Consumer Credit Plunges

The Federal Reserve announced that consumer borrowing dropped 5.2 percent in March Consumers are the weak link in recovery. Even if the banks were sound, business may not borrow and invest if they think consumers won't buy. What to do?

When there are massive unused resources in the economy, there is no need for consumers to save or borrow to put them to work. The government should increase consumer wealth. First step, eliminate payroll taxes for social security. But, that will not be enough. The Treasury should write everyone a sizable check, especially to the poor. And, there is no reason for the Treasury to borrow either (see earlier blogs on government finance). Writing checks is the civilized way to increase consumer wealth, but to make the point, it cash could be dropped from airplanes. I think Bernake suggested this once and earned the title of "helicopter Bernake."
I have mixed feelings about consumerism, maybe people will learn they do not need a lot of stuff to be happy. The millions of rental storage units across the country filled with stuff people bot, but really do not use, is witness to excess. But, this is a poor time to reduce consumer spending greatly.

Lawyers May Exploit GM Bankruptcy

If GM is forced into bankruptcy, Weil Gotshal & Manges LLP may charge 230 million for its legal services. They already charged $209 million advising Lehman Bros. in its bankruptcy. (DFP April 8) The greedy vultures seem to grow fat regardless of others distress. With this kind of transaction costs, it is a wonder that our economy does as well as it does. It certainly contributes to the growing skewness in the nation's income distribution.

House Approves Budget

Senate Republican leader, Mitch McConnell objected to the budget and said, "The administration budget simply taxes too much, spends too much and borrows too much at a moment when we can least afford it." LSJ April 3,2009.

However, this is the moment when we particularly can afford it. When resources are unemployed, there is no opportunity cost to using them. Why are so many rooted in myth and superstition? McConnell is partly correct, but I doubt if he knows why. We do not need to tax or borrow, the Federal Reserve and the Treasury can simply write checks. Remember, if commercial banks can create money by making loans, so can the Federal Reserve.

House approves budget

Senate Republican leader, Mitch McConnell objected to the budget and said, "The administration budget simply taxes too much, spends too much and borrows too much at a moment when we can least afford it." LSJ April 3,2009.

However, this is the moment when we particularly can afford it. When resources are unemployed, there is no opportunity cost to using them. Why are so many rooted in myth and superstition? McConnell is partly correct, but I doubt if he knows why. We do not need to tax or borrow, the Federal Reserve and the Treasury can simply write checks. Remember, if commercial banks can create money by making loans, so can the Federal Reserve.

CBO predicts $2.3 trillion more deficit

The Congressional Budget Office predicts that the public deficit over a decade will be $2.3 trillion more than earlier estimates as a result of Obama's budget.
This does not need to be. When stimulus funds are paid to our auto companies and others, there is no reason for the treasury to first borrow more from China and others. If the Federal Reserve can bail out banks by writing numbers after the bank's accounts at the Fed, it could write numbers after the Treasury Department accounts, and the Treasury could then write checks to keep businesses going. Remember, there is no opportunity cost to putting unused resources to work. No one need save first and defer consumption.
Of course, there is one reason to keep doing things as done in the past--myth and superstition!

How Does the FED Do It?

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

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

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

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

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

Fed to Buy $1 trillion in Securities

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