Bits and Pieces
This is an abnormally quiet week for economic data. Just about the only news we will see is the usual weekly unemployment claims series on Thursday. So that gives me an opportunity to catch up on a number of bits and pieces.
Inflation and Interest Rates
The talk about the need for a tightening in monetary policy, and therefore a hike in interest rates persists. I have no idea why. Even the Fed is starting to send out public signals about its possible lifting of rates. Some Fed governors are giving speeches warning that rates may need to be raised even before unemployment has begun to fall. The basis for all this nonsense is that during the crisis the Fed pumped an enormous amount of cash into the economy. And I mean enormous. Under normal circumstances this injection of liquidity would, possibly, spur a bout of inflation once the economy starts to grow – which it now has. Monetary hawks – with the conservative wing of the Fed and some cable TV analysts in the van – are jumping to the immediate conclusion that, given the size of the stimulus, we need an aggressive counter measure sooner rather than later if we are to avoid a nasty bout of inflation. They are wrong. Dangerously so.
“We will get nowhere if the only alternative to the social bias of the Democrats is simply a load of hysterical religiously driven, socially segregated, and backward looking name calling.Can we have an actual debate please?”
There is no evidence at all that inflationary expectations are building: the best place to look is in the market for inflation proofed government bonds – that infamously jittery bond markets should be a talisman for the inflation fearing crowd. But that market is quiet: the expectation seems to be for about 1.5% inflation over the next few years. That’s well within the 2.0% boundary the Fed has been talking about.
Plus: the economy is operating at an level well below capacity. There is just no room for inflationary pressure as long as capacity levels are so low compared with the economy’s potential. As growth picks up – and after unemployment starts to drop – we can re-visit this argument, but for now inflation is simply a red herring being touted by folks who didn’t like the extent of government intervention in the first place. They cannot wait for the Fed to disengage, not based upon empirical evidence, but on ideological grounds. Given this morning’s minor news that ‘mass’ lay-offs reached an all time high during the third quarter I just don’t see where pressure on prices is going to come from – certainly the labor market will not be the source of inflation.
Finally, on this topic, I should remind you that we are at an unprecedented point in terms of policy limitations. The Fed’s own analysis indicates it should be running overnight interest rates at about -5% [yes negative 5%], since it cannot we are stuck with just one oar – fiscal policy a la Keynes. Any empirically based analysis also tells us that getting the economy back to a point where the Fed’s indicator is for positive rates is months, and maybe even years, away.
So raising rates at the moment would be foolish. It would be a repetition of the mistakes of the 1930’s, and we all know how that worked out. The monetary hawks screwed up then and, apparently, want to repeat their error. Let’s hope Bernanke and crew ignore them.
Silly Arguments About Housing and Health Care
This won’t take long: I keep reading silly comments by right wingers that health care reform will force companies to do business with people who cannot afford to buy their services. The precedent being used is the Community Reinvestment Act that forces commercial banks to do business in minority dominated areas. CRA is being routinely blamed as the cause of the sub-prime mess: after all ‘those people’ cannot afford loans and the nice banks were forced into making rotten loans by those CRA advocates. This is such rubbish it’s hard to know where to begin. The best debunking of this argument, which is now a staple of the rightist analysts, is that the vast majority of sub-prime loans were made by organizations not covered by CRA. It could not, therefore, be the cause of the awful underwriting standards that led to the cave in of residential real estate. In addition: the amounts of money to be lost in commercial real estate will be a much larger amount, and most of those loans went to large developers and their corporations, very few of whom qualify, even remotely, as ‘minority’.
Bank Regulation
The forces are gathering for a fight over the re-regulation of finance. Given the ridiculous way in which the industry is flaunting its recovery – those bonus stories will be back with a vengeance very soon – the two sides are digging in for a heated debate. In this context the focus should be on ‘too-big-to-fail’ and on little else. What the industry proved to us all over the past few years is that it is not competent. It makes foolish and almost childlike errors on a regular basis. Plus, as those bonuses indicate, it cannot be trusted to regulate itself. It behaves exactly as if it were a supremely spoiled child – screaming when the toys are taken away, and snickering when it gets its won way. It has become a mammoth schoolyard bully. I am tired of repeating this: as long as we subsidize the industry’s profits by underwriting its losses, we give it free range to rent seek and rob us blind. That ‘great recovery’ is on our dime. It is not due to any great skill. Yet the managers of the big banks want us to believe they should reap huge rewards for ‘turning the industry around’. The appropriate language with which to respond to that claim is not to be printed here. Suffice to say the leaders of the big banks are simply morally unfit to engage in public discourse about regulation.
On a brighter note Bernie Sanders from Vermont has presented a bill in the Senate to order the Treasury department to break up the big banks. He won’t get anywhere because our lame administration seems to think it can get the same effect – controlling too-big-to-fail banks – by putting in place better methods for winding up bank holding companies. I see this as a punt by Obama. Even if they get the right legislative power there is no certainty that a future administration would use it: the public cry over ‘socialist’ take over of a private bank – no matter how defunct – will drown out any effort to wind it up. Instead we will most likely opt for the easy route: more bail out money. The one thing I have learned throughout this crisis is that the big banks have inordinate political power. Our political process is corrupted by the money that flows through it, so I remain skeptical of seeing any hard nosed re-regulation. Instead I expect a series of bureaucratic shuffles and kluges. We will probably get some form of watered down Consumer Finance Protection Agency, and a few new rules on bankruptcy proceedings for banks. That and higher capital ratios. The problem is that the banks that failed this time round did not go down because they were insolvent – they had capital, albeit with stupid leverage ratios – they became illiquid.
This raises an interesting policy point: the focus of our underwriting should be liquidity, not capital. An private organization should be on the hook for its own capital. If it becomes insolvent, that is a private matter for the shareholders and creditors to hash out. So solvency is a ‘private good’. In contrast, liquidity is a ‘public good’. It is something we all need – we all want to be able to get our hands on our own cash when we want or need to. This means that we, the taxpayers, have a true interest in ‘socializing’ the underwriting and protection of the payments system – we all share in its benefits – but we have little or no ongoing interest in the solvency of the big banks. The tricky part is that the big banks have become so large that, in order to save the public good, we have to bail out the private good too.
Hence the need to chop the banks down in size.
It won’t happen any time soon here, but there are signs that other countries are getting that message: the European courts have already forced the break up of one or two organizations, and the British government has ordered the break up of its big banks too.
The Berlin Wall and the Plight of Capitalism
One last thing: given this week’s celebrations of the twenty years since the fall of the Berlin Wall, and all the attendant crowing about the triumph of capitalism, we should all reflect on what has happened since. The post-wall years have produced much worse growth in household incomes than the deep Cold War years. It isn’t even close. If this is the fruit of the triumph of capitalism, then most Americans didn’t get much of a share. The victory was hollow. I attribute this to the lack of balance: the Cold War enforced a sense of proportion. The loss of an ideological competitor allowed America to indulge in unfettered capitalism – think de-regulation in particular – in the mistaken view that it was capitalism being verified and not simply socialism being proven false. Those two are not the same thing of course. The collapse of socialist economics is not the same as the proof of free market economics. Unfortunately the ideological drift of America since Reagan lulled us into forgetting that observation. The consequence is the current crisis and the ongoing ‘disproof’ of the free market hypothesis.
Now, perhaps, we can return to the balance of the post war era: rein in capitalism enough to restrict its inequalities, but not enough to stifle its creativity. The middle class boomed under such a balance and has been squeezed since it was led to believe in free market supremacy.
Time to rebalance.
But that requires two sides in the argument. And from what I see emanating from the Republicans right now, which is simply populist right wing dogma rather than policy recommendations, we are a long way from having such an argument. We need a Republican party engaged in debate, not simply enraged. Fiscally conservative policies are needed over the medium term. We will get nowhere if the only alternative to the social bias of the Democrats is simply a load of hysterical religiously driven, socially segregated, and backward looking name calling.
Can we have an actual debate please?
