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.