Economics 12/01/2009

• Amazon.com: Globalization and Its Discontents (9780393324396): Joseph E. Stiglitz: Books

  tags: Economics

  • I think that there are two main points that Stiglitz makes. The first is that standard IMF policy has tended to approach countries in financial crises with the same rather crude economics as that used on Wall Street, which leads them to think like bank managers rather than economists. If you force a country with a fiscal deficit to reduce government spending, then this will reduce aggregate demand, which will reduce government income, and make the deficit worse, inflicting more pain on the population. The reason that the IMF does this, is that it is meant to restore confidence in the markets, but once a crisis starts, foreign investors tend to bail out anyway, so all it buys you is breathing space. You should accept that the foreign investors are gone, and focus on growth.

    The other thing that I got from the book is the hypocrisy of the US administration, which forced policies on emerging markets, which it would not itself accept. In fact, the IMF more or less took instructions from the US Treasury during the 1990s, and certainly my sense at the time was that the actual IMF staffers were very frustrated at the policies that the US government forced them to follow. The point though, is that while the US government was battling the balanced budget amendment at home, on the reasonable grounds that it limited their freedom to manage demand, they were essentially forcing a balanced budget amendment on the emerging markets via IMF conditionalities. I remember attending a Paris Club meeting, where the Fund said that they were aware that budget deficits could be beneficial – this was never reflected in the lending policies that the Treasury forced on them. Other examples are forcing central banks to focus only on inflation, and forcing emerging markets to open their markets, while protecting US farmers from imports.

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Economics 11/26/2009

• RGE – A Tale of Two American Economies

  tags: Economics

  • The story of the U.S. is, indeed, one of two economies. There is a
    smaller one that is slowly recovering and a larger one that is still in
    a deep and persistent downturn.
  • Many of the lost jobs – in construction, finance, and outsourced
    manufacturing and services – are gone forever, and recent studies
    suggest that a quarter of U.S. jobs can be fully outsourced over time
    to other countries.
  • And the credit crunch for
    non-investment-grade firms and smaller firms, which rely mostly on
    access to bank loans rather than capital markets, is still severe.
  • Larger firms – even those with large debt problems – can refinance
    their excessive liabilities in or out of court, but an unprecedented
    number of small businesses are going bankrupt. The same holds for
    households, with millions of weaker and poorer borrowers defaulting on
    mortgages, credit cards, auto loans, student loans and other consumer
    credit.

  • With
    the stock market rising and home prices still falling, the wealthy are
    becoming richer, while the middle class and the poor – whose main
    wealth is a house rather than equities – are becoming poorer and being
    saddled with an unsustainable debt burden.

    So, while the United States may technically be close to the end of a
    severe recession, most of America is facing a near-depression. Little
    wonder, then, that few Americans believe that what walks like a duck
    and quacks like a duck is actually the phoenix of recovery.

• RGE – The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses

  tags: Economics

  • Also, remember: The last recession ended in November
    2001, but job losses continued for more than a year and half until June
    of 2003; ditto for the 1990-91 recession.

    So we can expect that
    job losses will continue until the end of 2010 at the earliest. In
    other words, if you are unemployed and looking for work and just
    waiting for the economy to turn the corner, you had better hunker down.
    All the economic numbers suggest this will take a while. The jobs just
    are not coming back.

  • As a
    result of these terribly weak labor markets, we can expect weak
    recovery of consumption and economic growth; larger budget deficits;
    greater delinquencies in residential and commercial real estate and
    greater fall in home and commercial real estate prices; greater losses
    for banks and financial institutions on residential and commercial real
    estate mortgages, and in credit cards, auto loans and student loans and
    thus a greater rate of failures of banks; and greater protectionist
    pressures.

    The damage will be extensive and severe unless bold policy action is undertaken now.

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Economics 11/25/2009

• James K. Galbraith: Old Mistakes Die Hard

  tags: Economics, Policy

  • I do blame the Bush-Obama financial policy team, who either believed that “credit would flow again” if you stuffed the banks with money, or knew that it wouldn’t.

  • Low interest rates prove this: despite all the dire predictions, there is no difficulty in placing Treasury debt. Hence, we are free to pursue high employment, if we choose to do it.

    Can anything be done now? Well yes, technically: the same steps that could have been taken in January 2009 could be taken in January 2010. But they won’t be, because for the moment we are seeing the inventory bounce, a productivity surge, real GDP growth, and other “good signs.” So we’ll be told to wait, to be patient, and to make sure we don’t buy what we can’t afford. And double-digit joblessness will linger on, breeding frustration and anger — perhaps all the way through to the mid-term elections. After which, what will be possible is anyone’s guess.

• Ezra Klein – Why must we have double-digit unemployment for the foreseeable future?

  tags: Economics, Policy

  • James Galbraith points fingers:

    Technically it would have been fairly easy, 10 months ago, to get this bus back on the road. There could have been open-ended fiscal assistance to stop the budget hemorrhage of the states and cities. There could have been a jobs program and effective foreclosure relief. There could have been a payroll tax holiday. There could have been a strategy for sustained massive effort on infrastructure, energy and climate.

  • I’m with hughmaine, who is also spot on. What happened to that tease about another stimulus a few weeks back (I’ve been out of touch)?

    What we’ve seen is the stimulus work, such pitiable amount of it that actually went into the productive economy. It’s not complicated. But perhaps the Democrats are tired of holding office.

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Economics 10/24/2009

• health-care and taxes

  tags: Economics, Policy

  • We’re not talking about more taxes, we’re talking about redistribution, narrowing that widened gulf between the holders of wealth and the dispossessed.

    We’re talking about redressing the massive shift in equities of the last 30 years, from Reagan on.

    There are reasons that the culture records a lack of progress in recent decades of that old American Dream – it stopped happening, and regresssive ideologies rolled back a lot of the well-being of ordinary people.

    Every chance, every micro-opportunity arising in the legislative chamber to redress this imbalance will be taken I trust, and should be taken, by the Democrats who were elected in general principle to do this very thing.

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Economics 10/16/2009

• Burn it Down and Salt the Earth | Mother Jones

  tags: Economics

  • There’s an insanity here that’s almost beyond analysis.  Wall Street can spark an economic slowdown that misses destroying the planet and causing a second Great Depression only by a hair’s breadth — said hair being an 11th hour emergency infusion of trillions of taxpayer dollars — and then turn around and use those trillions to return to bubble levels of profitability within a year.  And they can do it even though the rest of the economy is still suffering through the worst recession since World War II.  It’s mind boggling.

    Is there any silver lining here?  Probably not, but I’ll try: If Wall Street can shrug off the worst recession of our lifetimes as if it’s a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one.  That in turn means it will almost certainly happen while today’s politicians are still in office.  So maybe news like this will finally spur lawmakers to realize once and for all that the financial industry needs to be cut down to size.  Half measures won’t do it.  Self-regulation won’t do it.  Compensation limits won’t do it.  Byzantine, watered-down rules won’t do it.  Something like a Morgenthau Plan for Wall Street is the only thing that has even half a chance of working.

• Ezra Klein – The House That Private Insurance Built

  tags: Economics

  • This is the house they’ve built: an insurance market where plans are written for the healthy and all legal efforts are made to exclude the sick. That’s meant premiums are somewhat lower than they’d otherwise be, but only because the people who most need health-care insurance aren’t able to afford it, or in some cases, aren’t able to convince anyone to sell it to them. Now that arrangement is ending and they’re scared that they can’t provide an affordable product to the people who need it. They may be right, but it’s evidence of how deeply perverse their business has become, not of what’s wrong with health-care reform. When they say that the individual market would be cheaper in the absence of health-care reform, they’re saying the individual market would be cheaper if they could continue refusing to sell affordable insurance to people who need health-care coverage.

    This isn’t an argument against health-care reform. This is proof of its necessity.

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Economics 10/10/2009

• bampbs | The Economist

  tags: Economics

  • Wouldn’t it be lovely if experience could triumph over the cycle of euphoria and terror in their turns ? But our knowledge of the future is so fundamentally uncertain that financial markets will never cease their overreactions. It would be good if speculation with borrowed money were prohibited. It would be better if everyone recognized that movements in asset prices beyond those justified by reality are just another manifestation of inflation or deflation, and just as problematical as any other. For this reason, strongly counter-cyclical regulation is best; stability ought to be the regulators overriding goal. Finance has no independent value whatsoever. It is time it was put back in its place.

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Economics 10/06/2009

• Poverty Simulation

  tags: Economics

  • Come and live a month in poverty…

    One of our most powerful educational tools is the Poverty Simulation Workshop. The Poverty Simulation Workshop is a role-playing experience that offers the opportunity to learn more about the realties of living in conditions of poverty. Participants enter the workshop with a new identify and family profile. Participants experience one month of poverty compressed into the real time of the simulation (generally three hours total). Afterwards in the debriefing, they share insights of extraordinary vividness and intensity.

    
    As a result, ordinary people from all walks of life can share a very special kind of awakening. The Poverty Simulation Workshop can open people’s eyes to the human cost of poverty. The power of this unique learning resource is that it creates, like no other method, an insight into the state of chronic crisis that consumes so many working poor families.

• Ezra Klein – The Persistence of Obesity

  tags: Economics

  • If you have never participated in a poverty simulation run by qualified people, you should seek one out and do it. I thought I wouldn’t learn anything but I was floored by what I realized I would do to cope and survive – and this was a one-hour sim. I was also shocked by the assumptions that people had about the poor. I ran into a lot of deeply internalized beliefs (often to the point of subconscious acceptance) that the poor are not to be trusted, addicted to drugs and/or alcohol and are neglectful parents. If I could, I’d run poverty simulations in every high school in the country.

• Ezra Klein – Your Recession in Charts

  tags: Economics

  • Since the early 1970’s real wages have been flat to falling. Workers’ share of GDP has been falling. Management used to reinvest profits in the business, and/or pay dividends. But since the marginal tax rates came down beginning in the 1980’s, management instead pays itself ever more exorbitant compensation packages.

    To make up the difference, ordinary people stopped saving then started borrowing. The financial sector aided and abetted this by devising ever more clever means to hook people on debt.

    Now the golden goose is dying because people can’t afford to buy stuff any more. People are cutting back on credit and saving as much as they can. Business can’t get credit because the banks are hoarding the money and so no one is hiring. The gov’t is stymied by “deficit hawks” who would rather see unemployment keep rising than spend public money to make up for the decline in private demand. And the rich? The people whose share of income has more than doubled over the past few years? Don’t even think of raising their taxes back to where they were in the Clinton years. That’s Communism!

  • Mimikatz – as good a 3 paragraph summary as I have seen.

    I would add that what I find really remarkable is that many of the rich seem to be willing to allow the golden goose to die.

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Economics 10/02/2009

• Nieman Reports | Why the News Media Became Irrelevant—And How Social Media Can Help

  tags: Economics

  • But things started to change well before the Web became popular. Over the past few decades, news conglomerates took over local papers and stations. Then they cut on-the-ground reporters, included more syndicated content from news services, and focused local coverage on storms, fires, crashes and crime to pad profit margins. The news became less local and less relevant, and reporters became less connected to their communities. Surveys show a steep drop in public trust in journalism occurring during the past 25 years.
  • The truth is the Internet didn’t steal the audience. We lost it. Today fewer people are systematically reading our papers and tuning into our news programs for a simple reason—many people don’t feel we serve them anymore. We are, literally, out of touch.
  • Trust is key. Many younger people don’t look for news anymore because it comes to them. They simply assume their network of friends—those they trust—will tell them when something interesting or important happens and send them whatever their friends deem to be trustworthy sources, from articles, blogs, podcasts, Twitter feeds, or videos.
  • Mainstream media see social media as tools to help them distribute and market their content. Only the savviest of journalists are using the networks for the real value they provide in today’s culture—as ways to establish relationships and listen to others. The bright news organizations and journalists spend as much time listening on Twitter as they do tweeting.
  • The problem with mainstream media isn’t that we’ve lost our business model. We’ve lost our value. We are not as important to the lives of our audience as we once were. Social media are the route back to a connection with the audience. And if we use them to listen, we’ll learn how we can add value in the new culture.

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Economics 09/26/2009

• Why capitalism fails – The Boston Globe

  tags: Economics

  • “Minsky” was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.
  • In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

  • Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

    This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s ceaseless process of “creative destruction.”

  • To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve – what he liked to call the “Big Bank” – step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke – like Minsky, a scholar of the Depression – it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.

    Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was – and is – based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor – by building a new high-speed train line, for example.

    Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government – or what he liked to call “Big Government” – should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

  • If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”
  • Minsky did not share his profession’s quaint belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic.

• The Financial Crisis and America’s Casino Culture – NYTimes.com

  tags: Economics

  • The shock that accompanied the end of the American real estate boom once seemed a sentinel event that would bring tighter government scrutiny of the financial realm. Yet as fear of catastrophe fades, the question is how quickly the momentum in Washington for tighter financial rules is diminishing and whether unemployed workers and strapped homeowners will feed a groundswell for change strong enough to offset government turf wars and the influence of financial industry lobbyists.

  • In Washington, on Wall Street and on Main Street, many are aware that the era of lightly supervised markets was fabulously lucrative for those positioned to capture a piece. Financial services and real estate — nurtured by easy money — swelled into major sources of employment, while boosting stock portfolios for huge institutions and ordinary people alike. New York cemented itself as the global financial capital.

    Over the last quarter-century, moreover, the traditional faith in unfettered markets deepened, and became entwined with the belief in the abundance of American opportunity, reinforcing a justification for laissez-faire: In a land that subscribes to the Horatio Alger story — in which anyone can supposedly make it — the market can be trusted to make the rules. For Milton Friedman, the most influential economic thinker of the last half-century, political and economic freedom were synonymous.

  • So the question now is how many people have similarly changed their sense of what the American economy needs. Mostly, it is a matter of whether the country is still feeling lucky; whether the recent crisis will come to feel like an unavoidable toll on the highway to fortune, or whether something deeper has shifted in the American psyche, leaving us shaken in a lasting way.

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Economics 09/21/2009

• Priceless: How The Federal Reserve Bought The Economics Profession

  tags: Economics

  • The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession

  • Paul Krugman, in Sunday’s New York Times magazine, did his own autopsy of economics, asking “How Did Economists Get It So Wrong?” Krugman concludes that “[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”

    So who seduced them?

    The Fed did it.

• The Atlantic Online | September 2009 | How American Health Care Killed My Father | David Goldhill

  tags: Economics

  • What amazed me most during five weeks in the ICU with my dad was the survival of paper and pen for medical instructions and histories. In that time, Dad was twice taken for surgical procedures intended for other patients (fortunately interrupted both times by our intervention). My dry cleaner uses a more elaborate system to track shirts than this hospital used to track treatment.
  • It’s astonishingly difficult for consumers to find any health-care information that would enable them to make informed choices—based not just on price, but on quality of care or the rate of preventable medical errors.
  • A wasteful insurance system; distorted incentives; a bias toward treatment; moral hazard; hidden costs and a lack of transparency; curbed competition; service to the wrong customer. These are the problems at the foundation of our health-care system, resulting in a slow rot and requiring more and more money just to keep the system from collapsing.

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Economics 09/11/2009

• Op-Ed Contributor – Big Food vs. Big Insurance – NYTimes.com

  tags: Economics

  • When health insurers can no longer evade much of the cost of treating the collateral damage of the American diet, the movement to reform the food system — everything from farm policy to food marketing and school lunches — will acquire a powerful and wealthy ally, something it hasn’t really ever had before.

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Economics 09/10/2009

• Ezra Klein – The Provider Problem

  tags: Economics

  • Nobody likes insurers so they make a good target, but of course providers are the main problem. We need to get providers to organize themselves more efficiently. Specifically solo and small group practice has got to go. Those are the docs screaming that they can’t survive on Medicare rates–because their overhead is so high and they can’t afford to implement the best information technology. And you need good I.T. to deal with the complicated reimbursement schemes that are envisioned.

    The public option would have been great to accelerate the transition to larger more integrated delivery systems. If you set it up like Kaiser where all the docs are on salary in a closed system–beautiful.

  • The problem with your argument is that it ASSUMES that providers are the main problem. There are a whole host of factors driving up costs, and provider compensation is only a problem for some specialties and under some circumstances; and this is more a matter of the current cost structure than provider greed. Why do I have to write this?

    1. Fee for service plans, coupled with insurers unwillingness to pay reasonable rates for compensation, cause doctors to overbill in the expectation that they aren’t going to get paid what they bill. The result is that prices are gamed rather than negotiated. Some Doctors make out handsomely from this, but many simply can’t afford to bill at the medicare rates. Cutting compensation will drive these doctors out of business.

    2. Medical equipment, inflated Hospital and Clinical fees, and drugs inflate costs even faster than provider fees. All these are rated. Drugs are over-priced where-ever there is low rate production or a partial monopoly. Equipment is sold 10-20 times or leased at rates more expensive than it would cost to buy the equipment outright. There is little incentive to keep such costs down because both the hospitals, labs, and insurance companies prefer to bill piecework because they can get away with it.

  • 3. Hospital and Clinic administrators could control these costs, but only if the system as a whole is allowed to negotiate prices with the drug companies, to bargain for equipment; and if the various companies involved are subject to vigorous anti-trust enforcement.

    4. In some cases there are conflicts of interests from Doctors who own labs, or wear inappropriate multiple hats — that could be contained by some internal policing and new laws.

    5. Controlling provider costs would be simple too. If Doctors are paid a retainer, and given incentives based on outcomes, on the Mayo Clinic Model, costs can be contained reasonably and in a manner acceptable to both groups. Blaming any one group for the problem is kind of dumb because Provider Companies, Insurance Companies, Hospitals, Drug Companies, and Medical Equipment companies are all playing in a system that requires them to play billing games just to stay in business, and rewards them handsomely for what others outside the business might see as fraud, monopolistic practices, and profiteering.

• Back to Business – Wall Street Pursues Profit in Bundles of Life Insurance – Series – NYTimes.com

  tags: Economics

  • Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.
  • But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

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Economics 09/09/2009

• How Did Economists Get It So Wrong? – NYTimes.com

  tags: Economics

  • It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism.
  • Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations.

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Economics 09/02/2009

• What Will the Market Think?

  tags: Economics

  • Guys- when you talk about markets you’re talking about two seperate things. Most of the public thinks the market = the stock market. And yes, no reform is good for health insurance stocks. But Ezra is talking about the bond market, specifically the market for US Gov’t debt. This market absolutely dwarfs the stock market in size. And he is technically correct- if the US enacts policy to signal it will contain healthcare costs then interest rates will go down and we won’t find it as hard to issue debt down the line.

    Posted by: Quant | September 1, 2009 3:39 PM
    | Report abuse

    Quant has it right. And the Federal Reserve System, which controls the choke points of our economy, and which we seem to be offering evermore power to for some reason, holds the bond market as its principal focus of fidelity (after the banks, which are family).

    In other words, how the bondholders perceive America is how the Fed will either cripple or unencumber our productive economy, at any given time.

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Economics 08/05/2009

• The Strange Role of the Insurers

  tags: Economics

  • Other countries get better results at less than half the cost per patient. Clearly we can learn something from them. We do not have to invent the wheel. But this posting acts as if we are the only country in the universe. The reason is never stated, but it is clear. The most important principle in health care for the media is to preserve the income of health insurance executives and their wealthy stockholders. That is why we can’t learn from other countries. That is why all of the proposal being considered are so complicated.

    The goal of a well run corporation is to make money for shareholders. In the case of health insurance companies this is in conflict with providing good efficient health care to the country.
    The for profit insurers have learned that the way to get a high stock price is to have a low Medical Loss Ratio which is the percentage of inflow (premiums) paid out in medical benefit to patients. Notice that they consider medical benefits as “losses.”

  • They do this in two ways. They make the numerator smaller by making it difficult for doctors and patients to collect. They make the denominator larger by obscene executive compensation, high profits, billions spent processing complicated forms they require of physicians and patients, and still more billions spent on fighting with doctors and patients over coverage and payments. See the SEC fillings for the Medical Loss Ratios and a recent Commonwealth Fund Study for the difficulty patients and physicians have with coverage and payments.

    Because all of the current proposals try to fix health care but keep the cancer of for profit insurance, they are horrendously complicated. They run about 1,000 pages. HR676, Medicare for All, not only gives good health insurance to everyone, it solves the problems of pre-existing conditions and the situation where loss of job implies loss of health insurance. Furthermore, it costs less than any of the current proposals because it will save us $500 Billion each and every year by the elimination of the high overhead (= 1 – Medical Loss Ratio) and huge compliance costs of both physicians and patients. Also it will make it easy to crack down on the wasteful “marketing” of drug companies. In fact, studies have shown that we can get all this and it will not cost us anymore than we are already paying and probably less.

    HR676 is 70 pages long.

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Economics 08/04/2009

• Op-Ed Columnist – Rewarding Bad Actors – NYTimes.com

  tags: Economics

  • Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer.

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Economics 08/01/2009

• How Medical Breakthroughs Happen: A Response to Megan McArdle | The New Ledger

  tags: Economics

  • To understand how research is divided overall, consider it as three tranches: basic, translational, and clinical. Basic is research at the molecular level to understand how things work; translational research takes basic findings and tries to find applications for those findings in a clinical setting; and clinical research takes the translational findings and produces procedures, drugs, and equipment for use by and on patients.
  • Pharma operates under a great deal of pressure these days, and not just from the political side — everyone wants to avoid being left holding the next Vioxx. But as a matter of focus, their only area of interest is that last category: clinical research. What’s more, they’re only really interested in clinical research into areas that hold the promise of recouping the cost of their investment, and more. They are a business, and they perform as one.
  • The truth, as anyone knowledgeable within the system will tell you, is that private companies just don’t do basic research. They do productization research, and only for well-known medical conditions that have a lot of commercial value to solve. The government funds nearly everything else, whether it’s done by government scientists or by academic scientists whose work is funded overwhelmingly by government grants.

• Some U.S. bank pay unmoored from performance: Cuomo | Reuters

  tags: Economics

  • Cuomo said his office studied historical financial filings and found that at many banks compensation increased in the 2003-2006 bull market years, but stayed at those levels as the mortgage crisis and recession hit.

    “Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

    “Bonuses and overall compensation did not vary significantly as profits diminished.”

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Economics 07/24/2009

• Ezra Klein – The Problems With the Federal Reserve — and Its Alternatives

  tags: Economics

  • JonathanTE I recommend Greider’s book, Secrets of the Temple. I just re-read it this year, and it’s plain to see that nothng has changed since his initial explanation in the Eighties of how the Fed works.

    This business of slow versus fast, Congress versus some agency or commission, non-expert versus expert, is a bit of a straw man.

    It’s commonly posited that the Fed CAUSED the Great Depression by not loosening the money supply.

    Congress only has fiscal policy, because monetary policy is given to the Fed. Money creation is a part of how our economy works, and from old history the banks remain a party to this creation, which gives them lovely free profits.

    The point is that it’s government money, a sovereign thing. We the people through our representative government could actually share in this largesse of the system, rather than the banks, who actually do nothing for it other than expand credit – except when we really need it of course.

    The Fed over the decades has caused immense suffering and hardship. The governors have shown in analysis after analysis that they really haven’t known what happens in the economy – they operate by incremental trial and error. The trials generally err in favor of the banks, and the erors are weighted against us.

    They consistently sacrifice the productive economy to bolster the banking industry – their mandated and acculturated constituency.

    So when Greider is saying reform the Fed he’s talking about switching the constituency of the money-creation power back to the productive economy of us, the people.

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Economics 07/23/2009

• Dismantling the Temple

  tags: Economics

  • The Fed was
    never independent in any real sense. Its power depended on taking care
    of its one true constituency in banking and finance.

    A reconstituted central bank might keep the famous name and
    presidentially appointed governors, confirmed by Congress, but it would
    forfeit the mystique and submit to the usual standards of transparency
    and public scrutiny. The institution would be directed to concentrate on
    the Fed’s one great purpose–making monetary policy and controlling
    credit expansion to produce balanced economic growth and stable money.
    Most regulatory functions would be located elsewhere, in a new
    enforcement agency that would oversee regulated commercial banks as well
    as the “shadow banking” of hedge funds, private equity firms and others.

    The Fed would thus be relieved of its conflicted objectives. Bank
    examiners would be free of the insider pressures that inevitably emanate
    from the Fed’s cozy relations with major banks. All of the
    private-public ambiguities concocted in 1913 would be swept away,
    including bank ownership of the twelve Federal Reserve banks, which
    could be reorganized as branch offices with a focus on regional
    economies.

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Economics 07/19/2009

• Op-Ed Columnist – The Joy of Sachs – NYTimes.com

  tags: Economics

  • First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

    Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

    Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

  • Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.

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Economics 07/11/2009

• Ezra Klein – The Stars And Stripes Model

  tags: Economics

  • I note that UNsubsidized media (e.g FOX) doesn’t pursue truth either. Kind of shoots down the free part of free enterprise.

    The fact is that recipients of public monies can be held to standards, including the standard of transparency. And objective reporting can be measured and created by standards – the standards of logic and verifiability have long existed.

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Economics 06/25/2009

• President Obama Holds Press Conference – washingtonpost.com

  tags: Economics

  • OBAMA: Why would it drive private insurance out of business? If — if private — if private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.

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Economics 06/18/2009

• Ezra Klein – Health Insurance Exchanges: The Most Important, Undernoticed Part of Health Reform

  tags: Economics

  • The Health Insurance Exchange, combines the benefits of choice that are theoretically available on the individual market with the bargaining power and scale that’s generally accessible only in large employers (and the exchange will, in theory, have more bargaining power than even the largest employers, as it will have a much larger base of customers). You also have a space to test out innovative ideas that might make the market better, like Sen. Jay Rockefeller’s (D-W.Va.) insurance rating agency, or the public insurance option. You can standardize billing and payment methods and force the adoption of electronic medical records.

    And what happens when you introduce productive competition, efficiencies of scale, more innovation and increased consumer power into a market as dysfunctional as the current situation for health insurance? In theory, you get lower prices and higher quality. And if the Health Insurance Exchange has lower prices and higher quality, more individuals will use it and more companies will buy into it. And if that happens, then the efficiencies of scale should increase, and so should the pace of innovation (as the rewards will be greater with more customers), and so the Health Insurance Exchange should further outpace the other markets, thereby attracting yet more customers, thereby further accelerating the virtuous cycle. Eventually, it could become the country’s primary insurance market.

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Economics 06/04/2009

• Ezra Klein – My Colleagues Like Gambling Metaphors

  tags: Economics

  • An entrepreneur owes the racehorse.
    An “investor” bets on the outcome of the race.
    A seller of derivatives offers a side bet to someone else as to the chances that the investor will win his bet.
    A seller of CDO’s offers a side bet as to whether the derivative seller will honor his bet if he loses.

    Question: who is the real person making money in all this?

    Answer: the track, they don’t care whether the horse wins or loses, they gets their commission either way. The only way they can lose is if they accepts unbalanced bets. Pari-mutual odds are designed so that this can’t happen.

    In my analogy the track owner’s and bookies’ roles used to be taken by brokers and investment bankers, but they got greedy and started to take bets themselves instead of just collecting transaction fees (of which there are now many).

    Even with subprime mortgages they wouldn’t have been in much trouble since they packaged up the loans and sold them to others, thus reducing the risk. It was the CDO’s and other financially purposeless transactions that brought the system down.

    If you want to point the final finger at blame, then ask who was demanding that banks and other financial firms keep generating ever higher returns? The answer is us. As mutual fund holders and investors in IRA’s and the like we kept demanding 8-15% return per year. Any fund that didn’t meet this level quickly found its investors going elsewhere. The result was everyone got trapped in a cycle of increasing risk.

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Economics 05/28/2009

• Annals of Medicine: The Cost Conundrum: Reporting & Essays: The New Yorker

  tags: Economics

  • When you look across the spectrum from Grand Junction to McAllen—and the almost threefold difference in the costs of care—you come to realize that we are witnessing a battle for the soul of American medicine. Somewhere in the United States at this moment, a patient with chest pain, or a tumor, or a cough is seeing a doctor. And the damning question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.
  • As economists have often pointed out, we pay doctors for quantity, not quality. As they point out less often, we also pay them as individuals, rather than as members of a team working together for their patients. Both practices have made for serious problems.
  • When it comes to making care better and cheaper, changing who pays the doctor will make no more difference than changing who pays the electrician. The lesson of the high-quality, low-cost communities is that someone has to be accountable for the totality of care. Otherwise, you get a system that has no brakes. You get McAllen.
  • Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can’t do it. Or we can turn to the local medical communities, which have proved that they can. But we have to choose someone—because, in much of the country, no one is in charge. And the result is the most wasteful and the least sustainable health-care system in the world.
  • omething even more worrisome is going on as well. In the war over the culture of medicine—the war over whether our country’s anchor model will be Mayo or McAllen—the Mayo model is losing. In the sharpest economic downturn that our health system has faced in half a century, many people in medicine don’t see why they should do the hard work of organizing themselves in ways that reduce waste and improve quality if it means sacrificing revenue.

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Economics 05/23/2009

• Beat the Press Archive | The American Prospect

  tags: Economics

  • Zinc and Robert,

    Have you read William Greider’s “Secrets of the Temple”? Perhaps you could test your recollections against Greider’s contemporary analysis.

    Robert, I hope your alien abduction was enjoyable, and that they did not “render” you a third galaxy for the torture of reading Samuelson articles.

    Posted by:
    EconDumbo |
    May 20, 2009 9:12 AM

  • Erik, you should rely on facts, which Dean invariably supplies, and not your memory. Real GDP growth (gross and per capita) in the 70’s was better than in the 80’s (or for that matter the 90’s and 00’s.

    See Dean’s post from early last year. http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=01&year=2008&base_name=why_would_presidents_envy_bad&53.

    While Volcker’s policy certainly helped reduce inflation, the resulting high interest rates (both LIBOR and Prime peaked around 20% in the early 80’s), not only wrecked the US economy, but created havoc in developing countries, in particular Latin America.

    The Latinos don’t call the 80’s the Lost Decade for nothing.

  • “The U.S. economy had high inflation in the late 70s primarily because the OPEC price increases.”

    Correct me if I am wrong, but I think that there is more to that. Many petrodollars left the U. S. (and other countries) for the OPEC nations, because OPEC raised the price of oil. But these nations, by and large, did not have a developed banking system (because of religious strictures). So they sent petrodollars to the big banks in London and New York. Instead of lending the returning dollars in the U. S., which would lower U. S. interest rates, the big New York banks, our friends at Citi, BOA, and others, sought lucrative returns by making risky loans abroad, many to Latin American governments. The risk on these governmental loans was underestimated because of the idea that “governments do not go bankrupt” — and the ignorance of history. But governments do, and did, default on their loans.

  • A large part of our current predicament can be laid at Volcker’s feet. The recovery of 1983-84 was led by a massive expansion of consumer credit, specifically credit cards. (You can see this on any of the graphs showing the rising tide of consumer debt in the US.)

    The problem was that “whipping inflation” depressed wages for the majority of the population. So only the expansion of credit enabled the recovery. (One of the interesting things about the recovery from that recession was that it was led by consumer spending.) And one thing led to another…and then…and then…

• Ezra Klein – Should Ben Bernanke Roll the Dice?

  tags: Economics

  • Thanks Rick00 for the tip on the book. People may also want to check the writings of William Greider, whom I first read in his book on the Fed called Secrets of the Temple.

    It studies the inner deliberations and actions of the Fed during the transition from Carter into the Reagan years, including the fight to kill inflation, and the Savings and Loan collapse. It tells a story of massive hardships forced year after year upon working people and businesses by the Fed’s primary concern for its true constituency, the banks (and secondarily, bondholders).

    And it’s true as a commenter said above, that the Fed’s judgment is pretty poor when it comes to its adjustments. A study of financial history shows that the Fed has actually been screwing up pretty consistently since its creation.

    So there’s one thing consistent about the Fed for you. I’d say on that basis the randomness is already built in.

    Posted by: wapomadness | May 22, 2009 12:04 PM
    | Report abuse

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Economics 05/16/2009

• Felix Salmon » Blog Archive » When banks try to defend credit cards | Blogs |

  tags: Economics

  • I have credit card bills from 20 years ago. The rate was about 12-15 percent on the cards I had. It was the scandalous cards at 19.8. Moreover, there was no such thing 20 years ago as a default rate or companies raising your rate based on your other relationships with the bank. The grace period was also 30 days, compared to 20 today. The junk fees (late, over-the-limit, forex) were lower. And consumers were NOT paying the same rate. There was a wonderful diversity of card issuers and rates (almost all fixed) available.

• The Skirmish over Credit Cards « The Baseline Scenario

  tags: Economics

  • As we’ve written before, there is a complex relationship of co-dependency between the government and the banking sector. The administration has placed its bets on the banking sector in its current form, with its current leaders, and has provided it large amounts of financial support; and many members of Congress have even more direct allegiances to the banking sector via the mechanism of campaign finance. At the same time, banks are largely hated today, and credit card companies perhaps more than any other part of the banking industry. (They are largely the same companies – Bank of America, Citigroup, and JPMorgan Chase all have huge credit card businesses – but people feel differently about their credit cards and their checking accounts.) So this bill, and President Obama’s lobbying for it, is a way to strike a blow for the beleaguered consumer while not doing too much damage to banks’ profitmaking ability. As Felix Salmon pointed out, the Federal Reserve already defined new credit card regulations that go into effect in July 2010. 

    From the banks’ perspective, this may look like a slippery slope to more regulation, and so they are trotting out all the usual arguments that Salmon describes in his post. But when push comes to shove, I doubt they will call in all their favors fighting this battle. The big fight will be over the new regulatory structure in the fall, and in the meantime it doesn’t hurt to let the administration have a victory.

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Economics 05/08/2009

• EzraKlein Archive | The American Prospect

  tags: Economics

  • The subprime mortgages aren’t the real evil. They are like the kid who acts as a mule for a big-time drug dealer; involved but fungible. If it wasn’t subprime mortgages it could have been something else, such as tech stocks or tulips. Total subprime mortgages were worth less than 1 trillion, of those, a few hundred billion worth of defaults. That is a lot of money, but an amount that could have been absorbed by the economy without causing particular harm.
    The real evil is unregulated derivatives. Credit default swaps alone are estimated at over $60 trillion. Those are all just side bets on the original 1 trillion of subprimes. It’s like a craps table. The guy holding the dice drops a $100 chip on the table. If he loses, he goes home $100 poorer. But the derivatives markets then bet the farm on that same roll of the dice. And I mean the whole farm. The entire world’s domestic gross product is estimated at about $60 trillion. Derivatives makers and dealers bet the equivalent of the world’s economy on whether some poor schlub would default on his mortgage.
    Deal with everything else but not unregulated derivatives, and this will all happen again. Deal with the derivatives market, and everything else is just mopping up.
    For more info, google Frank Partnoy, or read the 2009 re-release of his book, F.I.A.S.C.O.

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Economics 05/01/2009

• Top Senate Democrat: Bankers ‘Own’ the US Congress | CommonDreams.org

  tags: Economics

  • Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth
    about Congress that, despite being blindingly obvious, is rarely
    spoken:  “And the banks — hard to believe in a time when we’re facing
    a banking crisis that many of the banks created — are still the most
    powerful lobby on Capitol Hill. And they frankly own the place.”  The
    blunt acknowledgment that the same banks that caused the financial
    crisis “own” the U.S. Congress — according to one of that
    institution’s most powerful members — demonstrates just how extreme
    this institutional corruption is.
  • So:  Paese went from Chairman Frank’s
    office to be the top lobbyist at Goldman, and shortly before that,
    Goldman dispatched Paese’s predecessor, close Tom Daschle
    associate Mark Patterson, to be Chief of Staff to Treasury Secretary
    Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and
    a virtually wholly owned subsidiary of the banking industry.
     That’s all part of what Desmond Lachman — American Enterprise
    Institute fellow, former chief emerging market strategist at Salomon
    Smith Barney and top IMF official (no socialist he) – recently described as “Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs.”
  • Here’s
    Jane Hamsher, with Rachel Maddow, in February, assessing the motives of
    people like Evan Bayh and analyzing who owns and controls them (begins
    at the 3:00 minute mark):

• Think Progress » Banking lobby successfully defeats mortgage cram-down provision.

  tags: Economics

  • Today, a proposal to change bankruptcy law and allow bankruptcy judges to cram-down mortgage payments for troubled homeowners failed in the Senate by a vote of 45-51. The provision, which was introduced as an amendment by Sen. Dick Durbin (D-IL), required 60 votes to pass. In recent weeks, support for the measure evaporated in the face of furious lobbying by the banking and mortgage industries. Prior to the vote, Durbin — who this week said that bankers “are still the most powerful lobby on Capitol Hill” — took to the floor to decry the banking industry’s influence in the cram-down debate:

    At some point the senators in this chamber will decide the bankers shouldn’t write the agenda for the United States Senate. At some point the people in this chamber will decide the people we represent are not the folks working in the big banks, but the folks struggling to make a living and struggling to keep a decent home.

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Economics 04/29/2009

• Bill Moyers Journal . Transcripts | PBS

  tags: Economics

  • BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

    WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you’re talking about was created out of things like liars’ loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That’s why it’s toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it’s scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I’m quoting Fitch, the smallest of the rating agencies, “the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined.”

  • BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

    WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you’re talking about was created out of things like liars’ loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That’s why it’s toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it’s scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I’m quoting Fitch, the smallest of the rating agencies, “the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined.”

  • WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

  • BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

    WILLIAM K. BLACK: There are two reasons. One, they’re much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they’re outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.’ But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

  • BILL MOYERS: Who’s covering up?

    WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine.

• Inflation Prospects In An Emerging Market, Like The U.S. « The Baseline Scenario

  wonderfully informative discussion at Johnson’s blog from the commenters, inflation and the bond holders, that old at-odds couple

  tags: Economics

  • The point (and the problem) is that virtually every action taken heretofore by Paulson/Geithner (Peithner?) has had as its primary goal indemnifying bank CREDITORS against any/all losses whatsoever. It’s not about the stockholders – or even the executives – it’s about the creditors and saving them at all cost. That is why $50 billion was funneled through AIG to Goldman Sachs, Deutsche Bank, Soc Gen, etc. paying them out 100% on what should have been worthless “investments” in AIG credit default swaps. There is a good chance that the CDS’s were, in fact, part of a criminal conspiracy to inflate banks’ balance sheets, in order to facilitate the speculative activity that you so correctly criticized in your now-famous Atlantic article. See:

    http://market-ticker.denninger.net/archives/923-FLASH-AIG-CALLED-CRIMINAL-SCAM!.html

    http://www.ritholtz.com/blog/2009/04/aig-before-cds-there-was-reinsurance

  • One of the most brilliant parts of your Atlantic piece was the proposition that the big banks be nationalized or put into receivership. You seem to have forgotten that in addition to the fact that receivership would help break up “too big to fail” institutions, it would also allow the banks creditors to be either “haircutted” or potentially wiped out. And that’s a good thing. And that’s a good thing that cannot happen with Hank/Tim Peithner continuing the policy of funneling money to the banks (including via the subterfuge that is the PPIP) for the very PURPOSE of protecting bank creditors. Geithner’s half-hearted (and probably insincere) promise to force a bank CEO or two out of office is merely a head-fake to throw everyone off the scent of his real goal: the continuing protection of bank creditors to the exclusion of virtually everyone else in American society. If GM’s bondholders are going to have to take losses (and they are, big-time), why are we wasting hundreds of billions of dollars to protect the creditors of Citi, Deutsche Bank, Soc Gen & others from taking any losses at all?

  • The austrians have a term for the beneficiaries of inflation: early receivers. Guess who they are? The banks, who first get their hands on the newly printed money.

    OTOH, the credit bubble was so big that it appears to my untrained eye to have totally eclipsed our ability to repay in any form, so the inflation necessary to wipe it out will be impossible without End Of The World sorts of events.

  • The receivers — banks, hedge funds receiving TALF/PPIP funding, AIG, etc. — get to spend the new money at old prices which don’t reflect the inflation.

    Next in the chain comes the large corporations who receive financing from the bank. Prices still will not have reacted significantly to the inflation, so they benefit from this as well. Their suppliers will also benefit somewhat, and their suppliers, and on and on.

    The last group in the inflationary food chain are the laborers. Wages are sticky, so laborers can’t expect to have real-time inflation-indexed wages. And, while upper middle class workers may have some negotiating power, less-skilled workers have very little power. As all the players near the top of the food chain begin to adjust to the new money in the system, they will start passing higher prices to their customers, and ultimately to the consumer. The last thing to change will be the laborer’s wages.

  • Fielding Mellish -
    Thanks for the comment about the true objective of the FED and Treasury’s policies. Protection of the bond market. Alas, we can not experience recovery until the credit losses are absorbed. Zombie banks and a fiscal deficit at 14 percent of GDP is obviously not the answer.
  • And the recent decision to start buying long-term Treasury securities means that the Fed is using new approaches to create money. While there is a debate over whether this constitutes “quantitative easing” or just “credit easing,” this represents a major expansion of the Fed’s role, which we discussed in our recent Washington Post Outlook article. These actions may help create moderate inflation and prevent the onset of sustained deflation; there is also a danger that inflation will be substantially higher than expected.

  • Mr. Johnson,

    Your conclusion is correct, but would your analysis change if you consider inflation is currently almost 8% when calculated in the same way as in 1980? See:
    http://www.shadowstats.com/alternate_data
    Read the August 2006 SGS newsletter linked there for the dry details of how and why it was falsified.

    The falsification of the inflation number is the driving force behind your statement:

    “Excessive inflation is a typical outcome in oligarchic situations when a weak (or pliant) government is unable to force the most powerful to take their losses – high inflation is, in many ways, an inefficient and regressive tax but it’s also often a transfer from poor to rich.”

  • The other aspect is that there was a “hidden” inflation created when Greenspan faked the CPI calculation to “fix” Social Security. From the shadowstats.com site it appears the “hidden” inflation has been 8% or more above the official CPI number for more than a decade.

    In other words, if the government claims inflation is 3%, you expect wages to go up about 3% instead of the the 11% more likely inflation number. Then you can’t understand why you keep going in the hole and need to refinace your house to cover expenses. Instead or gaining in wealth with the appreciation in value of your home you are borrowing it and the finance sector gains income for lending to you.

  • Unemployment is accelerating. That is wage deflationary, even if the incomes of those employed remains static.

    Municipalities are asking more from taxpayers (at least here in NY) in property, fees, tolls, public transportation. At the same time the public isn’t spending discretionary income as the fear exists there may be no job (hence no cash) for living expenses. That is deflationary.

    Housing price decline. That too is deflationary, as it was a substitute for static/low rising wages. Home equity wealth was withdrawn and used for consumption (vacations, cars, flat scree TV’s). HEW is now gone, and the wealth effect from that era has been spent.

    Other than praying that it becomes so, how would you expect a wage or price spiral in the shadow of falling job numbers, falling home prices, falling capital production utilization (currently at 65% IIRC, – apology but don’t have a link handy).

    Unless Ben Bernanke launches his cash filled helicopters and begins dropping it in the publics hands, there will be no inflation. Japan has tried and has failed. I think they’re at 190% plus DEBT to GDP….

    When the map (link to Slate.com article below – interactive map of vanishing employment across the country) begins to turn blue again, that’s when you’ll get your inflation. Don’t hold your breath.

    http://www.slate.com/id/2216238/

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