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

Thursday, March 28, 2013

Transcript: James K. Galbraith in Greece

Today's podcast is turned over to James K. Galbraith, speaking in Greece to a conference on what the Greeks need to do or CAN do to turn the increasingly depressing economic and social situation around in that country. Galbraith's remarks come at the end, after listening to several speakers presenting on internal changes. His own remarks conclude with a phrase that calls up the full sense of desperation that is warranted.

Before we get to that, however, we want to emphasize that we do not support Greece's staying in the euro-zone or continuing to deal with the ECB, for these reasons:
Listen to this episode
Greece has accepted austerity on false premises and under coercion. Continuing on that path ends when the situation gets so bad that one party or another takes power and repudiates the arrangements. That could well be -- as it was in very similar conditions in Germany in Germany in the 1930s -- a fascist government which gains credibility with the relief from onerous debt. Better to do it now while a representative democracy is still in charge.

Two: No amount of austerity or so-called structural reforms will produce the healthy competitiveness that is advertised. A reversion to the drachma will. Appropriate haircuts on debt will be immediate. Inflation on imported goods and services will spread the burden across the board. The balance of payments will reverse overnight. Greece has what no other nation in Europe has -- it has Greece. Perhaps the Germans will no longer come on holiday, but the rest of the world will.

Three: Somebody has to do this before the ECB and the IMF and the banks create a long-term depression monster. At present they are intent on extracting as much austerity as possible without going over the line that would force the peripheral nation's hand. Bribing the elites on one hand while beating the populations on the other. It is all about the banks and the bankers.

The ECB spent a good portion of the period since the establishment of the euro telling the banks to load up on sovereign debt, it was risk free and could even be counted as capital. Ooops. Much like the U.S. mortgage market, forcing money into these nations only meant they would find takers. Now the banks cannot take even the smallest write-down without insolvency. And the ECB comes calling as the banks' enforcer.

In the end, the Greeks will be well-served by not having sold their assets to the vulture funds as they were directed. They ought to take a long look at the evidence. No confidence fairy will visit, no matter how hungry they are.

Here, James K. Galbraith, March, 2013.


Monday, March 25, 2013

Relay: Victoria Chick on Money, Banking and the forgotten Keynes

Positive Money conference, January 2013, London

I’ve chosen to look at this from the standpoint of academic economists, because I am one and that’s what I know, and there’s some interesting things, I think, to say about that. The rest of academics would look to us for answers, claiming this was our area of expertise and we ought to be able to enlighten them. It is a very strange fact of Fate that I’ve been in this business long enough for the kind of understanding that you’ve been exposed to through “Where Money Comes From” and this new book constitute a return to what I was taught as an undergraduate.

Dennis Robertson, a Cambridge economist, used to say, “Highbrow opinion is like a hunted hare. If you stand in the same place long enough, it will come around again.” Well, it has come around again. The shocking thing to me is the amount of energy that people in Positive Money and places like that have to expend to get a point of view across that was taught tome as an undergraduate and then forgotten. So there has been a deliberate regression. Well, deliberate? There has been a regression from the understanding which pertained in the late Fifties and early Sixties, and now we’re fighting to restore that understanding. That is a very peculiar state of affairs, and I hope to give you a few ideas, nothing more, as to how it might have come about.
Listen to this episode
The question has to be treated in two parts. According to a very strange split in the way that money is talked about in academic economics. First of all, it has a role to play in what we call “macroeconomics.” And I think most of you have a fairly good idea of what that is. It is the theory of the economy as a whole and the policies that you might use to change the economy in some way from time to time. Then, quite separate from Macroeconomics, there are always courses in Money and Banking. Macroeconomics is sort of thought of as a core part of economics, and money and banking a kind of optional, slightly frivolous thing that some people spend a little time thinking about.

So what I have to say will fall into those two parts. But they are, it turns out, connected. In macroeconomics, money in the mainstream of economics has a very limited sphere of influence. And it doesn’t connect at all well even with the kind of money and banking which is taught as this frivolous option that I spoke of. Keynes – John Maynard Keynes – in his famous letter to George Bernard Shaw said, when he was writing the General Theory, that he thought what he was writing would revolutionize the way the world thought about economic problems.

And later on in a small article he spelled out what was different about the kind of economics he was creating from what had gone before. He said, “I want to talk about a money production economics. And the kind of economics we have been doing is about a real, exchange economy.” That was his basic contrast. That was what he thought would be his big revolution. His was the theory in which money permeated the entire economy. Labor bargains for money wages. Saving and investment were analyzed by him in money terms. The rate of interest was a monetary phenomenon and it was determined by exchanges of money assets. All these aspects are missing from today’s mainstream economics, as they were from the economics that surrounded Keynes when he was writing. We have gone back in mainstream economics to talking about a real, exchange economy, which has an extremely limited role for money.

Classical economics, or pre-Keynesian economics, models everything in real terms. It’s “real” wages, that is, the amount of goods money can buy, and so on down the line. Money is only brought in at the very last minute to determine prices. So the role of money is separate from this whole analysis of the real economy. It has this little role to play in determining the price level. The term “pure” economics, as used by Alfred Marshall and Walras, meant the economics of this real economy, this barter economy. So by implication money is profoundly “impure,” I suppose.

And the idea was that money was neutral. It didn’t really affect these real relationships. All it did was determine price. Prices could be anything, it didn’t really matter. The real relationships were set up by the system elsewhere, without money, the pure economy, the barter economy, the exchange economy.

This kind of system – dividing the economy between the real and the monetary – was known as the “Classical Dichotomy.” On the monetary side, you had the Quantity Theory of Money. The quantity of money determined prices. Full stop. End of story. Not very interesting, actually, for a role for money.

Now, Keynes showed that the Quantity Theory of Money was based on enormously restrictive assumptions which were very unlikely to pertain in practice. But Milton Friedman – whose name I’m sure you know, too – was able to use the QT as the foundation of his Monetarist revolution in the late Sixties, early Seventies. And as I am sure you know, the Monetarist revolution touched the heart of Margaret Thatcher and found its way into monetary policy.

Monetarism – you may not know, but you ought to – is also the basis for the construction of the euro (Can’t be very good, then, can it?) and determines the way the ECB is doomed to function, and is responsible for inflation targeting more generally in the Western World. And it could be said to be the foundation also of Quantitative Easing, though that interpretation is open to some dispute.

Monetarism and the Quantity Theory of Money and the Classical Dichotomy are all over Western economies like a kind of skin disease. Quite extraordinary. And the Keynesian story, in which money influences everything that happens, has been forgotten, which I think is a tragedy.

Now this simple, sequestered role of money in an analysis which uses the Classical Dichotomy gives rise to some wonderful supporting rhetoric. After all, it must be more interesting to study the “real” economy than the monetary economy. And the “real” economy is a “pure” economy. Money is imagined to be only a veil thinly drawn across the real economy, not affecting anything. And anybody which thinks it does affect anything is subject to “money illusion,” which is a terrible mental illness.

Now, How does this happen? What is the appeal of this way of analyzing the economy? We know, if we keep our common sense about us that money does affect everything. One reason pertains to academic economics and not to common sense people like yourselves: Economics does not really understand its discipline to be historically situated. It thinks of itself as uncovering universal truths. And it therefore fails to recognize the institutional basis of its theories.

The Quantity Theory of Money was devised in the days of circulating gold coin, not in the days when the banks were overwhelmingly the suppliers of money. And yet the Quantity Theory of Money has been carried forward, and as I have told you, has influenced major institutions to this day. The idea that money should have something do with the determination of prices has a certain intuitive appeal. And of course, it DOES have something to do with the determination of prices. But the Quantity Theory of Money says that its ONLY function is to determine prices, and prices are determined solely by the quantity of money. And that is going far too far.

Another possibility of money of explaining how Macroeconomics has come to this pass is sheer laziness. Hayek, an unlikely source for what I am going to read to you, put it like this.

The task of monetary theory is much wider than is commonly assumed. Its task is nothing less than to cover a second time the whole field which is treated by pure theory [“pure” theory, real theory, yes?] under the assumption of barter, and to investigate what changes in the conclusions of pure theory are made necessary.

So if you want to take money seriously, you have to do the whole thing again.

Now I think Keynes DID do the whole thing again, and he has been wiped off the face of mainstream economics. He’s not taught. Nobody knows what he said. Nobody reads his book. We’ve regressed to pre-Keynesian economics.

Let me turn to this separation between Macroeconomics and Money and Banking that is enshrined in the academic curriculum. As I said, when I was a student in the late Fifties and early Sixties, it was widely understood, absolutely taken for granted, that the causality went from loans to deposits. Loans create deposits. Now students are all taught that banks lend on deposits, that deposits create the ability to lend, and banks respond to that. This is a regression, which people like Ben are trying to redress or reverse.

And again, I tried to think of reasons why this idea of deposits pre-existing and determining the volume of loans has such a tremendous appeal, and why the idea that loans create deposits is so difficult for people to grasp.

One factor is that there is a great fault in the language that we use, or a great bias in the language that we use in relation to banking. The word “deposit” is a hangover from the days of the goldsmiths who took bags of gold for safekeeping. And you’ll find if you look closely that much of the Neoclassical theory of banking still regards banks as kinds of glorified safes, which they clearly are not.

Add to this the failure to understand banks as a system, as an interrelated system. You heard much in the breaking of the crisis about the lack of systemic understanding, of the risks that the banks were running. If one DID think systemically, one would realize easily the check you deposit in your bank came from somebody else’s deposit. It’s not new money at all. It’s just moving around. Then if you think systemically, or macroeconomically, about banks, there are very few sources of new money to the system, EXCEPT when banks are all expanding their balance sheets together. So the language is bad.

And we also speak of “lending money.” Banks do not lend money. It may feel like that when you get a loan. But that’s not what they’re doing. They don’t have a pot of money which they are passing on. What they’re doing is accepting your IOU and agreeing to pay your outgoings while you don’t have any money in your account in an overdraft system. In a loan system, they simply write up your account.

This leads us to another point, which is very powerful, which illustrates that it is in the banker’s interest not to let you know what they are doing, because you really wouldn’t like it. That they have too much power. And others, including academic economists, might not like the power of bankers to be recognized either. They know that if they expose the bankers, they will be in deep trouble, and their funding will be cut, and all kinds of terrible things will happen to them. So they go along with it. You’ve all seen “Inside Job,” I take it. It is a kind of Inside Job problem.

Furthermore, there is a long history of wanting to believe that money is something real. The idea that bankers can manufacture money with the flick of a pen is just too unpalatable. And that leads to rejecting it. The idea that should depend for its money-ness only on the fact that we all accept it, is just too freaky for words. So it doesn’t come into the textbooks. It would also make it very clear that money is very fragile. Once that trust is breached, the whole thing could collapse.

But then, finally, there is a connection between that macroeconomic separation of money from the rest of the economy and the difficulty of making people understand that banks create money out of nothing, that loans are the engine of the creation of money. A deep-seated and long-standing idea in macroeconomics is that saving is necessary before you can have investment. Read the reports of the World Bank, and they all talk about insufficient saving for development. It’s absolute nonsense if the banks can create money.

And it was the ability of banks to create money out of nothing that led Keynes to say, “No, Savings is not the engine of growth in the economy. Investment is. Investment comes BEFORE savings.” And it’s the banks that permit that to happen.

So that brings me full circle. To tie those two strands together. They are related. If macroeconomics is going to regress to a pre-Keynesian form, so also did the understanding of banking have to regress. And that is what is happened.

Thursday, March 21, 2013

Transcript: China's property bubble, America's dysfunctional media, and Keynes knows money, too bad nobody knows Keynes

Today on the podcast, a lot of audio, China's property bubble, America's dysfunctional media, and Keynes knows money, too bad nobody knows Keynes
Listen to this episode
First, Gillem Tulloch of Forensic Asia, Limited. Is there a real estate bubble in China

"Forensic's Talloch.

Gillem Talloch,whose business Forensic Asia is apparently also known as Private Equity International.

Now. When we last spoke, I uttered some apocalyptic warnings about bread and circuses, or maybe about media and our focus on contests to the exclusion of substance. Here is an exchange from On Point with Tom Ashbrook, illustrating my point if not proving it. We begin with a caller prodding the two news mavens in for the Week in the News roundtable.

Gustavo 22:08

The whole budget disaster is a media disaster as well. The media begins with the uncritical acceptance of the frugal householder metaphor. The government is seen to be no different than a household or business who, when times are tough, needs to tighten his belt and cut back on the spending. Instead the economy is a family farm, as Robert Shiller has said, and when winter comes or the ground is too wet to plow, you don't go inside and sit by the TV, you fix fence or roads or build a new barn or work on the well. A farmer who tightens his belt by failing to use all the labor available is not going to survive very long.

But there is a more dangerous metaphor. The contest. The media is preoccupied with who is going to win, that is what is news. Boehner and Ryan or Obama and Murray. Tag team. The media is not concerned about who is right. That is, they are not concerned about the issues. The issues may tail in with polling results, but always as sound bites. And I am, too, or at least I tend to get on my high horse and want my team to win. Now you have the two sides.... Ooops. There are not just two sides. Indeed, Obama and many Republicans are more on the same side than Obama and the Progressive Caucus. The need to have just two sides means there is a lot of discussion that doesn't get discussed. And as to who is right. Nobody is right all the time. Even Demand Side. But at least we're looking at the issues and the evidence and not just the colors of the teams.

Indeed, the Congressional Progressive Caucus budget, which they call "The Back to Work Budget," is a great proposal. I don't remember if I pitched it last week, the link is online. I'll tick off a bit of it in a moment.

My point is that Gustavo is exactly right, and xx makes his point for him in her long-winded defensiveness. It is about the teams and the players, not about the issues. It's about Red vs. Blue, not about what will work, or even what the American people think will work.

The Ryan budget: Lighten the load by throwing the engines and the fuel overboard. The Murray budget: No, just throw the fuel overboard. You might think the media would have a role in pointing out that budgets don't balance in a downturn. Doesn't work. Look it up. Pretending it will work this time is not going to make it work. So. Not that I have time, but this is good. The back to work budget:
Job Creation

• Infrastructure – substantially increases infrastructure investment to the level the American Society of Civil Engineers says is necessary to close our infrastructure needs gap

• Education – funds school modernizations and rehiring laid-off teachers

• Aid to States – closes the recession-caused gap in state budgets for two years, allowing the rehiring of cops, firefighters, and other public employees

• Making Work Pay – boosts consumer demand by reinstating an expanded tax credit for three years

• Emergency Unemployment Compensation – allows beneficiaries to claim up to 99 weeks of unemployment benefits in high-unemployment states for two years

• Public Works Job Programs and Aid to Distressed Communities – includes job programs such as a Park Improvement Corps, Student Jobs Corps, and Child Care Corps

Fair Individual Tax

• Immediately allows Bush tax cuts to expire for families earning over $250K

• Higher tax rates for millionaires and billionaires (from 45% to 49%)

• Taxes income from investments the same as income from wages

Fair Corporate Tax

• Ends corporate tax bias toward moving jobs and profits overseas

• Enacts a financial transactions tax

• Reduces deductions for corporate jets, meals, and entertainment


• Returns Pentagon spending to 2006 levels, focusing on modern security needs

Health Care

• No benefit cuts to Medicare, Medicaid, or Social Security

• Reduces health care costs by adopting a public option, negotiating drug prices, and reducing fraud


• Prices carbon pollution with a rebate to hold low income households harmless

• Eliminates corporate tax subsidies for oil, gas, and coal companies

The Back to Work Budget creates nearly 7 million jobs in its first year.

Now THAT has a chance

The "shrink your way to growth" strategy reminds me of the Nasrudin story. The Mulla was going to get rich by cutting the food to the donkey. Donkey works hard. Donkey gets thin and thinner. Finally dies. "Damn," says Nasrudin, "And I just about had him down to nothing."

So, went on too long there.

Now. Victoria Chick, author of Macroeconomics after Keynes. Professor Emeritus at University College London. She was there at the meeting called by Joan Robinson and Paul Davidson which gave conscious expression to what became the Post Keynesian school of thought.

We've got her talk transcribed and we're ready to run with it, probably Sunday, as March's Demand Side relay.
Classical economics, or pre-Keynesian economics, models everything in real terms. It’s “real” wages, that is, the amount of goods money can buy, and so on down the line. Money is only brought in at the very last minute to determine prices. So the role of money is separate from this whole analysis of the real economy. It has this little role to play in determining the price level. The term “pure” economics, as used by Alfred Marshall and Walras, meant the economics of this real economy, this barter economy. So by implication money is profoundly “impure,” I suppose.

And the idea was that money was neutral. It didn’t really affect these real relationships. All it did was determine price. Prices could be anything, it didn’t really matter. The real relationships were set up by the system elsewhere, without money, the pure economy, the barter economy, the exchange economy.

This kind of system – dividing the economy between the real and the monetary – was known as the “Classical Dichotomy.” On the monetary side, you had the Quantity Theory of Money. The quantity of money determined prices. Full stop. End of story. Not very interesting, actually, for a role for money.

Now, Keynes showed that the Quantity Theory of Money was based on enormously restrictive assumptions which were very unlikely to pertain in practice. But Milton Friedman – whose name I’m sure you know, too – was able to use the QT as the foundation of his Monetarist revolution in the late Sixties, early Seventies. And as I am sure you know, the Monetarist revolution touched the heart of Margaret Thatcher and found its way into monetary policy.

Monetarism – you may not know, but you ought to – is also the basis for the construction of the euro (Can’t be very good, then, can it?) and determines the way the ECB is doomed to function, and is responsible for inflation targeting more generally in the Western World. And it could be said to be the foundation also of Quantitative Easing, though that interpretation is open to some dispute.

Monetarism and the Quantity Theory of Money and the Classical Dichotomy are all over Western economies like a kind of skin disease. Quite extraordinary. And the Keynesian story, in which money influences everything that happens, has been forgotten, which I think is a tragedy.

Victoria Chick. Look for that relay. Endogenous money may be old news to Minsky fans and listeners to Demand Side, but the discussion is instructive, as it describes and illustrates the sad state of economics as a discipline.

So. Today's podcast brought to you by historical awareness. Has your policy prescription been tried before? Did it work?

Friday, March 15, 2013

Transcript: The institution of corporate control

Institutionalism.  The way we use it at Demand Side, this is the "political" in political economy.  For our purposes today, it is the skewing of the economy toward the interests of the corporate elite, the corporate oligarchy.  This has been done in three significant ways: capturing the bureaucracy of government, capturing the political parties, and controlling the media.
Listen to this episode
Control of the courts was accomplished by the Reagan and Bush administrations' appointments of justices with little to recommend them except ideology and willingness to actively dismantle government, epitomized by Clarence Thomas.  The court has recently elected presidents, subverted elections and pushed corporate power to the top.

Control of the regulatory bureaucracy is a natural consequence of the revolving door, with management desks and lobbyist desks revolving as the pro-corporate stuffed suit simply sits and collects.  Bureaucracy is further corrupted by armies of lobbyists controlling the process simply by their sophisticated participation as others are locked out.

As to Congress.  We have the best Congress money can  buy.  It turns out money can't buy a very good Congress.  The Republicans have two factions: business interests that are anti-government market fundamentalists and a quasi-libertarian zealot wing that is just anti-government, but is funded by anti-government corporate interests, possibly just in a cynical move to screw up government.  The past thirty years have been a series of experiments in testing the philosophy of less government and lower taxes.  Results are in.  The approach is a failure.  But they are not deterred, and they are well-funded and in power, so we have to continue the experiments until the patient dies.

The Democrats have two factions:  The progressives and the pro-business centrists, who have been neutered by big money and the necessity of campaign finance.

The functional government of pragmatists is gone.  The progressives are the pragmatists, of course. Not exclusively for their understanding of climate change, but because policies that are equitable are economically efficient, public goods as the province of the government, as in health care, is economically efficient, and it is economically efficient to regulate when no regulation means markets are structured to the specifications of the strong, not to the ideals of the invisible hand.

An essential aid to the direct control of government by the corporate institutions is the control of the media.  The concept of "liberal media" is laughable today, though you still here it.  While there may be pockets, the media has an unmistakable corporate bias.  Why not  corporate advertisers are paying the bills.  You have also the phenomenon of FoxNews and FoxNews facts.  My car is going to have a bumper sticker one day that says, "Global warming is real, FoxNews is a hoax." You can borrow that.

But more insidious is Bubblegum news.  This is not news, but accounts of violence and sex and celebrity.  Bubblegum news dovetails nicely with the sports culture and the celebrity culture.  Everything gets turned into a contest between two teams, the Republicans and Democrats, the Americans and the fill in the blanks, this side and that side.  Who will win?  Who are the big players?  Did the last zinger hit home?  Choose your side and it comes complete with ideology and convenient facts, no critical thinking necessary.

The Internet may have the potential of leveling the playing field, or it may be just another distraction, reducing attention spans to bubblegum card length, or balkanizing information and opinion and exacerbating the conflict.

I mentioned I was reading Shiela Bair's book, "Bull by the Horns."  Bair was the Republican head of the FDIC through the Great Financial Crisis. But she was close enough to see what was going on.

page 358
"The thing I hate hearing most when people talk about the crisis is the bailouts "saved the system" or ended up "making money." Participating in bailout measures was the most distasteful thing I have ever had to do, and those ex post facto rationalizations make my skin crawl.  Why system were we trying to save, anyway?  A system in which well-connected big financial institutions get government handouts while smaller institutions and homeowners are left to fend for themselves?  A system that allows government agencies unfettered discretion to pick winners and losers with taxpayer money?  A system that has created cynicism and despair among honest, average working people who take responsibility for their own actions and would never in a million years ask for a government bailout?  A system that has spawned two angry political movements on the left side and the right side that are united in their desire to end the crony capitalism characterized by too-big-to-fail policies?  That is not a system I want to save.

"With the millions of lost jobs and lost homes and the trillions of dollars of lost tax revenue, how can anyone try to rationalize what happened by saying that the bailouts "made money?" In point of fact, they did not make money.

"When the Treasury Department states that the bailouts "made money," they are referring to the dollar amounts that were invested in the financial sector offset by the amounts that were paid back.  Thus, the department does not count as a "cost" the very generous subsidies taxpayers provided financial institutions.  As one distinguished group of academic experts has pointed out, this cash flow method of measuring bailout costs is inconsistent with government accounting rules. ....If those funds and guarantees had been priced at or near their true market value, taxpayers would have been entitled to substantially higher rates of return."

Or as Joseph Stiglitz is fond of saying, "We got cheated."

but down here.
"The bailouts, while stabilizing the financial system in the short term, have created a long-term drag on our economy.  Because we propped up the mismanaged institutions, our financial sector remains bloated. The well-managed institutions have to compete with the boneheads. We did not force financial institutions to shed their bad assets and recognize their losses.  Lingering uncertainty about the true extent of those losses made previously profligate management more risk averse when prudent risk taking and lending were most needed, particularly by small businesses.  Only in 2012 are we finally seeing some meaningful pickup in lending by the big financial institutions. Economic growth is sluggish, unemployment remains high. The housing market still struggles.  I hope that our economy continues to improve.  But it will do so despite the bailouts, not because of them."

"In my farewell remarks to the FDIC, I expressed amazement at the conduct we tolerated in the years leading up to the crisis.  I said:
Looking back, How could we rationalize letting big firms take on leverage at 30 or 40 to 1, giving millions of people mortgages they couldn't afford, a mortgage refinance system which divorced the decision to make the mortgage from the responsibility if the loan went sour, the trading of hundreds of trillions of dollars' worth of derivatives without any ability of the government to police it."...
And on here, to end the chapter with,
It would be hard to find anyone on Main Street who was not in one way or another hurt by the horrible debacle. Government fundamentally failed in its role of protecting us."

Shiela Bair,

And I have to include some mention of the forecast.  The consensus is now complete, or nearly so, that we are in the great spring of recovery.  The zero interest rates and massive purchases of securities by the Fed have done their work.  Ooops.  We're actually not supposed to notice that part.  It is some kind of natural rebound.  As you know, Demand Side and Laksman Achuthan of ECRI are in the same small boat , with maybe a few others.

From the Demand Side there can be no recovery without an increase in incomes, and there is no increase in incomes, so any recovery is really a debt-fueled bubble.

This past week, we had noted regional forecaster Dick Conway in to the Seattle Economics Council.  Dick talked most about tax reform, but he did present us with a provocative chart under the title "The Great Depression and the Great Recession, Two Peas in a Pod."  We thought at first he was going to point to the debt bubble or the massive disparities in incomes and wealth that marked the decade prior to the great recession.  But the chart was in fact, GDP between 1929 and 1940 and a similar eleven-year period between 2000 and 2011.  Turns out the level of GDP in index terms was the same.  In fact, in 1940, the level was actually further above 1929, very slightly, than 2011 was above 2000.  How is that possible.  Because of the stagnation of the 2000's.  Yes, the enormous collapse of the economy between 1929 and 1933 was followed by a very strong recovery, excepting 1938.  The dot com crash was followed by seven years of a jobless recovery and then the Great Financial Crisis and Great Recession, followed by the non-recovery to date.

Dick's chart is online.


Friday, March 8, 2013

Transcript: Banking, Credit, TARP, Where is the success?

Today on the podcast, in the midst of a fever about cutting government, we look back at the financial collapse that caused the Great Recession.

This week at reMacroBaseline.com was Banking and Credit week. We haven't posted there yet. We may just post this podcast.

Our bottom line is that we haven't fixed anything with regard to the banks, that we have preferred they stay in their favored positions in their current forms and the rest of the economy stagnate. We haven't restructured credit, nor made it available to finance the infrastructure and massive change needed for the society to survive climate change. We've made it available for education only in the form of criminally burdening our young people with debt.
Listen to this episode
It's hard to engage the subject. We've got banker fatigue, and the country has moved on to fight about the deficit because EVERYBODY KNOWS that the federal deficit reached back from the future to cause all our problems. Sorry.

Let's take off from some comments Alan Blinder, Princeton economist, and former vice chair of the Fed under Alan Greenspan, a liberal, quote unquote. Here he is with Arthur Levitt, apologizing for TARP.


"TARP was a success."

No, it wasn't. Sure shoveling money at the banks to stabilize them did result in institutions still standing. But productive lending? Not so much. In spite of proclamations from the White House steps, first the banks, then the economy did not work. And in the first place, TARP was not sold as a bailout to banks, it was sold as a Troubled Asset Relief Program. It was EXECUTED as a cash infusion to banks, as Blinder describes here. All the banks were forced to take it, but it was Citigroup, Bank of America and Morgan Stanley who were teetering on the edge.

It was also sold as a means to help distressed homeowners. That was bait and switch. As soon as TARP was passed, that mandate was forgotten, in particular, by Tim Geithner.

Reading Shiela Bair's book "Bull by the Horns," one cannot help being discouraged. All of the big things we said here at Demand Side during the crisis, 2007 and onward, many of which we echoed from other observers, were right. At least the big things. And we see from Bair's book that these things were being said on the inside as well. They were just ignored to favor the big banks, particularly Citi and particularly by Tim Geithner.

Main Street would have come out of the crisis into a real recovery had principle reduction or some other form of real relief to homeowners happened. Blinder says in our audio that the fact that interest rates re-set to lower rates means it wasn't the junk mortgages that was the problem. Oops. Those mortgages bid housing prices up to record highs. That easy money is embedded in prices that are 40 percent above the current price in many markets. Those are the millstones the household sector is trying to swim with.

The Citigroup protective association, led by Tim Geithner, prevented meaningful help to real people. In case after case, incident after incident, he fought for the poorly run, poorly capitalized, over-leveraged institution and kept it afloat.

Some say it was his association with Robert Rubin, some say it was the fact that Geithner's New York Fed was responsible for oversight and he did not want to be blamed for such a high profile failure. But the rise of Giethner as Treasury Secretary was the fall of a coherent, effective response to the financial crisis. Now we have profitable banks and stagnation on Main Street.

One of the things we were wrong about at Demand Side was the notion that loans had to be unpacked one at a time in order to negotiate a reduction in principle and this was prevented by the fact that most of them were embedded in securities, mortgage backed securities. Bair's book points out that because the owners of those securities as a whole would have benefited from such re-negotiation, the servicers had the obligation to pursue it. They were not done because they had no sponsor (other than the FDIC) among the regulators and because the different tranches of the securities had competing interests. A systematic adjustment to mortgages and their terms was done by the FDIC at IndyMac and worked. Such a process was never -- in spite of presidential assurances that it would be -- done at the national level.

The discouraging, larger lesson is that the corporate goons were always in charge. Rolling out a TARP to save them, rolling back the TARP so the could get their big bonuses. Massive purchases of dodgy mortgage backed securities by the Fed. The meaningful parts of Dodd-Frank now being rolled back by anti-government Republicans operating with pro-Wall Street Democrats and Republicans. Socialism for the rich and anti-socialism for the rest of us.

I'm not as apocalyptic as Chris Hedges, yet, but the corporate control and the absence of any voice to counter it -- maybe Bill Moyers or Bill McKibbon -- is a doomsday scenario.

The precedent for the Great Financial Crisis was set only three decades ago in the 1980s with the Savings & Loan Debacle. In the early 1980s, the S&L’s or “thrifts” saw their business model undermined by high interest rates. The thrifts borrowed short, chiefly by taking deposits, and lent long, chiefly for mortgages. When interest rates ballooned from the Fed’s war on inflation under Paul Volcker, the thrift’s borrowing rate ran up well above the rate of its lending.

The answer under Ronald Reagan was not to admit insolvency and deal with the crisis in its infancy, but instead was to deregulate the thrifts in an effort to let them “grow” out of their problems. Instead it was the problem that would grow. Deregulated thrifts offered high rates and attracted massive amounts of capital, which they were then compelled to lend at even higher rates to make their profits. With the lax regulation they enjoyed, the environment was set for fraud and irrational, or at least rash, lending, and within a few years the spectacular collapse of the industry.

By 1995, half the thrifts had gone out of business. The Federal Savings & Loan Insurance Corporation (FSLIC) was abolished and replaced by the Office of Thrift Supervision (OTS). A massive takeover and rationalization of the industry took place, with the determination, “This will never happen again.” Twenty years later the OTS was abolished in the wake of a second and far greater financial sector collapse. Deregulation had returned within a decade, in even more complete form, with the repeal of New Deal banking laws (Glass-Steagal) and the rise of the anti-regulators of the George W. Bush administration.

The housing boom of the 2000’s depended on mortgage originators and mortgage lenders who were virtually unregulated, but it also depended on the banks and Wall Street. Originators found takers for fraudulent, onerous and undocumented mortgages and sold them to mortgage lenders. The banks provided the short-term “warehouse” loans to bridge the deal on into the Wall Street securitization market. Here the individual mortgages were combined to form securities that were sold as solid investments around the world. At the same time, banks themselves originated their own somewhat better, but still suspect, subprime and non-traditional mortgages to turn into securities.

When the inherent weakness of the mortgages came to the top and the securities found their true value, the Great Financial Crisis was triggered.

In the S&L debacle it was high interest rates instigated by the Fed’s war on inflation that led to a Wild West of fraud and excess. In the Great Financial Crisis, it was low interest rates forced by the Fed in fear of deflation that created another Wild West, as massive amounts of capital searching for yield flooded into the “safe” mortgage market.

Regulators who saw each crisis forming and who advocated strong action at the outset or strict rules governing lending activities were muted and frustrated by other, “captured” regulators and pressured directly by elected politicians acting on behalf of big donors. The “Keating Five” was a memorable example from the S&L debacle. Five Senators were censured for their efforts to protect Charles Keating, an S&L billionaire. When the S&aL debacle was over, more than 3,000 bankers and thrift officers went to jail.

That number is about 3,000 more than the Great Financial Crisis. Many banks have failed, but a certain class is still with us – the too big to fail. (These now include JP Morgan Chase, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup.) These institutions continue to receive special concessions, but more than anything else, it is the too big to fail insurance they enjoy that gives these enormous companies lower cost capital and an advantage over their smaller rivals. (Banking is not an industry with economies of scale.)

That favoritism arises in part from the efforts of Fed Chairman Ben Bernanke, one of the economists who has failed. Bernanke himself, or the Fed itself, took over the original mandate of TARP, or one of them, and bought one and quarter trillion dollars of mortgage backed securities. This year the Fed is ready to take another trillion dollars on to its balance sheet. Thus we see incredible efforts to expand credit to the private sector at the same time we are determined that the public sector do nothing of the sort.

The recent turn in the housing market, in terms of price and volume, is thought of as a recovery. Indeed, it is. As in going up. The chart online shows however, that the upturn is a blip with respect to the long term, and the foregoing shows that every effort has been made to do this without recognizing it in the lives of the underwater homeowners. What that means is that as prices recover, at each step, shadow inventory will come back on line.

So credit and banking, success or failure?

Friday, March 1, 2013

Transcript: The beginnings of the decline of the United States economy

We hope you took advantage of our relay earlier this week, and the perspective on the military sequester.

Today on the podcast, we look back at one of the turning points, down-turning points, in the U.S. economy. The present stagnation and inability to deal with the emergent challenges of global warming, poverty and economic stagnation in spite of being one of the most powerful economies in the world is not an accident of fate nor a temporary hiccup in the economic machine. It has been engineered by decades of imbalanced economic policy and market fundamentalism which has led by the invisible hand not to the best outcomes, but to an economy and government controlled by corporations blindly following the highest profit for the next quarter, wherever that may lead.
Listen to this episode
Let's begin before Reaganism, but not before conservatives took the White House.

Quoting from 1979:
Compared with the attainable goals under appropriate changes in national economic policies and programs, the likely and very disturbing results of the projection of current national policies ... are: An average annual real economic growth rate of only 3.0 percent from 1979 to 1980, and the same average from 1979 to 1983; a productivity growth rate averaging only 1.8 percent throughout; an inflation rate of 9.0 percent in 1980 and 7.5 percent in 1983; real growth in federal outlays of only 2.5 percent during the first year and averaging only 2.2 percent during the period as a whole; and an unemployment rate of 6.8 percent for 1979 and averaging 6.5 percent for the whole period.

The President's [Carter's] goal for real economic growth is 3.3 percent from 1978 to 1979, and this has already turned out to be unrealistic on the high side. The goal is only 2.2 percent for 1980. Both of these goals are egregiously below our needs and capabilities at almost any time. Viewing the goals for these two years, the President's 3.8 percent average annual growth rate for 1978-1983 is utterly unattainable. It would require a real economic growth rate during 1980-1983 which is pie in the sky in terms of the programs and policies which he sets forth. And it is pure pie in the sky, under these goals, to expect to come anywhere near the goal of 4.0 percent unemployment in 1983, which the president also sets. The President projects a productivity growth rate averaging only 1.5 percent annually for the period as a whole. This is a surrender to the declining growth rate which has resulted from repeated economic stagnations and recessions, and it is not at all consistent with our revealed capabilities during good economic performance years, nor with the requirements for full production.

The President's goals for major components of GNP also do violence to the requirements for economic balance or for an acceptable rate of real economic growth. By way of example, at the start of 1979, the President projected for that year real economic growth rates of only 1.7 - 2.25 percent for consumer expenditures, and only 0.75 - 1.25 percent for Federal purchases of goods and services. His projection of 4.0 - 4.5 percent for nonresidential fixed investment is far out of balance with the other projections, and unattainable in terms of them. The President also projected for 1979 a real rate of increase in Federal purchases of 0.75 - 1.25 percent. This is also very low, and out of balance with an non-supportive of some of the other goals.

The President commits himself to a "lean and austere" Federal Budget, with outlays rising at an average annual rate of 1.4 percent during fiscal 1979 - 1983, and generally declining from year to year. In ratio to GNP, this would represent a decline from 21.55 percent in fiscal 1979 to 20 percent or lower in fiscal 1983. That might be acceptable in a rapidly expanding economy; it would be intolerable in a repressed and slowly growing economy. Such Federal Budget trends in actuality would portend great losses for the economy and great hardship for large portions of the people.

All in all, to put it mildly the President has committed himself to the contrived development of the recession which is now under way, although in early 1979 his Economic Advisers denied that a recession was just around the corner."


In any event, the goals are dismal in terms of our needs and capabilities, or in terms of fulfilling the mandate of the Humphrey-Hawkins Act.

That was from Leon Keyserling, 1979, in "Liberal" and "Conservative" National Economic Policies and their Consequences, 1919-1979, subtitled: "A Study to Help Implement Promptly the Humphrey-Hawkins Act."

We would be lucky to have these problems today, you say. And in fact, with a president far more conservative than Carter, that is Ronald Reagan, the problems were much worse over the next four years. We'll visit that in a moment.

We featured Keyserling this week at ReMacroBaseline.com, as an introduction to the subject of the political frame on the economy. Keyserling said:

"The federal budget is the main single instrument of national economic policy. Its use is fundamental, toward promoting economic performance in accord with our needs and capabilities. Nobody denies this in principle..."

Of course, he was wrong. Plenty of people deny it. Unless the national economic policy is no policy, in which case the no government folks have made their point.

Leon Keyserling was one of the most successful economists in American history in terms of getting significant legislation passed, influencing public policy over a long term, and seeing results in the performance of GDP, inflation, employment, growth and national well-being. He had a hand in the Wagner Act of the New Deal (1935), also known as the National Labor Relations Act. He claimed to have modeled the Full Employment Act of 1946, which was probably the single most important piece of economics legislation in the country's history. And he participated in and influenced greatly the Humphrey-Hawkins Act. Keyserling was a member of the Council of Economic Advisers, then chair, under Harry Truman, and helped immensely in the transition from war to peace and managing the economy into a period of prosperity.

"Balanced growth" was Keyserling's vision of how successful economics and public policy operated, as a partnership between labor (consumers), business (and investors), and the government (public sector). The problem Keyserling saw in 1979 was overcapacity, resulting in a reduction in investment and recession. The condition of overcapacity was a function not only of overbuilding, but of under-consumption and a deficiency in government outlays. "Balanced" growth was a coordinated expansion in each of these three components. Investment was necessary, but could not run ahead of consumption, or the profits would not ratify the investment, prompting cut-backs and recession. Sufficient federal outlays were necessary to provide the foundation for investment and consumption and to address the nation's overarching priorities.

Keyserling saw over-investment as a problem virtually throughout the "conservative" period beginning with Richard Nixon in 1969. The federal budget, both its spending and its taxing sides, promoted ever more investment, more capacity. "Belt-tightening" was prescribed for spending -- wonderful if you're a household, but seriously negligent and lazy if you're a family farm or a government with responsibilities. There was no aggressive effort to expand employment or incomes, quite the opposite. National priorities, such as energy independence, were left to half-hearted measures. Not surprisingly, this was the era that spawned the great divergence of incomes, the inequality that has now become corrosive and destabilizing to the society.

Indeed, the experience of the economy was substantially worse than Keyserling envisioned in 1979. GDP shrank by 0.3 percent in 1980, recovered to 2.8 percent in 1981 and shrank again, this time by 1.9 percent in 1982. The average for the period 1979 to 1983 was 1.3 percent. Unemployment skyrocketed under Reagan, 10.4 in 1981, 11.7 percent in 1982 and up to 12.2 percent in 1983. Although as you will hear in a moment, it had declined to 8.2 percent by the end of 1983. Meanwhile the deficits of $28 billion in Carter's austere year of 1979 ballooned to $60 billion in 1980 and then ever higher, being $195.4 billion in 1983.

In Keyserling's world the overcapacity and under-consumption of private and public goods would certainly lead to serious economic consequences. Others looked at the correspondence of investment and growth, that is, the phenomenon that growth and investment occur side by side, and determined that stimulating investment would bring the economy out by itself. That has been the dominant economic stimulus plan for the past thirty-five years, and even before, stimulate investment with tax incentives, and the benefits will trickle down. Keyserling saw the only road as balanced growth, beginning with consumption, jobs and government outlays. Debt was incurred to finance investment in productive physical assets: factories, machinery, housing. His recessions were imbalances of overcapacity and inadequate consumer or government demand.

Although Hyman Minsky had already teased out the principles of the Financial Instability Hypothesis and the structures of hedge, speculative and Ponzi financing, the role debt could play in extending demand while it destabilized the economy was not obvious in the 1970s. The growth of debt over the next thirty years, public and private, sponsored much of the demand that has kept the economy afloat. And when debt and debt service became too large, the economy stopped. That is where we are now.

The Fed and others believe the answer is more debt and more and riskier investment, but Keyserling would have objected in flamboyant terms. There is plenty of investment, far too much, promoted by years of tax concessions to business and inadequate support to labor and government outlays.

Demand Side sees government outlays and debt restructuring in the private sector as being the two pillars of any recovery. The government spending needs to come in the form of needed infrastructure investment, physical and social, and green jobs. The debt restructuring needs to be substantial, not only to revive consumer spending, but to return some form of market discipline to the financial sector.

Now, as mentioned, we didn't get the conservative Carter for the next four years. Instead, we got the arch-conservative Ronald Reagan, who effectively closed the door on the post-war expansion, at least for the middle class. We visit him in the 1983 Economic Report of the President (p 6ff).

One of the four key elements of my program for economic recovery is a far-reaching program of regulatory relief... The Congress approved legislation that has led to substantial deregulation of financial markets and inter-city bus transportation. The Federal Communications Commission, with our support, has reduced the regulation of broadcasting and of new communications technology, and the Interstate Commerce commission and the Civil Aeronautics Board have gone far down the path of deregulation of competitive transportation markets.... Substantial further deregulation and regulatory reform will require changes in the basic regulatory legislation. I urge the Congress to act on the several measures that I proposed last year on natural gas decontrol, financial deregulation, and reform of private pension regulation.


Tax Reforms

The final installment of the 3-year personal tax cut took effect in July, giving a helpful boost to the economic recovery. The income tax rate at each income level has been reduced by about 25 percent since 1980.

... The Economic Recovery Tax Act of 1981 went beyond reducing tax rates to establish important reforms in the structure of the tax system. For businesses, the Accelerated Cost Recovery System increased the after-tax profitability of investments in plant and equipment. The sharp fall in inflation has also increased after-tax profitability.

Obviously the Economic Recovery Tax Act of 1981 led to no recovery, in spite of the title. Subsequently the Greenspan Commission, convened for the purpose of examining the finances of Social Security, proposed payroll tax hikes, which were adopted. Thus, the tax system lurched regressively to the right, with the cuts in income taxes benefiting the richer to a substantially greater degree than the middle and lower classes, and the new payroll taxes being patently regressive, as the rich were not required to participate above a certain income threshold.

Reagan continues:

One of my principal goals when I came to Washington was to reverse the dramatic growth of Federal spending on domestic programs and to shift more resources to our Nation's defense.... Outlays for defense had declined to only 5.2 percent of GNP in 1980, less than one-fourth of total government outlays. By the current fiscal year, defense outlays have increased to 6.7 percent of GNP and 28 percent of total outlays. Real defense outlays have growth 39 percent since 1980.

This is in addition to the military spending financed by entrepreneurial activity, such as the selling of arms to Iran to finance the illegal war in Nicaragua

But notice the parallels to the George W. Bush Administration. Substantial tax cuts, deregulation, defense spending, recession and unemployment.

Martin Feldstein was Reagan's chief economist in 1984. Later he became recession maven at the NBER. The Economic Report of the President is, unfortunately for Feldstein, a record of his thought at the time.

Should the United States adopt an industrial policy? Proponents argue that such a strategy is necessary to revitalize our manufacturing sector. They claim that U.S. manufacturing has done poorly compared with the manufacturing sectors of other countries, and that we are losing our international competitiveness. These claims have led to the perception that manufacturing's share of our economy is eroding and that we are "de-industrializing."

To reverse this alleged decline, some industrial policy advocates propose that the government encourage new high-technology industries and help older industries regain their former strength.
Oddly thirty years later they are saying the same thing. Now the response is that it is natural for economies to move to service work. At the time, however, Feldstein preferred to engage in Milton Friedman style debate, characterizing his opponents views in his own terms and then attacking them. I won't burden you with that, but pick it up later.

Some industrial policy advocates claim that the United States already has an industrial policy. They argue that such policies as trade protection and subsidies for exports and research and development are components of an industrial policy simply because they affect the composition of industrial output. The difference between our present policies and what they advocate, they say, is that the former is ad hoc industrial policy while the latter is coherent.

It is true that many Federal policies affect industrial output. But the argument about whether they constitute industrial policy, like all arguments about definitions, is pointless. What is relevant is whether the proposals of industrial policy advocates are a good idea. Should the U.S. Government have a larger role than it now has in deciding the composition of U.S. industry?

The answer is "no." An industrial policy would not solve the problems faced by U.S. industry and would instead create new problems. Industrial policy has a mixed record in Japan and has been unsuccessful in Europe."

Not so unsuccessful that they didn't eat our lunch for the next twenty-five years.

And obviously this is not the balanced growth model of Leon Keyserling, but the Supply Side, trickle down, or as Keyserling would say, watering the tree at the top, approach.

There is so much more. Including the principles of the Reagan approach, as articulated by Feldstein. Monetarism, in the Friedman tradition, and as implemented by Paul Volcker, came in for particular attention.

The fundamental guiding principle of the Administration's approach to monetary policy is that the rate of growth of the money stock should be reduced gradually until the rate is consistent with price stability. This principle is consistent with the general approach enunciated in recent years by the independent Federal Reserve.
We don't hear about the money stock so much any more. Primarily because they tried and failed to control it. The attempts to constrain it led to the high double digit interest rates, and combined with other Reagan policies to promote double digit unemployment, which eventually did lead to lower inflation. Oddly, the crude crushing of inflation, the explosion of deficits and borrowing resulting from the Reagan tax cuts and the blunderbuss approach to industrial policy left the room when Feldstein talked about the exploding trade deficit, even though he blames it on an appreciation of the dollar. What else can the dollar do when you put a huge price on it yourselves with high interest rates and the rest?

The second principle of the Administration's economic strategy was to reduce government spending, quite antithetical to the Keyserling balanced growth prescription. The third principle was to reduce taxes and restructure the tax system, which we covered. And the fourth was to wring their hands about deficits, using it as further reasons to cut domestic spending, which never -- oddly -- did reduce deficits.

In any event, we'd love to do more here. This is the beginning of the stagnation. The presidents following Reagan have all been more or less conservative. All have made increasing capacity a primary economic stimulus program and none have supported consumption, by which Demand Side means consumption of both private and public goods, or Federal outlays. Reagan himself began raising taxes after 1984, since it was difficult to bemoan historically high deficits when they happened on his watch unless he did something about them.

Growth rates declined, unemployment rose, de-industrialization continued apace, incomes stagnated, inequality soared, the rich got richer, debt at public and private levels rose, the deregulation of the financial industry led first to the S&L debacle and then to the far worse Great Financial Crisis.

And we come to 2013, where we sit in frustration along with the ghost of Leon Keyserling, looking at austerity tried over and over again and never working, at least for the economy as a whole and the middle class. So it goes.