Bank of Japan More Innovative than US Fed

The Bank of Japan has begun a modest purchase of the stock of Japanese firms that expand the economy by investing in their factories or by raising workers’ pay.  “The BOJ is doing what it can to support capital spending and investment in human resources” says the Bank’s governor.  In contrast, the American central bank buys billions of dollars buying bonds owned by banks.  U. S. “corporations have tapped the markets for trillions of dollars in recent years, yet they have plowed relatively little of the money into new operations.”  American firms have been on a binge of buyouts and mergers further adding to oligopolies.    The stock market and junk bond markets love this.   “Business investment as a percentage of gross domestic product has remained below historical levels since the Great Recession. “ The government has not helped.  “Public investment spending as a share of overall economic activity has fallen to lows not seen since the 1940’s.  (NYT Dec. 18, 2015 p. B-8) This has pleased the Tea Party and other “know nothings.”  But it has done nothing to fill road chuck holes and repair dangerous bridges.   Meanwhile American passenger rail lines are the laughing stock of Europe and its high speed trains.                                                                                                        

Air Force as Show Business and Special-Interest Politics

At the end of WW II a task force was assembled to study the role of the Air Force in winning the war.  John Kenneth Galbraith was a member of the team.  It concluded that the Air Force was of limited impact and that it was the infantry that had to do the work.  “Attempts at daylight precision bombing in World War II proved ineffective.  The bombers suffered heavy losses, and the enemy had to be defeated the old-fashion way with massive armies slogging across Europe….” The same battle is going on again.  The Air Force wants new, big and super-fast fighters that cost $1.5 trillion each.  Yet, it was the cheaper, slower and more maneuverable A-10 that provided air support to our troops in Afghanistan and Iraq.  Probably, the speedier fighters account for many of the civilian casualties that the Afghans complain about.  Fast planes and drones lack the necessary field of vision to distinguish friend from foe.  The Air Force is determined to eliminate the A-10.  Harper's reports that “Legislators with A-10 bases in their districts who might ordinarily attempt to save those jobs, were offered special inducements by the Air Force.  Thus Michigan’s Carl Levin, chairman of the Senate’s Armed Services committee, has been guaranteed a squadron of aerial tanker planes that will provide substitute employment.”
    The military-industrial complex is fleecing us again. I wish Levin had asked for high-speed rail lines rather that jets.

Source: Andrew Cockburn, “Tunnel  Vision,” Harper’s, February 2014.

There is Another Way

Forty percent of domestic lending in Brazil is by three Federal government banks, including the Federal Government Savings Bank.  The Banco National de Desenvolvimento Economica loans for roads transport, and mining. Brazil has been growing rapidly.
The US should be building things like transnational high-speed trains and electric grids to put people to work, especially our youths.
Let's replace TINA with TIAW.

Cash for Clunkers

" Economist Alan Blinder helped popularize the idea of a scrappage program, and the moniker "cash for clunkers", with his July 2008 op-ed piece in the New York Times. Blinder argued that a cash-for-clunkers program would have a tripartite purpose of helping the environment, stimulating the economy, and reducing economic inequality." (From Wikipedia)

This was a good idea, but there was inadequate appropriation in 2009.  Put money into the economy by buying something that lots of people have.  Even better would be to buy labor from the unemployed to build infrastructure.  How about a high-speed rail line across the country? Instead now the FED buys bonds to help the banks, and the no-nothings want to reduce government spending in favor of austerity.
   

Austerity Superstition

“Small and medium-sized enterprises in many countries, which are the engines of employment, are starved of credit. The prospects in the countries on the periphery of a reduction in today’s record-level unemployment are bleak. These countries face a lost decade of economic progress that will trap tens of millions of people in misery.”

“the E.C.B. will discover that just pumping in liquidity will not suffice to prevent economic conditions from getting worse.”

says William R. Rhodes, former senior vice chairman of Citigroup

Rhodes is correct.  This bleak picture does not need to be. The European Central Bank (and the Federal Reserve) could make loans to the treasuries of sovereign nations that they could use to employ the unemployed to construct much needed infrastructure.  This would increase consumer demand for products of the economy.  It is only myth and superstition that prevent governments from seeing the obvious.  Austerity is absurd.

Recession in Europe.

The European Central Bank is  hopelessly confused and not doing its job.  Germany lost WW II, but is now wreaking havoc  on the rest of Europe worse than a Panzer division.  Here is their lame excuse as reported by the New York Times.

     "But despite his pledge at that time to do ‘'whatever it takes'’ to save the euro, Mr. Draghi does not appear willing to risk an outcry in Germany by throwing out the rule book altogether. And he must contend with the European Central Bank’s 23-member Governing Council, which includes the heads of all 17 national central banks in the euro zone.

“There are 17 governors of 17 member states with completely opposing views,” said Zsolt Darvas, a research fellow at Bruegel, a research organization in Brussels. “There are major disagreements. Probably they try to err less by being more cautious rather than being more aggressive.”

In addition, Mr. Darvas said, the European Union lacks a central treasury that would stand ready to provide financial backup if central bank investments went wrong, as the United States Treasury implicitly backs the Fed."

    This is myth and superstition at its worst.  A central bank can't go broke as it can always create more money if the previous creations don't work.. Try, try again until you get it right. If these bankers had a family out of work and unable to buy the necessities of life, it would not cling to this outmoded policy.

China Teaches Us

China has had phenomenal growth that slowed and now is continuing. The New York Times reports "the renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects."  We could do this too.  Our Federal Reserve could loan money to the national and state and local governments to build much needed infrastructure.  We are mired in old thinking that austerity is the answer to unemployment.  The debt of Chinese state-owned banks and the central bank is only a bookkeeping phenomena of no consequence. Central bank debt is just an accounting matter.  It can go on until the economy can not produce further goods. The limit is the real capacity of the economy.  Does anyone doubt that our economy can produce more?

ECB offer to buy Spanish and Greek bonds

It is bloody nonsense for Spain and Greece to not sell their bonds to the European Central Bank.  They say they fear greater European control.  Well let chaos reign from more labor strikes and human suffering!

British Monetary Policy

"But there is also a growing sense (in Britain) that, with interest rates already at a record low (.5) and the economic effects of the central bank’s asset purchases unclear, monetary policy is becoming less effective as a means of stimulus.

Instead of central bank stimulus measures, some economists favor a slowdown in the pace of large government spending cuts intended to reduce the country’s budget deficit." NYT Oct 18 

       This economist agrees, but more is needed. When will central banks make interest-free loans to the country to create jobs in public works, etc.?  The problem is weak consumer demand.

Forget Bank Bailouts

Crisis is the mother of innovation in fiscal policy.  In the face of recession when consumer demand is weak, I have long advocated that central banks make loans to the treasury to employ people and put more spending power into the economy.  After saying they would never do it, the European Central Bank, is buying the debt of its member governments.  This will relieve the pressure on countries facing extremely high interest rates on their borrowing.  This enlightened policy is somewhat offset by the EU governments (led by Germany) insistence on budget cutting austerity which reduces consumer spending, in exchange for EU bailout money. Forget bailouts, they would not be needed if the central bank was doing its job.

      The Japanese central bank is the most progressive buying corporate bonds, commercial paper, exchange traded funds, and J-Reits.  The U.S. Federal Reserve is the least progressive of the three biggest central banks.  It only buys government bonds.  It says its program will lower long term interest rates.  This is a nonsensical objective since rates are already historically low.  Our problem is not high borrowing costs, but the fact that business does not want to borrow when consumer demand is low. 

      Financial columnist, John Plender, writing in the Financial Times 26 Sep 2012 worries about central bank balance sheets and the quality of collateral.  He does not understand that a central bank can’t go bankrupt.  It can just create more money via more loans and try again to get the economy moving.  A really progressive central bank would buy things owned by consumers such as home mortgages.  I do not approve of countries such as Greece with overly costly public employee pensions and early retirement that are unfair to other citizens.  But, think what their economies would look like if pensioners had no money to buy consumer goods.  The Greek government could subsidize all pensions and tell the retirees to go out and buy.  Instead, more austerity is being insisted upon for the Greek, Italian, and Spanish governments.  The world’s policy makers and general public are asking the wrong question when they see rising public debt.  The problem is not debt, but how it is financed. The problem is not the inability of European and US economies to produce more goods, witness the excess capacity in plant and equipment and unemployment. 

Fed Fumbles

The Federal Reserve just announced its latest solution to the slow economy.  It is called the "twist."  They will sell short term bonds and buy long term bonds.  This will hopefully lower long term interest rates.  Whopee!  Interest rates are  already at historic lows, but the private sector does not want to borrow because consumer demand is inadequate.  Instead of trading in the financial markets, the Fed should be buying something that everyone has so as to put new money in the hands of consumers.  You can hear the no-nothings scream socialism.  Why buying bank assets is OK say them, giving money to real people is some how bad.  Go figure!
   The same problem pervades Europe.  The European Central Bank buys assets of failing banks, but does not buy bonds of failing nations. 

Cross of Gold

Presidential candidate William Jennings Bryan admonished policy makers not to "crucify mankind on a cross of gold." In the face of the financial crisis of 1893 and unemployment, he advocated the coinage of silver from government stockpiles to increase the money supply and increase consumer demand.  Of course, the wealthy opposed him as they were not hurting
     Today the unemployed are being crucified on a cross of austerity that the wealthy says is good for them.  The fact that austerity has failed has not dulled support.  Austerity has already made a deep bite in local police, fire, and schools, and libraries.  Voters in several European countries have vented their rejection of austerity, but no alternative has emerged such as I suggest.  The EU has tried to help banks, but has done nothing to aid consumers so the bank bailouts are not working.

What is our biggest problem?

The two chairs of the Commission appointed to develop a plan for reducing the Federal deficit agreed that the debt was the nation's biggest problem and unsustainable. We have to cut defense, social security and medical care they say. But, they know it won't happen.

This has become conventional wisdom. Why does not anyone raise the question of what the real economy of people and factories is capable of producing. Have we lost the knowledge needed to produce? Have the factories rusted?

No. This is an institutional failure, not a physical problem. There is an alternative to borrowing more money in the market. The Treasury could borrow from the nation's own bank,the Federal Reserve. Tell me why it is OK to create money every time a private corporation borrows money from a bank, but not OK if the government does the same thing??

Stock market and the economy

Fed chief Bernanke said that deep problems remain in the labor market. So the S&P hit its highest close in 4 years. Go figure! Of course behavior in a gambling casino doesn't have to make sense.

Good news? Layoffs in January were 154,000 fewer then than in December, 2007. Bad news: firms hired 778,000 fewer workers then they did in December, 2007.

"the fact that labor demand appears weak in most industries appears weak in most industries and locations is suggestion of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs." WSJ March 27, 2012.
This problem will not be fixed by tax cuts and austerity.

Finally some good sense emerges in Europe

The European Central Bank is now doing what I have advocated. I suggested it buy bonds of nations suffering financial crises. To make this less obvious, it is loaning money to banks who in turn invest in bonds of these countries. Now if they would buy new bonds these countries might use for infrastructure and to inject new income and consumer spending into these economies, instead of the senseless wholesale austerity that Greece, Spain, Ireland, and Italy have adopted. This is often condemned as printing money, but surely some clever official could think of language to calm the superstitious.

Central Bank History

I have been advocating that the Fed should make loans to the Treasury to finance public intrastructure and consumer spending. If you think this is completely crazy, keep in mind what has actually happened. During the height of the recent financial crisis in 2007, the Fed loaned a German bank $350 million and Citigroup, JP Morgan, Bank of America, and Wachovia each $500 million. All this and more was done to keep the banks solvent so they could make loans to business.

None of this cost the American taxpayer a dime. The Fed was doing what any bank does everyday for its commercial customers, creating money by making loans. Security? The banks pledged various assets including residential mortgages that no one knew exactlly what they were worth. What could the US Treasury use for security? Why not the human capital assets of the nation? This would allow the Treasury to finance such local gvernment investments as teachers instead of laying them off. This makes too much sense and therefore probably won't be done!

For more, read William Krehm at

Monetary Stimulus

Adam Posen, a member of the the Bank of England's monetary policy committee, wants central banks to print more money, a lot more. He suggests that the Bank of England and the British Treasury form a government backed bank to make small-business loans. He does not say specificially how this would be financed.
The Euro Zone is in crisis and needs some new ideas. The Bank of England has a program of purchasing the bonds of weak euro zone economies, but it is expected to stop. The European Central Bank may be forced to adopt the policy I have been advocating, namely to directly make loans to Greece, et. al. The EU countries have abdicated the right to do this, leaving only the European Central Bank.
It is unfortunate that Posen uses the term "print money" since this diverts thinking about the central bank creating money by making loans. If the central bank can create a loan to a bank on its balance sheet in order to buy bonds, it could surely make a direct loan to the Treasury who could use the money to invest in infrastructure and create jobs whose income could increase consumer demand. This is of course the method that should be used to finance Obama's new stimulus instead of more government borrowing and slashing entitlements. (Slashing military budgets is the right idea.)
Source: New York Times, Sept. 17, 2011

Debt Ceiling = Recession continues

Never has public policy been so dominated by superstition and myth as those opposing the increase in the debt ceiling and insisting on reducing Federal spending. This is a recipe for continuation of the recession. The Federal government is the only hope for tax revenue-starved state and local governments. Do these people really want to reduce the number of teacherw, firefigters, and police??

European Austerity

Austerity is not the answer for Europe’s debtor nations. The UK has gone that route and the economy has tanked. Others, as noted below in an article in the New York Times, are destroying themselves. And Why are we all doing this when the physical ability to produce is still there? Eichengreen’s suggestion makes sense. It could be combined with writing off some of the bad loans held by banks as I have suggested before. We are killing ourselves at the altar of paper.

“In Greece, the central bank is forecasting that unemployment will hit 16.5 percent this year. Support for the Socialist government of George Papandreou and his reforms continues to erode, with a recent poll showing that just 35 percent of Greeks would vote for him again.
In Ireland, it now seems that the banks whose bad lending brought the country to its knees may need even more than the 35 billion euros already allocated to them by the European Commission and the I.M.F.
Finally, in Portugal, after four cost-cutting austerity packages that have covered the usual areas like pension reform, spending reductions and tax increases, the people have had enough.
The lesson is clear, argues Barry Eichengreen, an economist and an expert on the euro and its origins — sustained austerity that is not supplemented by some form of debt reduction in which the holders of bank or government debt are forced to take a loss is not just unworkable but unfair as well.
“When you reduce the incomes of the people who service the debt but you don’t reduce the incomes of the bondholders, you won’t reduce the level of debt,” he said. “Some might call it shared sacrifice, but some people are not sharing.”

Stimulus & Jobs

The Congressional Budget Office reports that the unemployment rate might have been higher if not for the Stimulus enacted in 2009. A study by Goldman Sachs comes to the same conclusion. It's sad that the no-nothings in Congress who want to severely cut the budget don't understand. But, then they are not interested in facts, only folk wisdom and slogans.