A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, July 26, 2010

Transcript: 397 Unusual uncertainty in Bernanke's step

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Fin Reg

An AP account up on the blog in the coming week is long, but is the best summary we've seen so far of the recently passed financial regulation.

Our view is the Act is a good beginning, but only a beginning. The most substantial piece is the Consumer Protection Bureau. Yes, it is nice to level the playing field with a consumer advocate, provide some symetry in information, Joe Stiglitz might say. But to us, it is the one big step to structuring markets. It involves no intrusive regulation, but only a means to standardize and make safe the products, and thus make possible a competitive market. Financial industry objections are thus exposed as anti-market.

Due to thelanguage of the bill, however, the person heading the bureau will likely have a good deal to say about how well it works, or doesn't work. We -- along with the rest of the informed population -- favor Elizabeth Warren as first head of the bureau.

Also on the blog this week is testimony to the Commission on Deficit Reduction, the sham committee set up by the Obama Administration to faciliate dangerous and uncalled-for cuts in Social Security and Medicare. The testimony is from the pen of James K. Galbraith. It is presented in several parts, for easy digestion.

Galbraith is notable for not signing the patently demand side manifesto released through the Daily Beast under the names of Joseph Stiglitz, Alan Blinder, Robert Reich, Laura Tyson, and others, including Robert Pollin. Perhaps more deafening than Galbraith's objections was the non-response from the Market Fundamentalist economics that produced the current mess. The reason for Galbraith and co-authors Paul Davidson and Keynes' biographer Robert Skidelsky not signing on was that they do not share the alarm about even medium term government deficits. Both manifesto and response are up on the blog, Tuesday, I think.

Links are in the transcript







Galbraith also got into it with Paul Krugman on this subject. Krugman called him out for his contention that deficits have a benign effect in an economic depression. Unfortunately Krugman's mathematical refutation went off the rails into elementary quantity theory erros and leaps of assumption.

Demand Side is with Jamie Galbraith on this, after reviewing the arguments. Deficits don't have to grow, however. We see ample idle resources on corporate balance sheets to tap for new revenue. We also call for big new revenues from hiking top income tax rates, removing eh cap on payroll taxes, getting a tiny part of the casino action with a financial transactions tax, and of course, the simple but essential carbon tax. Lowering deficits by these economically efficient means would rebalance the economy.

Still, the important point is that deficits are a result of the capitalist excesses. Lowering them will not inspire a capitalist recovery. Quite the opposite.



The noted columnist for the Financial Times is having a more and more difficult time relaying his opinion of policy actions by his own government and others such as the G-20 without breaking from his measured, considered and thoughtful tone. Recently terms such as "insane" and "if the moon were made of green cheese" and so on have crept into his commentary. The blind ignorance displayed by the new Cameron government in pursuit of fiscal austerity has particularly drawn his ire.

But here we relay his comments on taxation. He takes off from the British system, but seems to be channeling Michael Hudson, who you may recall on a relay at the first of the year, advocated taxing away the rents to land and resources. Hudson described this as the object of the classical economics leading up to the Twentieth Century. But you can get that there. Here is Martin Wolf. On the value of land speculation.



A computer crash lost the remainder of today's transcript. We include the following as partial replacement


described by the Wall Street Journal as "the most extensive remapping of financial regulation since the 1930s." It is nothing of the kind.

Where to open a critique is as much a problem as where to close it. So, this will start and end at the source: the Federal Reserve. In a single sentence, the Journal captured the most compelling reason to heave the proposed legislation into the BP oil spill: "The Federal Reserve would emerge as the pre-eminent regulator, with responsibility for the most complex financial companies."

The Federal Reserve has less understanding of banking than Bonnie and Clyde. Fed Chairman Ben S. Bernanke is unable to comprehend there was cause-and-effect between the boom the 1920s and the Great Depression of the 1930s. His ineptitude gave then-Federal Reserve Chairman Alan Greenspan the academic cover to reduce the fed funds rate to one percent in 2003. The most egregious credit bubble in the history of the world followed. Learning nothing, Simple Ben has now cut the funds rate to zero, creating an even greater credit bubble than the behemoth that collapsed in 2007.

Bernanke and his cohorts have no excuse for their ignorance. Federal Reserve policy in the 1920s was central to the credit write-offs that sank bank balance sheets later. This story was chronicled by dozens of economists in the 1930s. Their contribution is resurrected in "Masses of Worthless Paper," now posted on the AuContrarian.com website, in the "Articles" section. This was originally written for the May, 2010, Gloom, Boom, and Doom Report.

It is too late to escape the consequences of what Greenspan and Bernanke have done. But, there is no excuse for allowing the ruin to continue inflating. Chairman Bernanke keeps adding fuel to the conflagration. He should be handed a one-way ticket on a coal car to Princeton this afternoon.

Frederick Sheehan writes a blog at www.aucontrarian.com

James K. Galbraith:

The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?


A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.

That being so, what must now be done? The first thing we need, in the wake of the recovery bill, is more recovery bills. The next efforts should be larger, reflecting the true scale of the emergency. There should be open-ended support for state and local governments, public utilities, transit authorities, public hospitals, schools, and universities for the duration, and generous support for public capital investment in the short and long term. To the extent possible, all the resources being released from the private residential and commercial construction industries should be absorbed into public building projects. There should be comprehensive foreclosure relief, through a moratorium followed by restructuring or by conversion-to-rental, except in cases of speculative investment and borrower fraud. The president’s foreclosure-prevention plan is a useful step to relieve mortgage burdens on at-risk households, but it will not stop the downward spiral of home prices and correct the chronic oversupply of housing that is the cause of that.

Second, we should offset the violent drop in the wealth of the elderly population as a whole. The squeeze on the elderly has been little noted so far, but it hits in three separate ways: through the fall in the stock market; through the collapse of home values; and through the drop in interest rates, which reduces interest income on accumulated cash. For an increasing number of the elderly, Social Security and Medicare wealth are all they have.

That means that the entitlement reformers have it backward: instead of cutting Social Security benefits, we should increase them, especially for those at the bottom of the benefit scale. Indeed, in this crisis, precisely because it is universal and efficient, Social Security is an economic recovery ace in the hole. Increasing benefits is a simple, direct, progressive, and highly efficient way to prevent poverty and sustain purchasing power for this vulnerable population. I would also argue for lowering the age of eligibility for Medicare to (say) fifty-five, to permit workers to retire earlier and to free firms from the burden of managing health plans for older workers.


Finally, there is the big problem: How to recapitalize the household sector? How to restore the security and prosperity they’ve lost? How to build the productive economy for the next generation? Is there anything today that we might do that can compare with the transformation of World War II? Almost surely, there is not: World War II doubled production in five years.

Today the largest problems we face are energy security and climate change—massive issues because energy underpins everything we do, and because climate change threatens the survival of civilization. And here, obviously, we need a comprehensive national effort. Such a thing, if done right, combining planning and markets, could add 5 or even 10 percent of GDP to net investment. That’s not the scale of wartime mobilization. But it probably could return the country to full employment and keep it there, for years.

Moreover, the work does resemble wartime mobilization in important financial respects. Weatherization, conservation, mass transit, renewable power, and the smart grid are public investments. As with the armaments in World War II, work on them would generate incomes not matched by the new production of consumer goods. If handled carefully—say, with a new program of deferred claims to future purchasing power like war bonds—the incomes earned by dealing with oil security and climate change have the potential to become a foundation of restored financial wealth for the middle class.

This cannot be made to happen over just three years, as we did in 1942–44. But we could manage it over, say, twenty years or a bit longer. What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to "normal," no going back to a world run by bankers—and no alternative to taking the long view.

A paradox of the long view is that the time to embrace it is right now. We need to start down that path before disastrous policy errors, including fatal banker bailouts and cuts in Social Security and Medicare, are put into effect. It is therefore especially important that thought and learning move quickly. Does the Geithner team, forged and trained in normal times, have the range and the flexibility required? If not, everything finally will depend, as it did with Roosevelt, on the imagination and character of President Obama.

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