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No Return To Normal - the Galbraith article

by whataboutbob Mon Mar 23rd, 2009 at 10:33:58 AM EST

A few days ago this amazing article was printed by the political blog
Washington Monthly (which is well worth reading for US and international politics).

 It is entitled:
No Return To Normal by James K. Galbraith

It is has a US economics focus, but I am also particularly interested to hear the comments from our astute European economists here at ET, as to how you think this relates to the European and international economy: Here's one quote that caught my eye (out of many):

...in 1994, after a long period of credit crunch, banks and households were strong enough, even without a stimulus, to support a vast renewal of lending which propelled the economy forward for six years.

The Bush-era disasters guarantee that these happy patterns will not be repeated. For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash--protected by deposit insurance and now desperately being conserved--the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare--illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.

In addition, some of the biggest banks are bust, almost for certain. Having abandoned prudent risk management in a climate of regulatory negligence and complicity under Bush, these banks participated gleefully in a poisonous game of abusive mortgage originations followed by rounds of pass-the-bad-penny-to-the-greater-fool. But they could not pass them all. And when in August 2007 the music stopped, banks discovered that the markets for their toxic-mortgage-backed securities had collapsed, and found themselves insolvent. Only a dogged political refusal to admit this has since kept the banks from being taken into receivership by the Federal Deposit Insurance Corporation--something the FDIC has the power to do, and has done as recently as last year with IndyMac in California.

Geithner's banking plan would (only) prolong the state of denial.

Let me emphasize his stunning point: The big banks are insolvent and  pumping more money into them will only prolong and worsen the crisis.  So my question to our resident economists: how does this situation effect Europe and Europeans? And are there European banks that are insolvent (besides British banks, that is)?

Anyway, I highly recommend you read this excellent article, and while you are reading it, think about how it relates to Europe - I am most interested in your comments.


Display:
Here's another quote - and again, how does this relate to the current state of European finance?

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?


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Mar 20th, 2009 at 04:53:58 AM EST
Everyone is focused on the need for banks "to start lending again". The current crisis is the result of a debt and credit binge (and we're not even at the hangover phase, we're vomiting into the toilet bowl so to speak). The solution cannot be more credit. But we don't know how to run our economy without credit. Unsecured credit such as overdraft facilities, credit cards and compnaies' revolving credit lines (used for operating expenses) are being cut. In the case of secured credit, mortgages are a dodgy proposition since property prices can be expected to continue to fall. As to project finance... Jerome can speak to this, but if the expectation is a 5-year recession it is very difficult to justify lending, too!

"No return to 'business as usual'" is right.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:07:33 AM EST
[ Parent ]
Next stage will be the 'dry heaves'.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Fri Mar 20th, 2009 at 03:11:44 PM EST
[ Parent ]
... functioning banking operations that can lend to credit-worth borrowers if the recovery should bottom out and with the easing of downside risk the number of credit-worthy people who find it prudent to borrow increases.

Trying to issue credit into a recession a refusal to admit to the reality that you cannot push on a string ...

... we need effective fiscal stimulus to address a deep recession of this sort in order to create a bottom as soon as possible, and throwing money into insolvent institutions so that they can burn through it simply undermines the capacity to do the public finance required by the stimulus.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 07:35:59 PM EST
[ Parent ]
Trying to issue credit into a recession a refusal to admit to the reality that you cannot push on a string ...

But that's what every policymaker wants, because they have learned that there is a correlation between credit and growth during the upwards phase of the economic cycle, they have been given kool-aid positing a causal link in the wrong direction (credit causes growth, rather than growth allows credit), and now that there is no growth and no credit, they want more credit. The saddest part of this is that everyone agrees that there has been an excess of credit over the last decade and yet in the same breath they demand more credit as the solution!

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:25:38 AM EST
[ Parent ]
The politicians that jump in front of the parade to say, "no, people need more income so they have an ability to repay debt" stand to make a big jump from the back of the political queue to a place near the front.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Mar 22nd, 2009 at 11:53:06 AM EST
[ Parent ]
Perhaps paying people wages that keep up with inflation in the states is a start.

Don't know about the rest of the world, but here they made obscene profits off the backs of the workers from the 1970's on and when we couldn't afford things they lent that profit back to us with interest and we depended on loans to pick up the slack our wages didn't pay for.

Something tells me this is just the fall before the rise of a global currency.

Textbooks will recall this time as "The Monetary Revolution" and forget (like the EU transition) about those who resisted being brought under a single currency and giving up a piece of our sovereignty.

"Every normal man must be tempted at times to spit on his hands, hoist the Black Flag, and begin to slit throats."- H.L. Mencken

by Jacks Smirking Revenge on Sun Mar 22nd, 2009 at 03:44:10 AM EST
[ Parent ]
Hmm.

The big banks are insolvent and  pumping more money into them will only prolong and worsen the crisis.

This can be true only to some degree. If you pump enough money into banks at some point they have to become solvent again. Their liabilities are not infinite.

Without gov't assistance? Marked to market and not fantasy?
At least 7 out of the ten largest banks in Germany would be insolvent.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Mar 20th, 2009 at 04:58:18 AM EST
Their liabilities are not infinite

No, but they are not static either. The worsening of the economic situation increases risk (and actual default) which continues to degrade banks' balance sheets.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 20th, 2009 at 05:09:23 AM EST
[ Parent ]
Assuming you mean assets, not liabilities, because the solvability problem concerns the value of assets.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 20th, 2009 at 05:14:13 AM EST
[ Parent ]
The assets cannot lose more than their face value.

The liabilities, on the other hand, can grow infinitely. But, in a climate of deflation and low interest rates, liabilities grow slowly.

So the problem is that some assets are maybe worth zero. All you need to do is add free cash to the assets until the assets are worth enough. Normally this would be done with an equity injection, which would mean a share of ownership. If the share of ownership becomes more than 50%... tough for the management!

This is the way to deal with this mess: Turning Bad Bank / Good Bank on its head (Update) by BruceMcF

OK, now, suppose we do it this way. Bank examiners do "stress testing", which is to say, a real world audit instead of the fantasy audits that we have been doing in order to avoid official recognition of the depths of the problem. And banks that are in too much financial peril to be allowed to continue operating as they have been doing ... are put into receivership.

Now, the US government strips out the liabilities that we wish to protect ... the account liabilities ... and takes over the "good" assets. If that is a net plus, the government pays the original bank for the positive net assets. If that is a net minus, the government makes up the difference with the new Good Bank, and takes a compensating Senior claim in the old Bad Bank.

Then the residual of the old Bad Bank is run through ordinary Chapter 11 proceedings ... in most cases the shareholders will be zeroed out, the bondholders will become shareholders, the new shareholders are quite likely to sack the old senior executive management, and the old Bad Bank will see what they can do to recover whatever value can be had in the trash that forms their asset base.



Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:18:57 AM EST
[ Parent ]
I agree that the solution could work, but the problem is that the liabilities HAVE grown, and will ocntinue to grow massively, given that they included tons of bets that a lot of stable institutions would not fail - several already have, and more could follow them).

The asset side of the mess could be plugged by Fed injections, but the liabilities side cannot (and yet this is what is being done via AIG).

Whatthis means, though, is that lots of people (like Paulson) are making outrageously large profits from having bet on supposedly rare failure events - and this money is being created for them by the Fed.

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

by Jerome a Paris (etg@eurotrib.com) on Fri Mar 20th, 2009 at 05:50:35 AM EST
[ Parent ]
Credit default swaps could be delared null and void in a fell swoop of the legislative pen and the effect wouldn't be too serious.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:00:17 AM EST
[ Parent ]
Then declare them illegal - maybe all short sales, too.  At least, re-institute the one-uptick rule in the U.S.

The only problem is that we're discussing things that: 1) won't happen, because the U.S. Congress is what they are; and 2) won't help, because this mess is way beyond re-regulation.  Rationalization - i.e., socialism for the monopolistic/oligopolistic elements of the economy - is the only solution that can offer progressive outcomes at this point.  And that ain't going to happen without a real fight - not Apple vs. Microsoft.

I support Chris Cook's ideas in every way, except that they won't happen either at this juncture.  We're just not evolved enough, however much some of the objective conditions call for his approach.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Fri Mar 20th, 2009 at 03:22:32 PM EST
[ Parent ]
paul spencer:
I support Chris Cook's ideas in every way, except that they won't happen either at this juncture.  We're just not evolved enough, however much some of the objective conditions call for his approach.

I think it depends on how the propositions are put across. And I don't think we actually have a choice, because the system of credit is terminally fucked IMHO.

First, Peer to Peer investment though unitisation offers a mechanism that wipes the floor with secured debt. Any bank or investor that does not use such a Debt/Equity swap mechanism to exit their crap loans will be at a disadvantage to those who do.

And the more who use it, the more liquid the "Pool" of Rental Units becomes.

Second, Peer to Peer unsecured credit which is interest-free, but not cost-free. What's not to like?

The Carnegie Institute liked the ideas....

Peer-to-Peer Finance: A Flight to Simplicity

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.


"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Mar 20th, 2009 at 04:36:43 PM EST
[ Parent ]
Don't know how it is in northern England, southern Scotland currently, but it's getting tense here.  (Old guys like me, who have stuck their minority opinions into controversial situations, have an acute sense of dangerous levels of tension.)

I'm actually still working on your/our principles.  If you can help me find $300k, we can do the land phase of workforce housing in Carson, WA with a guaranteed 5% for investors.  I'm good for $30k, and Steve N. might be interested.  LLC with builders and suppliers at-cost for labor and materials with (reasonable) profit as their buy-in on the long term.

Another (producers') co-op project involves chipper, dump truck, and track-skidder for forest-health/fuel-reduction thinning operations cum woody biomass energy-source purpose.  I'd diary that and several related topics, but I just don't have time at present.  I'm going off to Texas April 7 for a visit, then driving back over 8 days.  Should be able to elaborate then.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Mar 21st, 2009 at 02:27:02 AM EST
[ Parent ]
Paul,
Send me a link or links so I can educate myself. And do diary this, with time frame ASAP.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Mar 21st, 2009 at 04:57:30 AM EST
[ Parent ]
but I really do not have time.  I barely manage to come by ET and sample the diaries.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Mar 21st, 2009 at 11:06:21 AM EST
[ Parent ]
Commendable - at least someone is putting some ET talk into action.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 05:12:04 AM EST
[ Parent ]
That is why the New Good Banks / Bad Old Banks plan pulls out protected bank depositary liabilities to be the liabilities of the "New Good Bank" and the sound assets  to form its assets, makes up the shortfall if there is one, against a Senior stake in the Bad Old Bank ...

... in the case that there are more sound assets than deposit liabilities to be protected, the surplus sound assets can be left as a part of the asset base of the Bad Old Bank. Shareholders are still likely to get wiped out, but bondholders in those institutions will get more cents on the dollar ...

Then the Bad Old Bank can be moved from receivership to bankruptcy, and the management of the Good New Bank can be taken over via an LLP/LLC with an existing bank that managed itself with enough prudence to be solvent in the middle of such a severe recession.

Geithner is protecting the wrong part of the finance sector ... which is not surprising, since he is from the Anglo Disease part of the finance sector ...

... since finance companies that survive will have trimmed their sails substantially, small and medium sized businesses are going to need a functioning banking system if they are going to be able to respond effectively to any upturn in demand that should occur and consumers are going to need a functioning banking system to be able to respond to any stabilizing of household income.

Indeed, if we are going to hope to bring as many banks OUT of receivership as we will need to do, it will have to be in the context of a recovery, and waiting to clean up the mess until the recovery happens means we are caught in a vicious circle, since the lack of confidence in the solvency of large money center banks makes recovery less likely.
 

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 07:48:02 PM EST
[ Parent ]
Indeed, if we are going to hope to bring as many banks OUT of receivership as we will need to do, it will have to be in the context of a recovery, and waiting to clean up the mess until the recovery happens means we are caught in a vicious circle, since the lack of confidence in the solvency of large money center banks makes recovery less likely.
My own prediction is that, for instance, the stock markets won't hit bottom unless and until the banking sector is repaired.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:21:42 AM EST
[ Parent ]
My own prediction for the US is that with the stock market in the toilet (whether or not it hits bottom), many medium sized companies that could raise funds in equity markets will need bank lending for working financial capital should there be a prospect of new orders.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Mar 22nd, 2009 at 11:34:14 AM EST
[ Parent ]
Well, stock prices are underpinned by earnings, and for as long as earnings are perceived to be falling there won't be anything underpinning stock prices.

We're into second order effects now. If people are out of jobs then it doesn't matter much what the mortgage rate is or the market rent - they won't be able to pay.

So a second wave of defaults on apparently "prime" mortgages gathers pace.

I cannot see any conventional way of stopping the spiral we are in. The numbers are too fucking big.

Better try something unconventional, eh?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Mar 22nd, 2009 at 11:44:36 AM EST
[ Parent ]
See this article I quoted in the other thread:


Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities' underlying collateral. "It was obvious that a lot of the stuff...was practically worthless at the time of issuance," he says. He finds it "perplexing" that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street's finest could have miscalculated so badly.

Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it "blew out of control" and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 20th, 2009 at 05:53:43 AM EST
[ Parent ]
Their liabilities are not infinite.
True.  So who has $165 Trillion in spare change?  According to the FDIC, that is the amount of off balance sheet" liabilities in the financial system as of 2007, excluding CDOs, SIVs, etc. etc.  Certainly not infinite and not ALL of it will be total worthless. Lets say it is worth 70 cents on the dollar.

Then the question might better be: "Hey buddy, got a spare $50 Trillion?"  If so, then perhaps they will know who to call when the CDOs, SIVs, etc blow up.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 06:08:00 PM EST
[ Parent ]
If it are off balance sheet vehicles, maybe it is possible to default with the vehicle without defaulting the balance. What is the point of having a balance if most of the liabilities aren't in it?
I have often seen these huge sums of outstanding CDOs, but who has sold them except AIG, that has only a tiny fraction of them?
If the sum is so well known, I guess there are as well some informations, on who has sold them. But I have never seen a good hint on that. And shouldn't we see the pain right now? If AIG pays out, shouldn't we see other institutions in pain as well, due to CDOs?
I'm of course not sure, but I guess, that those banks, that don't have troubles with CDOs so far, probably don't have sold them and therefore they aren't likely to suffer a lot in the future from them, only indirect by having lent to institutions that are going into bankruptcy.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Sun Mar 22nd, 2009 at 06:22:10 PM EST
[ Parent ]
JP Morgan has also sold fantastic amount of CDS. They invented them. And they're still peddling them.

Anyway, from the FDIC's site: Off-Balance Sheet Activities

Additionally, swaps, futures, forwards, and option contracts are derivative instruments whose notional values are carried off-balance sheet, but whose fair values are recorded on the balance sheet.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 06:24:53 PM EST
[ Parent ]
Additionally, swaps, futures, forwards, and option contracts are derivative instruments whose notional values are carried off-balance sheet, but whose fair values are recorded on the balance sheet.
And of course these "fair values" are conservatively estimated, which is why these off balance sheet items only come back on the balance sheet when things do not go according to the script, as, for instance, at the present time.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 06:49:36 PM EST
[ Parent ]
I don't think those $150 trillion are money that has been created already as Chris Cook claims in the diary you linked to a couple of posts upthread.

If I bet you $1M on some rare outcome and then I can't pay up, the $1M never existed, you never added it to your balance sheet except at "fair value" which might have been something like $1k, so if it goes away the only outcome is that I go belly up and you get to fight it out with the other creditors, but you don't go belly up (most likely).

So I am a little puzzled by the whole thing.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 06:56:32 PM EST
[ Parent ]
Yeah, the table does better at identifying what it is not than what it is.  But I recall some statistics about "shadow banking" that indicated that CDSs were a relatively small part of a $500 Trillion pie.  And I have been suggesting, and TBG has been sort of agreeing for four or five months that dissolution of credit default swaps by governmental agencies would be a good thing.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 07:20:17 PM EST
[ Parent ]
More from the FDIC's Risk Management Manual

Risk Management Manual of Examination Policies    

Section 3.8 - Off-Balance Sheet Activities

Introduction
Off-balance sheet activities encompass a variety of items including certain loan commitments, certain letters of credit, and revolving underwriting facilities. Additionally, swaps, futures, forwards, and option contracts are derivative instruments whose notional values are carried off-balance sheet, but whose fair values are recorded on the balance sheet. Examiners reviewing off-balance sheet derivative contracts will find resources such as the Capital Markets Handbook, the Consolidated Reports of Condition and Income (Call Report) Instructions, Senior Capital Markets Specialists, and capital markets and accounting subject matter experts helpful.

Off-balance sheet fee producing activities can improve earnings ratios, at a faster pace than on-balance sheet fee producing activities. Earnings ratios typically use assets as a component. Since earnings generated from these activities are included in income, while total asset balances are not affected, ratios appear higher than they would if the income was derived from on-balance sheet activities. Because these types of activities remain off the balance sheet, capital to asset ratios (with the exception of risk-based capital ratios) are not adversely affected regardless of the volume of business conducted. But, the volume and risk of the off-balance sheet activities needs to be considered by the examiner in the evaluation of capital adequacy. Regulatory concern with off-balance sheet activities arises since they subject a bank to certain risks, including credit risk. Many of the risks involved in these off-balance sheet activities are indeterminable on an offsite-monitoring basis.

-Skip-

General guidance regarding the risks involved with derivatives instruments and the proper recording and accounting are outlined below. Expanded guidance is delineated in the Capital Markets Handbook and the Call Report Glossary and the instructions for RC-L - Derivatives and Off-Balance Sheet Items.

Off-Balance Sheet Lending Activities
An evaluation of off-balance sheet lending activities should apply the same general examination techniques that are used in the evaluation of a direct loan portfolio. For example, banks with a material level of contingent liabilities should have written policies addressing such activities adopted and approved by their board of directors. The policies should cover credit underwriting standards, documentation and file maintenance requirements, collection and review procedures, officer and customer borrowing and lending limits, exposures requiring committee or board approval, and periodic reports to the board of directors. Overall limits on these contingent liabilities and specific sub-limits on the various types of off-balance sheet lending activities, either as a dollar amount or as a relative percentage (such as a percent of total assets or capital), should also be considered. (my bold)

It seems clear why the banks like "off balance sheet activities" and why the FDIC devoted an entire section of their Risk Management Manual to the subject. Less clear is the rationale, if any, for the FDIC to approve this practice.

It would appear that the particular types of off balance sheet activities referenced in the table Chris cited can be quite varied.  The "hopeful" assumption that they may be credit default swaps seems at best unproven at this point.  I don't know whether to be pleased or afraid.  The direction things are going the terms of every default swap ever written could well be fulfilled by the end of the year.  More rich people to bail out?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 09:19:27 PM EST
[ Parent ]
Considering that:
Many of the risks involved in these off-balance sheet activities are indeterminable on an offsite-monitoring basis. (My Bold)
...and considering that many, if not most, of these activities may be based on transactions with institutions registered in tax havens such as The Isle of Mann, Grand Turks, etc., to which the FDIC may not have access...can you define the term "Regulatory Arbitrage?"

Surely, prior to the failure of Bear Sterns, insistence by the FDIC on viewing the complete documentation of transactions based in off shore tax havens would have constituted the very essence of "burdensome regulation."

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 09:31:42 PM EST
[ Parent ]
James Galbraith hits the nail on the head No Return to Normal
The president has an economic program. But there is, so far, no clear statement of the thinking behind that program, and there may not be one, until the first report of the new Council of Economic Advisers appears next year. We therefore resort to what we know about the economists: the chair of the National Economic Council, Lawrence Summers; the CEA chair, Christina Romer; the budget director, Peter Orszag; and their titular head, Treasury Secretary Timothy Geithner. This is plainly a capable, close-knit group, acting with energy and commitment. Deficiencies of their program cannot, therefore, be blamed on incompetence. Rather, if deficiencies exist, they probably result from their shared background and creed--in short, from the limitations of their ideas.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:26:23 AM EST
Soros calls Summers and Geithner "free market fundamentalists" - hard core ideologists - and this is the one thing that makes me worried: does Obama not see this? Wouldn't it be wise to have some people outside of this group giving him advice too?

Frankly, I'd rather see Summers fired as the senior economic advisor and replaced by a Roubini or Galbraith, who are more reality based and see the bigger world economic picture, and not tied to an ideology. Even Josh at TPM is now saying these same concerns right now - that Obama will have to show some leadership on this, rather than being a deer in the headlights.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Fri Mar 20th, 2009 at 05:55:45 AM EST
[ Parent ]
I don't know where "Market Fundamentalism" comes from, but it features prominently in Stiglitz's Globalization and its discontents. Stiglitz was on the opposing camp to that of Rubin and Summers during the Clinton administration, something that he also talks about in his book.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:59:08 AM EST
[ Parent ]
Stiglitz would be a great advisor, but he admits being too outspoken for a government worker...

I keep wondering what other perspectives are being considered by Obama...or is he just going on his faith in these particular experts?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Fri Mar 20th, 2009 at 06:04:01 AM EST
[ Parent ]
whataboutbob:
Stiglitz would be a great advisor, but he admits being too outspoken for a government worker...
Joseph Stiglitz - Wikipedia, the free encyclopedia
Stiglitz moved to Washington in March 1992 to join the Clinton Administration, first as a member, and then as Chairman of the Council of Economic Advisers, in which capacity he also served as a member of the cabinet. He became deeply involved in environmental issues, which included serving on the Intergovernmental Panel on Climate Change, and helping draft a new law for toxic wastes (which was never passed).


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:10:21 AM EST
[ Parent ]
I can't remember the source, but Stiglitz just had an interview in the last week or two where he said he was happy to be an academic now, because he can state his opinions without censorship

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Mar 20th, 2009 at 06:17:46 AM EST
[ Parent ]
Government is a collegial affair - you cannot state opinions contrary to the government's consensus and remain in a cabinet post for long.

That is not censorship.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:19:20 AM EST
[ Parent ]
Obama CLAIMS to want a diversity of opinions in his administration.  I would settle for quarterly round tables consisting of his entire economic team, top Treasury people, if there are any besides Geithner, Bernanke, and a group of outsiders who are priviledged to ask questions and follow up those questions vigorously, with Obama presiding.  The outsiders should include Stiglitz, J. Gailbraith, Krugman, Roubini, Soros, Mason Gaffney, etc.  

Having the whole proceeding broadcast on CSPAN would be icing on the cake.  Obama could demonstrably fulfill his pledge to "seek a wide range of opinions" and the country could have the confidence that at least all serious options and opinions had been considered.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 06:26:05 PM EST
[ Parent ]
Isn't that why you have a Congressional committees on economic affairs?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 06:28:12 PM EST
[ Parent ]
Well, a congressional committee would probably call one or two outside experts to give testimony, but would not likely have a free wheeling round table discussion driven by questions from those who are critical of the dominant narrative.  Might as well dream big.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 06:54:11 PM EST
[ Parent ]
It wasn't that he was too outspoken.  He just didn't want to move back to DC.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Mar 20th, 2009 at 09:07:55 AM EST
[ Parent ]
whataboutbob:
Stiglitz would be a great advisor, but he admits being too outspoken for a government worker...

man, that irks...

shades of bushie yes-men. tightlipped bureaucrats only need apply.

we have to evolve governments that encourage candid participancy. this smacks so of apparat.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Mar 21st, 2009 at 07:13:27 AM EST
[ Parent ]
whataboutbob:
Soros calls Summers and Geithner "free market fundamentalists" - hard core ideologists - and this is the one thing that makes me worried: does Obama not see this? Wouldn't it be wise to have some people outside of this group giving him advice too?

Of course he does, and the interests behind these people were key in getting him elected, so he has had no choice.

He will let them discredit themselves - they are doing  afantastic job - and their entire ideology will be consigned with them to the dustbins of history.

He will then be rid of the albatross currently around his neck.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Mar 20th, 2009 at 06:19:52 AM EST
[ Parent ]
One can only hope.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:23:54 AM EST
[ Parent ]
So you think the ultimate pain a a total crash is unavoidable? That we're not just looking at a lost deacade of stagnation?

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire
by papicek (papi_cek_at_hotmail_dot_com) on Fri Mar 20th, 2009 at 10:40:55 PM EST
[ Parent ]
I hope you're right, and I tend to agree- it seems he's just too smart to be taken in by a plan that involves a fake market theater piece created to satisfy some visceral need for the 'Invisible hand" to validate their ideology.
"Toxic asset plan involves big subsidies"--NYT

But by the time Geithner and Summers slide into the dustbin, will the remaining political environment be one in  which a true progressive plan can be installed? Or will the US be the Wiemar Republic all over again?

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Mar 21st, 2009 at 05:13:46 AM EST
[ Parent ]
invisible hand....snort...

a thief can be masked, but you can sure tell your pocket's been picked when your wallet's gone.

first it's a prosthesis, and it's getting very clear what it's designed for!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Mar 21st, 2009 at 07:17:40 AM EST
[ Parent ]
I think that there is a vacuum waiting to be filled, and that the corollary to Joni Mitchell's line in "Big Yellow Taxi"

You don't know what you've got 'til it's gone

will apply.

ie you don't know what you haven't got 'til you see it.

As A R Geezer said recently, the US needs an updated Henry George

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Mar 22nd, 2009 at 06:48:50 AM EST
[ Parent ]
GIP
But by the time Geithner and Summers slide into the dustbin, will the remaining political environment be one in  which a true progressive plan can be installed? Or will the US be the Wiemar Republic all over again?
That is the question.  I would feel a lot better if someone could convincingly argue that all of the promises already made and currently on offer by Treasury and the Fed to AVOID acknowledging the scope of the problem can easily be dealt with and will not, themselves, undermine our ability to actually deal with the problem when we finally have to acknowledge its true nature.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 06:33:04 PM EST
[ Parent ]
No Return to Normal - James K. Galbraith
The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama's economists lean left. Hence the priority they gave, in their first days, to the stimulus package.

...

Why did the CBO reach this conclusion? On depth, CBO's model is based on the postwar experience, and such models cannot predict outcomes more serious than anything already seen. If we are facing a downturn worse than 1982, our computers won't tell us; we will be surprised. And if the slump is destined to drag on, the computers won't tell us that either. Baked into the CBO model we find a "natural rate of unemployment" of 4.8 percent; the model moves the economy back toward that value no matter what. In the real world, however, there is no reason to believe this will happen. Some alternative forecasts, freed of the mystical return to "normal," now project a GDP gap twice as large as the CBO model predicts, and with no near-term recovery at all.

Ouch, ouch, ouch.

I recently came up with the following metaphor.

Economists reason in terms of a "general equilibrium" which they assume is stable. Picture the economy as a ball rolling inside a bowl, oscillating around the bottom point. Economists don't even concern themselves with the approach to equilibrium, which they assume is quick enough, or else they concern themselves with the "long term". So what they do is they study how the equilibrium point changes when you change some choice parameters.

Maybe a better metaphor for the economy would be a pencil balanced on its tip, or a ball rolling on the outside of an upside-down bowl. There is an equilibrium position on top, but it is unstable and in order to keep the ball at the top or the pencil balanced on your fingertip you have to carefully but vigorously move the bowl or the finger.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:35:51 AM EST
... that any general equilibrium modeling that involves a small number of equilibria with well behaved dynamics is itself theory requires absurdly heroic assumptions.

This was worked out in the high reaches of theory in the 1970's, just as the invalidity of using marginalist modeling of macroeconomic aggregates was established in the 1960's.

So we "know" that the only two ways to do conventional marginalist modeling are inapplicable to real world macroeconomies, and yet mainstream economists have to use one or the other, because those are the only two options that make use of their toolkit.

And to think that the failure of the bastardized Keynesian-marginalist models of Samuelson et al.   to be able to talk about the Oil Price Shocks of the 1970's were laid at the feet of the Keynesian side of the hybrid, when it turns out that marginalist modeling is incapable of adequately modeling the level of activity in the macroeconomy ... just as Keynes originally argued.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 07:55:06 PM EST
[ Parent ]
Can you drop some jargon, names and references for
  • any general equilibrium modeling that involves a small number of equilibria with well behaved dynamics requires absurdly heroic assumptions (is that Arrow-Debreu?)
  • the invalidity of using marginalist modeling of macroeconomic aggregates


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:20:00 AM EST
[ Parent ]
Ackerman 1999 (pdf) does a good job of covering the (separate) work of Mantel and Debreu in 1974, elaborating on the work of this german guy whose name I can only remember by copying it from a source.

The collapse of aggregate marginalist modeling of the economy emerged into economic theory in the Cambridge Capital Controversies, when Sraffa's "Making Things Using Things You Made" (sic) was used to demolish the aggregation of heterogeneous real capital (productive equipment) to determine the real interest rate, since heterogeneous real capital defined in real terms cannot be guaranteed to give a capital supply curve heading up and to the right ...

... of course, aggregate demand for spending on heterogeneous real capital can be defined as a schedule determined based on a nominal interest rate, as Keynes did in the General Theory, but then the interest rates is an input to the productive sector from the finance sector (the price of liquidity), money is not neutral, and we are tossed into the real world where the economy does not automatically trend to full employment.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Mar 22nd, 2009 at 11:48:33 AM EST
[ Parent ]
No Return to Normal - James K. Galbraith
But the plumbing metaphor is misleading. Credit is not a flow. It is not something that can be forced downstream by clearing a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can't qualify for loans. The other requirement is a willingness to borrow, motivated by what Keynes called the "animal spirits" of entrepreneurial enthusiasm. In a slump, such optimism is scarce. Even if people have collateral, they want the security of cash. And it is precisely because they want cash that they will not deplete their reserves by plunking down a payment on a new car.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:37:14 AM EST
I am trying to gauge how this is playing out here in Switzerland. It seems to me that Switzerland follows after the US, in terms of policies and economic responses (this is just anecdotal, I have no empirical data to support this, but it seems this way from where I stand). For example, Switzerland is just now starting to see a real increase in unemployment. What is different here is that, for the most part, the local Swiss banks didn't play games with sub-prime mortgages - people still had to put down real money on their homes - so this problem is not here so much. But, people aren't spending money so freely now, so business is contracting.

I'm curious, what about in Spain? How is it looking there? And is the socialist government handling the recession well there, or are they going to get blamed for this?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Fri Mar 20th, 2009 at 06:01:42 AM EST
[ Parent ]
Europe is in worse shape than the US because in the US it is at least conceivable that a Cabinet and Congress could be in place that would enact the kinds of policies that Galbraith advocates.

In Europe you have a European Commission infected with Market Fundamentalism (and I'm not just talking about the Commissioners but also the "civil service") and the likelihood of a consensus in the Council and the Parliament to move away from Market Fundamentalism is slim. In addition, the Commission and the Central Bank are required by their statutes to push economic "liberalisation".

So the US is more likely to start moving away from Market Fundamentalism than the EU.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:16:44 AM EST
interesting. (sad interesting). Hmm, makes me wonder if there were "Galbraith-ian changes" in the US approach, if it would have an influence in EU approaches?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Mar 20th, 2009 at 06:20:15 AM EST
[ Parent ]
There is a diary to be written about the "Brussels Consensus", by analogy with the "Washington Consensus" said to be behind the IMF's policies in the 1980's and 90's.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 06:23:26 AM EST
[ Parent ]
Wasn't Krugman arguing in the same vein yesterday? Although the only snippet I caught was focussed on the EU wide monetary policy...
by Nomad on Fri Mar 20th, 2009 at 07:23:31 AM EST
[ Parent ]
Was he? Do you have a link?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 07:25:23 AM EST
[ Parent ]
I saw in in the late night news yesterday that and he was addressing his talk to EU leaders; I'll have a brief search.
by Nomad on Fri Mar 20th, 2009 at 07:27:15 AM EST
[ Parent ]
I´m without Firefox at moment...

Link: http://www.nytimes.com/2009/03/16/opinion/16krugman.html?_r=1

On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration's stimulus plan is too small, given the depth of the crisis. But America's actions dwarf anything the Europeans are doing.

The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.

The only thing working in Europe's favor is the very thing for which it takes the most criticism -- the size and generosity of its welfare states, which are cushioning the impact of the economic slump.


by Nomad on Fri Mar 20th, 2009 at 07:33:42 AM EST
[ Parent ]
Nomad:
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration's stimulus plan is too small, given the depth of the crisis. But America's actions dwarf anything the Europeans are doing.
On this one I am not sure. Krugman seems to want to compare the EU to the US and EU member states to US states. On fiscal policy, that's just wrong. The EU budget is 1% of GDP and it doesn't raise its own taxes. EU member states raise their own taxes and have independent fiscal policies (subject to the Growth and Stability Pact - but that was "relaxed" in November). US states at most collect sales taxes at a rate about 1/2 of EU VAT. Nomad:
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.
On the other hand, the ECB was a lot more proactive (and derided for it) than the US Fed and the Bank of England in the second half of 2007. European governments have been bailing out banks like the US has. I am not convinced that the EU interest rate needs to be nearly zero as the US one, but if it needs to, we still have room to move it there. The US has hit the "zero lower bound".Nomad:
The only thing working in Europe's favor is the very thing for which it takes the most criticism -- the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
We still have idiots like Aznar and other EPP leaders advocating social cuts to balance budgets. But at least we have a generous welfare state.

I don't like what I read from Krugman about the EU, I think he doesn't understand it. But maybe I'm the one who doesn't understand the EU. He's the Bank-of-Sweden-Prize economist.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 07:40:14 AM EST
[ Parent ]
I think that, like many people, especially in the US, he falls into the trap of seeing the EU as a federal state because that's the only model he has for it in his head.
by Colman (colman at eurotrib.com) on Fri Mar 20th, 2009 at 07:42:36 AM EST
[ Parent ]
It's also true of the federalist and anti-federalist groups within the EU.
by Colman (colman at eurotrib.com) on Fri Mar 20th, 2009 at 07:48:23 AM EST
[ Parent ]
I think you guys are assuming he's referring to the EU in places where he may not be.  Certainly the ECB is relevant to the EU, but I read it as Krugman speaking about the national governments' fiscal policies.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Mar 20th, 2009 at 09:19:36 AM EST
[ Parent ]
He has been comparing Spain to Florida for a while.

NYTimes.com: The pain in Spain ... (Paul Krugman Blog, January 19, 2009)

The pain in Spain ...

... isn't hard to explain. Spain was basically Florida, with a housing bubble inflated by both resident and holiday purchases, and now the bubble has burst.

But Spain is in worse shape than Florida, for two reasons -- reasons familiar to anyone who was involved in the great debate about whether the euro was a good idea.

First, Europe doesn't have a central government; Spain, unlike Florida, can't draw on Social Security and Medicare checks from Washington. So the burden of recession falls entirely on the local budget -- hence the country's declining credit rating.

To which I replied (but my comment didn't pass moderation) that Spain is a sovereign country with its own central government, taxes and fiscal policy and, yes, it could draw from its own "Social Security and Medicare". Spain's budget per capita probably exceeds Florida's "local budget" severalfold.

He's just wrong on what it is like to be an EU member state, and has been for two months.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 09:33:51 AM EST
[ Parent ]
True enough, but Spain does have the SGP, which is where I think his -- admittedly very muddy, even with a generous reading -- main point would come in.  Spain has a much larger budget than Florida, but what's that got to do with the price of eggs in Taiwan?  I think he'd argue that Spain is under certain restrictions on what it can do fiscally, not wholly unlike state governments in America, but that also the EU can't do the kinds of things the federal government here can do.

Not as strict as what Florida must adhere to, but then I think the comparison with Florida has a lot more to do with the two areas having been boom-states for construction due to their warmer climates attracting Brits and Northerners.

The SGP is obviously not set in stone, and maybe that's where he gets tripped up.  But that would be more a failure to understand the nuances of EU politics than a failure to grasp the main concepts.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Mar 20th, 2009 at 10:49:24 AM EST
[ Parent ]
This is what Joaquín Almunia, European Commissioner For Economic And Monetary Policy has to say about the Stability and Growth Pact (25 February 2009)
...

The downturn, interventions in the banking sector and stimulus measures are all taking their toll on public finances. The government deficit is projected to reach 4.8% of the EU GDP in 2010, its highest level in 15 years.

...

This morning the Commission adopted opinions on the second batch of Member States' Stability and Convergence Programmes - the documents in which countries detail their budgetary plans for the next five years. Six countries foresee deficits above 3% of GDP and therefore, in accordance with the Treaty, the Commission has adopted excessive deficit reports under Article 104.3.

...

I want to stress that the Pact is not about sanctions; is about peer pressure and support for sound policies. It is about anchoring credibility for member states public finances - and that is particularly pertinent when we consider widening spreads and the pressure that some countries are being placed under by the markets.

...



Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 11:10:35 AM EST
[ Parent ]
to go beyond the Europe.Is.Doomed common wisdom, too.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 01:48:33 PM EST
[ Parent ]
True, I think. I see some of the same misconceptions coming from another bright guy I respect, Simon Johnson, on his "Baseline scenario" blog.
He's right about the social safety net being a great assett for much of europe, but I never seem to see either of them pursue the question of how this hugely valuable asset came into being. An example of their Ideological blinders?

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Mar 21st, 2009 at 05:28:13 AM EST
[ Parent ]
On this one I am not sure. Krugman seems to want to compare the EU to the US and EU member states to US states. On fiscal policy, that's just wrong. The EU budget is 1% of GDP and it doesn't raise its own taxes. EU member states raise their own taxes and have independent fiscal policies (subject to the Growth and Stability Pact - but that was "relaxed" in November). US states at most collect sales taxes at a rate about 1/2 of EU VAT.

Well, the relative weakness of the EU is a valid argument. The EU states have presumably worked out the outlines of a stimulus plan among themselves, in terms of size, with a minor EU angle. The result will be a wildly divergent stimulus in terms of direction, with some implementation issues to boot.

The upside is that we're seeing more coordinated action in the EU than before, which is good for the EU in the longer run, and that the obstacles to collective action will save us from some of the more foolish decisions that the US seems to be making.

by nanne (zwaerdenmaecker@gmail.com) on Sat Mar 21st, 2009 at 08:28:41 AM EST
[ Parent ]
US states at most collect sales taxes at a rate about 1/2 of EU VAT.

Small point about this comparison. We pay about as much tax to the State and local government entities as to the Federal Govt.  Sales tax (5%) is not the largest State tax. In Virginia we also pay a tax on income, a large estate tax, a tax on other personal property, and various other lesser taxes.  The States also have their independent budgets and fiscal plans. I think, as an aside, that California is/was the world's fifth largest economy or some such. It's budget and government structure reflected that fact.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Sat Mar 21st, 2009 at 03:18:38 PM EST
[ Parent ]
I remember when I was in California sales tax was about 8% and state income tax was paltry compared with Federal income tax. But of course, each state is different.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:15:59 AM EST
[ Parent ]
You are right, each State has its own taxing laws and not all States have an income tax (most do though).  However, they are all fairly artful in extracting taxes from one source or another.  Some depend on "natural" resources to provide most of their revenue, like Texas (maybe oil) and Florida (probably tourism), but they are not dependent on the Federal government for funding many of their services to citizens.
This site
shows state taxes for 2007 by state as a percentage of income.  Guess which State collects the higher tax by far (Alaska - shame shame Ms Palin). I don't know what is included in this "total" of taxes because Virginia only ranks 39th with 6.3%.  I think this must be income tax and sales tax alone because property and other taxes we pay probably double this percentage.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Sun Mar 22nd, 2009 at 10:02:30 PM EST
[ Parent ]
by Nomad on Fri Mar 20th, 2009 at 07:36:30 AM EST
[ Parent ]
... the US is among the countries that was most badly infected with the Anglo Disease, but at the same time is among the countries with the institutional framework that can put effective policy in place should it stumble upon an effective policy.

And then there's Peak Oil ... any main global region that is still in recession when several main global regions can start a recovery faces the risk of rising oil prices while it is still in recession.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 07:59:10 PM EST
[ Parent ]
NBBooks hit the top of the Daily Kos rec list last night with a Diary on this, and I felt I should put in my three penno'rth (which I rarely do there....)

Daily Kos:  The Economy: "No Return to Normal" - Galbraith UPDATED

Nice Diary, NB Books, we could use it to spice up EuroTrib tonight!

Humpty Dumpty is definitely broken, and can't be put back together again.

The first point is that most of the capital that underpinned the Mother of All Bubbles didn't come from banks, it came from investors, many of them overseas, through the mechanisms of securitisation, credit derivatives, credit insurance, and toxic cocktails of these three.

So while recapitalising Banks might treat the visible wounds, it won't stop the invisible internal bleeding of credit from the shadow banking part of the economy, and the further collapse of asset prices and disappearance of jobs.

The second point is that pumping capital into banks, and providing them with more liquidity through buying up their holdings of debt will not make their potential borrowers any more creditworthy than they have now become.

So the shortage is not of credit, it's of creditworthy borrowers. Monetary solutions are IMHO doomed to failure. and the Fed is utterly powerless.

The only solutions are fiscal.

The effect of the existing system of financial capital - a toxic combination of leverage and private property in commons - has been to transfer wealth from the 99% to the 1% who are even now clamouring that the 99% are to blame and should bail out the 1%.

This is the effect of what Jerome calls the Anglo Disease.

Apart from the stimulus of investment in public assets - a Green New Deal etc - and massive investment in public services, I believe that Systemic Fiscal Reform is necessary.

Simply put, we should tax Privilege and not People.

All taxes on earned income and profits, and transaction taxes should be abolished, as should means-tested benefits.

To replace them I advocate:

(a) Location Benefit Levy - a tax on the rental value of land.  This is a tax on the privilege of exclusive occupation of the Commons of land;

(b) Carbon Levy - a tax on the privilege of the exclusive use of the commons of non-renewable energy;

(c) Limited Liability Levy - a levy on the GROSS revenues of Corporations - this is a tax on the privilege enjoyed by investors of limitation of liability.

From the proceeds I would pay a National Dividend - as of right - to all citizens, and provide decent education and health services to all within a framework of what Dr Yunus of Grameen Bank calls "Social Business" operating on a "Not for Loss" basis.

The savings in the operating costs of the existing fiscal system - both in the Public and private sectors - would be phenomenal, and those involved would be far happier doing something socially useful, I suspect....

There we are. Solved the problems of the World. ;-)

Now back to ET....



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Mar 20th, 2009 at 06:26:17 AM EST
Yes. I read his piece yesterday. Damned good.
Wish he's diary here more often.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Mar 21st, 2009 at 05:29:53 AM EST
[ Parent ]
ChrisCook:
The second point is that pumping capital into banks, and providing them with more liquidity through buying up their holdings of debt will not make their potential borrowers any more creditworthy than they have now become.

this should be repeatedly drilled....i see one of those luminous boardings in times and piccadiily squares...

it really is the nub of the issue, the final rag falling off the naked emperor, the 'duh!' understanding moment, the great unanswered question most don't even want to contemplate.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Mar 21st, 2009 at 07:29:47 AM EST
[ Parent ]
... get the recession to the bottom with the smallest feasible decline to set a higher platform for the recovery ... during a serious recession like this, sparked by a fundamental flaw in the generation of new spending capacity and recirculation of that spending capacity through the spending/income cycle, monetary policy can at best accommodate recovery ... it cannot generate recovery.

And on the one hand, burning through money to paper over insolvency of financial institutions undermines the political and public finance position to pursue sufficiently aggressive fiscal stimulus, and on the other hand, it is vital to have a banking systam that can accommodate the credit demand of credit-worth borrowers if the recession bottoms out.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 08:03:54 PM EST
[ Parent ]
yup, that's increasingly clear, even to little bear brains.

the real shock comes when you think of a trillion put into highspeed rail, green grids etc, and then i put it together it's gone to be squatted on by people who are already ungodly rich, and don't give a rat's ass about the the environment, or us for that matter.

we're all just commodities, methinks, to them...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Mar 23rd, 2009 at 09:49:22 AM EST
[ Parent ]
No Return to Normal - James K. Galbraith
Third, the initial package was affected by the new team's desire to get past this crisis and to return to the familiar problems of their past lives. For these protégés of Robert Rubin, veterans in several cases of Rubin's Hamilton Project, a key preconception has always been the budget deficit and what they call the "entitlement problem." This is D.C.-speak for rolling back Social Security and Medicare, opening new markets for fund managers and private insurers, behind a wave of budget babble about "long-term deficits" and "unfunded liabilities." To this our new president is not immune. Even before the inauguration Obama was moved to commit to "entitlement reform," and on February 23 he convened what he called a "fiscal responsibility summit." The idea took hold that after two years or so of big spending, the return to normal would be under way, and the costs of fiscal relief and infrastructure improvement might be recouped, in part by taking a pound of flesh from the incomes and health care of the old.
Ouch.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 10:21:39 AM EST
There will be a revolt if he touches social security in any way but to ADD money!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Mar 20th, 2009 at 10:55:40 AM EST
[ Parent ]
(Haven't read the thread yet so apologies if this has been covered.)

One of the more irritating lacks of US political and economic analysts (sic) is their operative ignorance of historical data and knowledge coupled with a inability to grasp social, cultural, economic, political ... anything - really ... as dynamic trends.

All "normal" means - operative definition - is the analyst expects the Universe to run along as it ran during the time the analyst was impressionable.  

To which I reply, "Get a brian, moran."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Mar 20th, 2009 at 10:31:23 AM EST
Here's Krugman's take on whether Obama is allowing Geithner & Summers enough rope>

The Geithner plan has now been leaked in detail. It's exactly the plan that was widely analyzed -- and found wanting -- a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system -- that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad -- I mean misunderstood -- assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it's immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating -- deliberately! -- the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn't, that's someone else's problem.

Read it and weep.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Mar 21st, 2009 at 07:36:34 AM EST
geezer in Paris:
Read it and weep.

I laugh.

These people forget that they have international creditors.

I suspect that they will be reminded in London shortly in respect of who owns:

(a) their IOU's;

(b) the oil and gas.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Mar 21st, 2009 at 08:19:51 AM EST
[ Parent ]
my (ever-optimistic) friends over at the oil drum think that a real dollar crash will be inevitably accompanied by war.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 01:47:48 PM EST
[ Parent ]
with who?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Mar 21st, 2009 at 03:37:56 PM EST
[ Parent ]
Needs to be somewhere we can build some electric railway lines to invade.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 08:05:04 PM EST
[ Parent ]
I don't know, you have military bases everywhere.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:26:36 AM EST
[ Parent ]
So they think a dollar crash won't occur for that reason?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Mar 21st, 2009 at 03:42:13 PM EST
[ Parent ]
... it is, rather, zOMG we are going to have a war, because the dollar.is.s0.d00med!!!

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Mar 21st, 2009 at 08:06:31 PM EST
[ Parent ]
I don't know zilch about what you guys are talking about, but having spent 30 years in Hollywood, I understand graft, fuck ups, corruption, coke, whores, cost overruns, lies, frauds, egos, super-rich, fake loans, fake assets, fake money, etc. so I get the general idea.

When I left Credit Lyonnais in 1985 it was because I'd seen the bank being conned out of tens of millions by a couple of mafiosi, and since I wasn't in a position to persuade anyone of that fact, I bailed out. That's also why we left the US in 2005. A country being run by the joined intellects of Tony Soprano and Sauron isn't the ideal place if you want to enjoy your golden years in peace.

Without being 100% in agreement with Kunstler and others like him, I've been saying for a while that we're headed for a global collapse/transformative decade.

I believe that most of the concerns I see discussed in this thread will pale before far more important concerns which are/will be: food, shelter, transportation and security.

Our local rag LA DEPECHE DU MIDI had its front page today about people starting to grow food in their gardens, and last week about modern-day Robin Hoods stealing food from supermarkets to give to the poor.

The times, they're a-changin'.

 

by Lupin on Mon Mar 23rd, 2009 at 12:40:38 PM EST


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