic development among nations. It was called "Achievement Motivation."

Friday, September 3, 2010

Buying Political office

Former Illinois Governor, Blagovich stood trial for selling a US Senate seat. Buying and selling of political office is commonplace. Senator McCain spent $20 million in the recent primary! That's around $75 per voter.
In Michigan, the Republican candidate for governor spent $7.6 million in the primary! This absurdity is buying office plain and simple. And it all masquerades as freedom of speech according to the Supreme Court!
Big campaign contributors get something for their money. The Securities and Exchange Commission sued Goldman Sachs for $! billion and then settled for 550 million in a case of claiming that Goldman mislead investors in a subprine mortgage product. I wonder why?
And now even some Democratic and most Republicans in Congress say we must continue the Bush tax cuts for the rich so as not to spook the recovery. Why do people keep electing representatives who do not legislate in the interest of most ordinary citizens? Answer: by bombarding the public with lies and diverting their attention with reference to gays and abortion.

Thursday, August 26, 2010

Global Reserve Currency

Joseph Stiglitz in his excellent latest book, "Freefall," advocates the creation of a new global reserve currency (ICCs) with "annual emissions." "This would thereby increase global aggregate demand and strengthen the global economy." He acknowledges that the world is able to produce much more, but many have no money to buy it. So why not create more? (He also argues that such a reserve currency would reduce the need for countries to run trade surpluses to accumulate reserves.)
The IMF could create the new reserve currency. Stiglitz cleverly calls it an "emission" and not a loan that would create the obligation to pay interest, much as I have been advocating to solve the problem of inadequate demand currently in the US.
The following is from a 1999 report to the UN from a special commission that Stiglitz chaired.
"the international agency in charge of creating global reserves would simply issue the global currency, allocating ICCs to member countries, much as IMF Special Drawing Rights are issued today. There would be no “backing” for the global currency, except the commitment of central banks to accept it in exchange for their own currencies. This is what would give the ICCs (or SDRs) the character of an international reserve currency, the same way that acceptance by citizens of payments in a national currency gives it the character of domestic money. However, if the issues of global currency received by countries are considered deposits in the IMF or the Global Reserve Bank, and the institution in charge of managing the system is allowed to buy the government bonds of member countries or to lend to them, then these investments would be the “backing” of the global currency, just as domestic moneys are “backed” today by the assets of national central banks (the government bonds in their hands and their lending to private sector financial institutions).

Monday, August 23, 2010

Tax Cuts for Rich

If the tax cuts for the rich are extended, I will be deeply discouraged.
The facts are noted by Paul Krugman in his New York Times column of August 22.

"According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion in revenue over the next 10 years. For the sake of comparison, it took months of hard negotiations to get Congressional approval for a mere $26 billion in desperately needed aid to state and local governments.
And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year."

This extension is unconscionable, immoral, and surely not in the interest of most citizens. Are the American people not able to understand their own self-interest?

Copter Cash could improve Japanese economy

Japan's economy remains in the doldrums. Consumers are saving and firms are desperately reducing prices. The problem is deflation, not inflation. The Bank of Japan has pushed interest rates to near zero with little stimulus to investment. To make matters worse, Japan's currency is rising against the dollar, depressing exports.
What's the answer when traditional monetary policy has no effective options?
Answer, Copter Cash. Create more money to overcome consumer reluctance to spend. This could be done by Bank of Japan and the Japanese treasury directly creating money without borrowing and incurring debt obligations.
By the way, this would be a good policy for the US as I have proposed in earlier blogs. Dropping cash from helicopters would be crude, but every one could be sent a check, and of course the government could spend on infrastructure. How would you like a high-speed trans-country railroad to bring us up to European standards? A country without high speed rail is a second rate country. Or maybe you would like a national electric grid that could prevent power failures and be able to transport solar-driven electricity from sunny areas to cloudy cities.

Saturday, August 14, 2010

Recession Policy in Germany

Germany is enjoying economic growth despite the world-wide recession. Their policy reported by the New York Times makes a lot of sense to me:
"Government officials here are confident they found the right approach, including a better solution to unemployment. They extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions."

Wednesday, July 28, 2010

Afghanistan spending

The US has spent $300 billion in Afghanistan. What did we get for our money? The New York Times reports that the Taliban is stronger today than at any time since 2001.
What kind of evidence do we need to change our policy? I am greatly disappointed in Obama. 300 billion would buy a lot of health care and help us get out of this recession, but he and a lot of our politicians do not see the connection.

Monday, July 26, 2010

Social Security shortfall?

Many commentators view with alarm the fact that the “Social Security Trust Fund will begin to face a long-term cash shortfall by 2016” as reported in the AARP Bulletin, July-August, 2010. The trust fund is simply an accounting device and is not a repository of saved funds. Government spends all the money it collects in every kind of tax for all kinds of purposes. Future expenditures for Social Security and any other purpose depend on Congressional appropriations, and not the balance in some made-up, so-called trust fund.
As Randall Wray puts it, "the trust funds cannot provide external funding for one of the governments own programs, because this is a case of the government 'owing itself.' At the same time, however, this means that it is logically impossible for any one of the government's programs to face a financial crisis on its own, because it is the overall budget that matters--not a single program's finances." Levy Economics Institute, Policy Note, 2005/2.
Instead of being scared by an artificial device, we could be debating modifying the regressivity of social security taxes. How much do citizens want to spend on social security and who should pay. This is the same question we should be debating about national defense and health care.

Wednesday, June 16, 2010

Recession & Jobs

An Associated Press writer says that businesses to retain earnings "become more productive; they found ways to produce the same level of goods or services with fewer workers." I thought the competitive market forced firms to do than all the time, not just when earnings fall. Could it be that economists need a more refined behavior model to explain this? Could it be that firms satisfice most of the time, until some frame makes them breakout of the status quo?
LSJ May 14, 2010

British Petroleum

BP execs say spill was an aberration, as if that excuses their ineptitude and lack of preparation. These things are what one author calls Black Swans, rare events that if they happen have disastrous consequences. What one learns from them is that you need a back up plan if it happens.

Friday, May 14, 2010

War on Drugs

There is a third war that diverts public funds with little positive results--the War on Drugs. We have spent billions for many years destroying poppy fields and giving aid to the armies and police of countries suppling heroin. What have we accomplished? It simply makes the drug lords richer by driving up prices. And, it corrupts the police and other public officials. Ordinary citizens are caught in the cross fire of feuding drug lords. You would have thought that we would have learned something from our experience with liquor prohibition. It did not work and we eventually repealed the law.
If we legalized heroin and supplied it in regulated clinics, we would destroy the huge profits that fund guns for the drug lords and the Taliban in Afghanistan. If we used a portion of the money trying to help addicts instead of search and destroy we would have more for out money.

Recession and Wars

It saddens me to see public schools closing and teachers laid off. Many people seems fatalistic about it. "It's the recession, you know." But, it doesn't have to be. Let's look at options within public spending. In February, we spent $6.7 billion in Afghanistan and $5.5 billion in Iraq. That would pay for a lot of teachers.

Wednesday, March 24, 2010

All across our land, state, local governments and school districts are laying off employees and shortening their work week. How can we educate our children for the modern world by reducing spending on education?
This is nonsense. We do not have to do this. The Federal government should be spending more financed by borrowing interest-free from the Federal Reserve as I have outline in previous posts.

Japan Fiscal policy

Japan has a very aggressive approach to turning around the recession.

The record budget, worth $1 trillion, for the fiscal year starting in April will pay for Prime Minister Yukio Hatoyama’s ambitious stimulus agenda, including cash handouts to households with young children, free tuition at public high schools and income support for farmers.

Mr. Hatoyama, who heads the Democratic Party, is looking to bolster both Japan’s deflation-stoked economy.

“Creating a virtuous circle in which a growth strategy spurs employment and demand will help combat deflation,” Mr. Hatoyama said.

Hatoyama understands how the economy works. In contrast, we are closing schools and laying off teachers.

Wednesday, March 3, 2010

Jobs Bill

A Kentucky Senator held up the extension of unemployment benefits for hundreds of thousands of the unemployed. Why? He said he was worried about the public debt. He wants to reduce spending elsewhere. This makes no sense. When you have unemployed resources there is no real cost to public spending. No opportunity cost forgone. What is needed is an increase in spending, not substituting one expenditure for another.
When consumer demand is inadequate to use all resources, it is not the time to reduce some people's income. The barrier to full employment is the outmoded way we finance public spending with borrowing incurring interest payment obligations. Money is created when banks make loans, if commercial banks do not want to do because they are pessimistic about the economy, the government's own bank, the Federal Reserve, could loan the treasury enough to get nearer full employment. (For more, see some of my earlier posts.)
Sen. Bunning finally relented and voted for the bill, but he and no other politician is looking for a new means of finance.

Monday, February 1, 2010

Consumer Culture

We have created a culture where many Americans don’t think they have to live within their means. So, if they “need” something,” they buy it on credit. More new stuff is acquired even if they must rent a storage space for the old stuff. If people lose their jobs, they try to maintain their old level of consumption. In times past, people in a financial jam would have gone to parents and family, and the parents would tell them “You don’t need that if you are using my money.” But, with a credit, debit, or pay-day loan, they don’t have to face anyone saying no.
There are twice as many pay-day loan offices than there are Starbucks, and people may pay over 400% interest for a two week loan. Overdraft protection on a debit card is not called a loan but euphemistically termed a “courtesy” by the banks as they collect enormous fees. Some people will take money, if available, no matter their chance of repayment. And financial organizations take advantage of this. As one wag put it, there are two words Americans love to see—“Free” and “All you can eat.”

Thursday, January 28, 2010

Dark Times

Dark Times

(apologies to Ted Roethke)

In a dark time
the mind begins to search,
It asks
what is a variable,
what is chosen
that no longer works.

People want the President
to solve unemployment,
but they don’t want taxes
and fear bigger debt.

Asset values have dropped
and loans have gone bad.
Do taxpayers have to pay to save the banks?

Is there a variable in there somewhere?
Or must we pay for our sins of greed?

The bank loans created money
from thin air.
Can the process work in reverse?
Release these debts into ether space
and start over.

27 January 2010

Wednesday, January 27, 2010

A. I. G. bailout

The Federal bailout of AIG, the insurance giant, was not just for AIG, but for all of the banks that held their derivative securities.

"E-mail messages made public in recent days show that A.I.G. sought the New York Fed’s advice on the contents of its filings about the bailout to the Securities and Exchange Commission. The New York Fed crossed out certain passages, including references to the fact that A.I.G.’s trading partners would get 100 cents on the dollar on their soured derivatives trades." NYT 27 Jan 2010.

Goldman Sachs came out smelling like a rose and could pay back its direct grant from the government. Given the fact that they were not required to share any of the AIG losses, it is hard to believe that they were not favorably treated.

Wednesday, January 20, 2010

Electric Power Grid & Wind

"Adding wind gets progressively more difficult as the amount used rises because of wind’s intermittent nature and the need for back-up power generation, according to the study, which was prepared for the National Renewable Energy Laboratory. Without a better (electric) grid, the system would often waste large amounts of wind power because at many times during the year, the power grid would not be able to handle the traffic." New York Times, 20 january 2010
The country needs a modern electric power grid. The present one was built largely a piece at a time by different companies. It reminds me of the telegraph in its early days. Lots of pieces that connect two points here and there, but no cross country lines and connections, We could use some national planning and both private and public investment within it. Now, with high unemployment would be a good time for major investment in our infrastructure.
The country could also use a national system of high-speed trains, we are pathetic compared to other western countries.

for related view see,

Sunday, January 17, 2010


If the U.S. would spend half as much on helping Haiti and other poor countries as we spend fighting in Iraq and Afghanistan, we would be betterloved instead of hated. Benevolence would remove some of the motivation for terrorism.

Friday, January 15, 2010

Bank tales

The following appeared today in the Washington Post:
JPMorgan Chase received $25 billion in bailout money in the fall of 2008 at the peak of the credit crisis. It paid back that money in the middle of 2009.
Goldman Sachs didi much the same. Don't you wonder how they earned so much in such a short time. Are they making the same risky investments that got them into trouble in the first place? Certainly the absurd bonuses paid to investment bankers provide the incentives for it.

Reported 20 Jan 2010
Morgan Stanley, revealed today it had set aside $14.4bn for pay and bonuses in 2009 despite showing a net loss