Mish has a great column today blowing apart the arguments by Pelosi and Krugman for the stimulus package and points out how we will be repeating Japan's failed policies (have you noticed most liberals who quote Krugman don't quote or read any other economist. It couldn't be because he does their thinking for them, could it?):
"none of this spending can possibly stimulate anything. Take for example $62.3 billion for transportation or the $91.3 billion to renovate schools. What happens after the schools are renovated and the potholes are filled? Where will the jobs come from? Do the schools even need to be renovated?
Taxpayers will eventually have to pick up the tab, either via taxes or a weaker US dollar....
The problem is not falling prices, the problem was the excess of debt that led to massive speculation and ever escalating prices. Krugman continues to put the cart before the horse in this regard. Indeed, Krugman Is Still Wrong After All These Years.
It is impossible for government to spend one's way to prosperity. Proof can be found in the failed practices of Russian and Chinese central planners over the years, and more recently the failed policies of Japan.The ultimate irony of the "Conscience of a Liberal" tag is that Paul Krugman is openly supporting policies that continue to destroy middle class America, while pretending otherwise..." Mish
Meanwhile over at the Wall Street Journal, George Meollan discusses whether Obama's stimulus plan will cause inflation and the effect it will have on the bond markets (worth reading) by asking the simple question about the stimulus plan: Who is going to finance it?:
"The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.....
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more..." Who will buy the Treasuries?
Indeed, what will happen when trillions in Treasuries are dumped on the market while demand from China and Japan decrease as they deal with their own recessions? Supply and demand don't change in a recession and the price for treasuries will eventually drop, sending interest rates higher. What is Obama going to do when he gets his way and 18 months from now interest rates are at least ten percent? More deficit spending financed by treasuries becoming more worthless?
Meanwhile, over the Financial Times, Willem Buiter offers an intriguing idea (and one that Karl Denninger at the Market Ticker has advocated for some time): the government should capitalize several new banks with the bailout money instead of supporting banks that are likely to fail anyway:
"There is an alternative solution to the problem of valuing the toxic assets. It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks - all state-owned and state-funded to begin with. Effectively, some or all of the existing banks would become bad banks. The good banks would acquire the deposits and the good assets of the bad banks or legacy banks. The good assets are, by definition, easy to value. The creation of multiple good banks may be desirable to encourage competition.......
In my proposal, the existing banks would become the bad banks and retain their existing ownership structure. No government resources would be wasted propping up the valuations of existing assets. All government financial support would go to the new state-owned good bank. Even there, government guarantees would only be provided for new bank borrowing (if this is from the private sector) and for new bank lending and investment. There is no point here either in propping up the valuation of existing assets.....
As credit markets normalise and the economy recovers, the aggregate lending targets and the government guarantees for new lending and for borrowing from the private sector would be eliminated. In due course, but probably not before the third year of their existence, the privatisation of the new good banks could be contemplated. (I'm thinking sooner with a successful IPO)...." Good bank, bad bank
I like this idea as the main problem facing banks right now is the balance sheets. The toxic assets are becoming a black hole sapping our resources. Banks aren't going to lend if they are more worried about being gobbled up by their own debt. Creating some banks without the toxic assets albatross on their balance sheets will give our financial system some stability and put a stop to some of this madness.
Back to the Wall Street Journal where two economists argue the New Deal prolonged the Great Depression. Harold L. Cole and Lee. E. Ohanian write:
"So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.....
Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression......
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth. (Remember, Obama is making the stimulus plan union-only, thus ensuring higher wages)....
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing....." FDR made the Great Depression worse
Enough reading for you?
"none of this spending can possibly stimulate anything. Take for example $62.3 billion for transportation or the $91.3 billion to renovate schools. What happens after the schools are renovated and the potholes are filled? Where will the jobs come from? Do the schools even need to be renovated?
Taxpayers will eventually have to pick up the tab, either via taxes or a weaker US dollar....
The problem is not falling prices, the problem was the excess of debt that led to massive speculation and ever escalating prices. Krugman continues to put the cart before the horse in this regard. Indeed, Krugman Is Still Wrong After All These Years.
It is impossible for government to spend one's way to prosperity. Proof can be found in the failed practices of Russian and Chinese central planners over the years, and more recently the failed policies of Japan.The ultimate irony of the "Conscience of a Liberal" tag is that Paul Krugman is openly supporting policies that continue to destroy middle class America, while pretending otherwise..." Mish
Meanwhile over at the Wall Street Journal, George Meollan discusses whether Obama's stimulus plan will cause inflation and the effect it will have on the bond markets (worth reading) by asking the simple question about the stimulus plan: Who is going to finance it?:
"The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.....
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more..." Who will buy the Treasuries?
Indeed, what will happen when trillions in Treasuries are dumped on the market while demand from China and Japan decrease as they deal with their own recessions? Supply and demand don't change in a recession and the price for treasuries will eventually drop, sending interest rates higher. What is Obama going to do when he gets his way and 18 months from now interest rates are at least ten percent? More deficit spending financed by treasuries becoming more worthless?
Meanwhile, over the Financial Times, Willem Buiter offers an intriguing idea (and one that Karl Denninger at the Market Ticker has advocated for some time): the government should capitalize several new banks with the bailout money instead of supporting banks that are likely to fail anyway:
"There is an alternative solution to the problem of valuing the toxic assets. It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks - all state-owned and state-funded to begin with. Effectively, some or all of the existing banks would become bad banks. The good banks would acquire the deposits and the good assets of the bad banks or legacy banks. The good assets are, by definition, easy to value. The creation of multiple good banks may be desirable to encourage competition.......
In my proposal, the existing banks would become the bad banks and retain their existing ownership structure. No government resources would be wasted propping up the valuations of existing assets. All government financial support would go to the new state-owned good bank. Even there, government guarantees would only be provided for new bank borrowing (if this is from the private sector) and for new bank lending and investment. There is no point here either in propping up the valuation of existing assets.....
As credit markets normalise and the economy recovers, the aggregate lending targets and the government guarantees for new lending and for borrowing from the private sector would be eliminated. In due course, but probably not before the third year of their existence, the privatisation of the new good banks could be contemplated. (I'm thinking sooner with a successful IPO)...." Good bank, bad bank
I like this idea as the main problem facing banks right now is the balance sheets. The toxic assets are becoming a black hole sapping our resources. Banks aren't going to lend if they are more worried about being gobbled up by their own debt. Creating some banks without the toxic assets albatross on their balance sheets will give our financial system some stability and put a stop to some of this madness.
Back to the Wall Street Journal where two economists argue the New Deal prolonged the Great Depression. Harold L. Cole and Lee. E. Ohanian write:
"So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.....
Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression......
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth. (Remember, Obama is making the stimulus plan union-only, thus ensuring higher wages)....
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing....." FDR made the Great Depression worse
Enough reading for you?
1 comment:
thought you might enjoy this blog. it hits daily around 3pm or so. all good and insightful stuff
http://theautomaticearth.blogspot.com/
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