Dear Sirs,

In his article today (" The Federal Reserve must prolong the party"), Martin Wolf refuses to acknowledge one obvious origin of the current financial crisis: the explicit policies of the Bush administration, pushed with the open support of the Greenspan Fed. These policies, via targetted tax cuts, massive corporate pork made possible by a war of choice, and lax monetary and banking policies, had as sole goal to make the rich richer. Stagnant wages, made possible by weakening of corporate regulation and increased access to the Chinese labor pool, were instrumental in making higher profits possible, and lax monetary conditions allowed bubbling financial asset values. Lower taxes made capture ofthat wealth easier forthe owner class, and share buybacks (instead of investment) was one of the preferred instruments.

The debt bubble also had the great advantage of making it possible to hide from most Americans that they were not sharing in that wealth capture, by allowing them to keep on consuming - by spending money provided by easy debt instead of by actual income. The fact that spending was underpinned by debt and not by income, which is an invitable result of the neoliberal pollicies pursued, is the main cause of the American deficits and the need for the rest of the world to finance them. As US spending is directed at manufacturing based in other countries, their complicity has been easy enough to procure.

At this stage, the imbalances are totally unsustainable and need to be corrected - in fact, they should have been several years ago. That correction will be painful enough; arguing for yet another round of the bubble merry-go round, will can only lead to a worse outcome in the end, is utterly irresponsible.

Amendments, comments, ideas?


In the long run, we're all dead. John Maynard Keynes

 it's time to make bankers personally liable for the deals they get their banks into and that go wrong whether financially, legally, or at the very least reputationally;

Banks as credit intermediaries are obsolete, and will be replaced by banks as service providers:

(a) managing bilateral creation of "trade" credit, backed by a mutually owned guarantee/default fund;

(b) bringing together investors in productive assets with investment in productive assets, using more efficient legal vehicles than the current nonsense.

it's high time to restore punitive marginal rates of taxation, to dissuade short termist wealh capture and profiteering

No. It's time to tax privileges such as private property in Commons such as land and therefore to redistribute Capital and unearned income.

 it's high time to create a separate funding mechanism for the military, based exclusively on fuel taxation

It's certainly time for massive fuel taxation, to be deployed in the fight for alternative energy and the fight for clean water.

Redeployment of massive military R & D budgets to such a fight would be fine with the corporations provided they thought they could make a profit out of it.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

In a January 17 speech, Federal Reserve governor Frederic Mishkin reiterated the Fed's view, that its job does not extend to intervening in possible bubbles. By contrast, Ian MacFarlane, who recently retired as head of Australia's Reserve Bank, and successfully intervened in that country's housing bubble, feels that the current policy framework does not recognize asset inflation as a cause of instability, and sees the threat as serious.
[...]
Yet by contrast, Macfarlane's views are vastly more forward-thinking. From the Sydney Morning Herald:

    The biggest single challenge starts with the recognition that as an economy becomes more developed, its financial side grows a lot faster than its real side. As a result, economic outcomes will depend more on what happens in asset markets and less on what happens in the real side of the economy, such as in the goods and labour markets....If a major financial shock were to occur, such as a large fall in share or property prices, the effect on the economy would be greater than before.

    So the central question is whether booms and busts in asset markets are more likely to occur in the future. No one knows, but there is no reason to believe that they will become less frequent or smaller. We know that since financial markets have been deregulated we have seen some pronounced asset price booms and busts, the most notable being the Japanese bubble of the 1980s and the high-tech share market bubble in the United States in the late 1990s. Both of these were followed by recessions. Australia had an equity and property boom and bust in the late 1980s, and a house price boom during the past decade that had many of the characteristics of a bubble, but fortunately it was not followed by a bust.

    If it is likely that asset price booms and busts will be at least as common as over the past two decades and that their effect on the economy will be larger, what can monetary policy do about it? There was a time when we felt that monetary policy, by returning the economy to low inflation, would have a stabilising effect on asset markets.... But the broader evidence does not support the view that low inflation will prevent booms and busts developing in asset markets....Some have even gone as far as to suggest that low inflation may encourage the build-up in asset prices.

    So, if low inflation does not provide any insurance, what should a central bank do if it suspects that a potentially unsustainable asset price boom is forming, particularly when the boom is being financed by debt?...

    Many people have pointed out that it is difficult to identify a bubble in its early stages, and this is true. But even if we can identify an emerging bubble, it may still be extremely difficult for a central bank to act against it for two reasons.

    First, monetary policy is a very blunt instrument. When interest rates are raised to address an asset price boom in one sector, such as house prices, the whole economy is affected. If confidence is especially high in the booming sector, it may not be much affected at first by the higher interest rates, but the rest of the economy may be.

    Second, there is a bigger issue which concerns the mandate that central banks have been given. There is now widespread acceptance that central banks have been delegated the task of preventing a resurgence in inflation, but nowhere, to my knowledge, have they been delegated the task of preventing large rises in asset prices, which many people would view as rises in the community's wealth. Thus, if they were to take on this additional role, they would face a formidable task in convincing the public of the need.

    Even if the central bank was confident that a destabilising bubble was forming, and that its bursting would be extremely damaging, the community would not necessarily know that this was in prospect, and could not know until the whole episode had been allowed to play itself out. If the central bank went ahead and raised interest rates, it would be accused of risking a recession to avoid something that it was worried about, but the community was not. If in the most favourable case, the central bank raised interest rates by a modest amount and prevented the bubble from expanding to a dangerous level, and it did so at a relatively small cost in terms of income and employment growth forgone, would it get any thanks? Almost certainly not...In all probability, the episode would be regarded by the public as an error of monetary policy because what might have happened could never be observed....

    The interest rate decision is not the only decision that a central bank has to make ....[T]here are other ways of addressing the problem. Central banks have some credibility and authority, which can be used in a public awareness campaign to make people recognise the risks they are taking in plunging into an overheated market....At the Reserve Bank, we had some success with this approach during the recent house price boom....

    But that still leaves the central bank with a very limited armoury with which to fight a potentially dangerous asset price boom - the interest rate, which it does not have a clear mandate to use, and public suasion, which is of limited effectiveness. How would it cope if it faced an asset price boom of the magnitude of those that occurred in the US in the 1920s or Japan in the 1980s? Not very well, I expect, but it would probably be held largely responsible for the distress that accompanied the bubble's eventual bursting.

    Looking back at the evolution of monetary and financial affairs over the past century shows that policy frameworks have had to be adjusted when they failed to cope with the emergence of a significant problem. The new framework then is pushed to its limits, resulting in a new economic problem. The lightly regulated framework of the first two decades of the 20th century was discredited by the Depression and was replaced by a heavily regulated one accompanied by discretionary fiscal and monetary policy. This in turn was discredited by the great inflation of the 1970s and was replaced by a lightly regulated one with greater emphasis on medium-term anti-inflationary monetary policy. This has acquitted itself well over the past 15 years and is still working effectively, but over the next decade or two will probably face the type of challenges I have outlined.

    No one is very good at picking the next major epoch, and we mainly react after the damage has been done. I am influenced by the fact that as the great inflation of the 1970s was building from the mid-1960s, no one, including the central bank, had a mandate to prevent it. As we struggled to come to grips with it, governments made decisions that effectively gave the central bank a mandate, and central banks worked out a framework that to date has been effective in dealing with it. No one has a clear mandate at the moment to deal with the threat of major financial instability, but I cannot help but feel that the threat from that source is greater than the threat from inflation, deflation, the balance of payments and the other familiar economic variables we have confronted in the past.

http://bigpicture.typepad.com/comments/2007/08/coming-soon-tru.html

Every now and again, a potentially significant story manages to slip through the cracks, barely noticed by anyone. A recent Dow Jones article by Jilian Mincer -- "Mtge Lawsuits Could Bail Out Some Borrowers" -- is just such an article. The only reason I even knew about it was because I spoke with the reporter and was quoted in it.

It is a fascinating tale that I suspect won't be ignored for long. For those few people familiar with the Federal Truth-in-Lending Act (TILA), this won't be much of a surprise. To everyone else, read on.

What happens if a buyer fails to comply with the TILA rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
[...]
And, here's the real rub:    This kinda makes you wonder what sort of due diligence the secondary market actually did on these basic non-compliant loan errors in the sub-prime market. How about the CDO banking underwriters -- didn't their Legal review these docs for compliance with existing laws prior to purchasing trillions of dollars worth of the stuff? Was their fraud involvd, or did these guys just miss it?

This is basic stuff, and its amazing that in the headlong rush to write these garbage loans, no one caught very basic, banking 101 type rule.    

It just shows how little oversight by the regulators there was in this space. Hard to imagine, but the Central Bankers either never reviewed these loan documents, or never caught these basic disclosure errors.

And yes, I place some of the blame on the Greenspan Federal Reserve -- they were the regulatory authority in charge of bank mortgage lending when these junk mortgages were written . . .

Emphasis mine.

If you compare the size of the trade deficit, the domestic deficit and the military budget you will see a rough equivalence. In other words we are borrowing from the rest of the world in order to fund our military adventurism. This has two side effects, the most obvious is that it has sucked money out of the rest of the public sector. Falling bridges and over topped levees are only the most visible effects, but the lack of support for education and other social programs is taking its toll as well.

Second the money spent on militarism has warped national priorities. Bright people are being diverted into the death and destruction industries and away from important areas such as basic R&D in energy, materials and health.

As for the revisisonist articles that are appearing this is easy to understand. Those who have been lackeys of the administration are now seeing that they may be at risk of losing their jobs when a new group takes over. So they are reinventing themselves in the hope that they will find work under a new regime. We have seen this first with the Iraqi invasion cheerleaders (Wolfowitz, Feith, etc.) and now the economic pundits are attempting to do the same thing.

Policies not Politics
---- Daily Landscape

it's high time to create a separate funding mechanism for the military, based exclusively on fuel taxation - because frankly, that's all it's used for: access to energy - and restore government, shorn of that function, to concentrate on its real tasks - ensuring safety and security for its citizens, which starts by economic safety, and includes environmental safety, and essentially means regulation of corporations, not pork, and focus on long term investment in infrastructure and education.

Reading the rest of your diary, this kind of seems to come out of left field.  But it's brilliant!  BRILLIANT!  Please come run my country.  Thank you.

"Pretending that you already know the answer when you don't is not actually very helpful." ~Migeru.

http://blogs.ft.com/wolfforum/2007/08/the-federal-res.html#comments

Thanks for writing it and you can add my name whenever you want!  This is unbearable and all I could muster would be to call him a "blank kool-aid sycophant blanker".

This idiot cannot conceive that 1. resources are finite! 2. this "growth" and purchases do not have to be replaced in another part of the world 3. all efforts must be switched to reuse in sustainable ways, or his god forbid 4. that slowing ´consumer´ spending in current crap is a positive.


Our knowledge has surpassed our wisdom. -Charu Saxena.