Institutionalizing Too Big Too Fail

Roosevelt Institute Fellow Mike Konczal writes in Why is Paul Ryan’s Budget Trying to Dismantle Financial Reform?

"During the financial crisis of 2008, regulators found that they were lacking the necessary legal powers for unwinding and resolving large financial institutions. We can debate whether they actually lacked these powers, but their argument that they didn’t have them was more than enough for them to avoid having to do anything. They also found that when they went to collapsing institutions like Lehman, there was little prep done at the firm by either regulators or staff for what it would mean to unwind itself, so the only option was to send it flying into bankruptcy in the most awkward way or do an extensive bailout. These were the only options.

"How to solve this problem? Give regulators the powers they need and then make a very public showing of prepping firms for resolution when they fail. Have records of “living wills” so it is clear that no firm is too big to fail. It’s not enough to say, “We’ll never bail anyone out again.” We need to do a few simple things to make sure a crisis or a failure goes more smoothly. Seems fair, right?

"Well a funny thing happened on the way to writing living wills. Wall Street has decided that they can’t be bothered and are lobbying against it."

Surprise. It turns out that what Wall Street wants is enshrined in Paul Ryan's budget bill.

Mike concludes, "In a budget that skews so strongly towards the top 1%, it’s telling that it tries to break apart one of the few mechanisms for holding Wall Street accountable post-crisis."

Bill Mitchell: "It's Time To Get Angry"

Prof. Bill Mitchell is one of the original developers of MMT and the author of billy blog, one of the premier MMT resources on the Internet. In It Is Time To Get Angry, Bill traces the origins of the present crisis to the dominant neoliberal economic theory and economic policy based on it.

It is often recounted how Henry Ford cleverly realized that if he was to sell his cars, he would have to pay his workers a wage sufficient to afford them. This is the basis of a how an economy works. Income must be sufficient to purchase output, taking into account funds diverted to savings that won't be consumed in the present period.

This implies that demand leads supply in the sense that demand sends a signal to invest. Insufficient demand to purchase potential output results in economic underperformance and rising unemployment.

Bill explains how the seeds of the crisis were sown based on this:

"In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming.

"Here a link between the real economy and the financial sector emerged. The deregulation push not only affected the real economy (wages, conditions etc). The neo-liberals lobbied hard to ensure that policy makers also reduced their oversight of the financial sector. The myth of self-regulation leading to efficiency and optimal outcomes for all was generalised.

To keep consumption growing at the same time as the power elites were “stealing” more and more real output via the redistribution mechanism noted above [productivity gains not being passed on], the financial sector became more sophisticated (which in this context doesn’t connote good or better) and we observed the rise of “financial engineering,” which pushed ever increasing debt onto the household sector.

"It was such a lurk. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments – while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.

"The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the sub-prime housing crisis of 2007–08."

Why is it time to get angry? Even though this theory was discredited by the crisis, it has arisen from the dead and is still dominating the policy debate. What does it take to kill a zombie. A depression?

Flash crash be gone?

The SEC has revealed a new plan to try and stop a recurrence of the May 6,2010 "flash crash". For some interesting background information on the 2010 flash crash, read this.

Core Manufacturing

The late great industrial engineer Seymour Melman was a renowned critic of the military industrial complex. He was concerned about the massive amounts of resources devoted to manufacturing military equipment. He was also concerned about the intellectual/technical manpower required to maintain this system. Melman argued that continued government devotion to the military industrial complex essentially crowded out non-military manufacturing and therefore did not increase U.S.productive capacity. He waged his war against the misallocation behemoth for decades from the era of the international gold standard until his death in 2004.

In 1992 Melman wrote a a booklet titled Rebuilding America: A New Economic Plan for the 1990's. It was written in the aftermath of the 1990-1991 recession but still has great relevance to today's current economic situation. The main points of the publication were that the U.S. faced three problems 1) an antiquated/decaying infrastructure (this was 1992!) 2) diminished ability to produce the means of production and 3) an army of unemployed that was being neglected in favor of spending on the military industrial complex. It is easy to confirm that the U.S. is still suffering under points 1) and 3). The U.S. has a composite infrastructure grade of D and unemployment is at 8.8%. Point 2) is interesting because it has received virtually no attention and it has direct bearing upon the ability to address our antiquated/decaying infrastructure problem. Point 2) is alarming when one takes into account that global oil production has likely peaked.

What did Melman mean by "produce the means of production"? Simply put: the fundamental equipment required to participate in industrial manufacturing. Want to manufacture wind turbines and electric rail? First one needs equipment such as machine tools and ball and roller bearings. From a national security standpoint, perhaps it is unwise to depend on imports for such fundamental equipment? To illustrate the decline in the manufacturing of fundamental equipment, I've created a sequel to a data chart that Seymour Melman called "The Road to Underdevelopment". Please click on the chart to expand it.

Downgrade US debt over the political shenanigans?

Edward Harrison of Credit Writedowns thinks so:

"So that's where we are right now in the U.S. There is the possibility if this gets out of hand and spooks business, that it crimps economic growth, nascent job growth, and that this leads to a double dip recession and a debt deflation. Who gets blamed for that? I think the whole thing shows a recklessness in American politics that should be rewarded with a sovereign debt ratings downgrade. This is the sort of irresponsible brinkmanship that you don't see in other developed countries –even Belgium. For me, it is a clear sign of the decay of American governance and the political system."

[Emphasis added]

11 O'clock Tick Tock

Ouch!

Will a disaster liberate us or enslave us?

A government shutdown seems all but certain now. The tea party element of the Republican Party seems intent on imposing economic hell upon us all. If there is a disaster as a result of political manipulation then who will get the blame? Will it be the fanatics or the ineffective marketing ploy known as Barack Obama? Do ideas like Modern Monetary Theory stand a chance in the face of such madness? Economist Thomas Palley gave his thoughts on the matter back in 2008.

Tim Duy: Fed Unlikely to Tighten

Tim Duy of Fed Watch doesn't think that Bernanke's Fed will be tightening anytime soon, in spite of what some members of the FOMC may be signaling:

The Good, The Bad, and the Fed

"Likewise, the employment to population ratio shows no indication of rebounding to prerecession levels anytime soon. At this rate of recovery, I am generally worried that the next decade will prove to be once again “jobless,” that nonfarm payrolls will once again remain stagnant by the time we are near the trough of the next recession. Maybe this is what inevitably becomes of aging economies.

"The palpable weakness of the labor market reveals itself in stagnant wage growth. Average hourly earnings gained just a penny in February, and nothing in March. Workers might be feeling the effect of headline inflation, but apparently have absolutely no power to respond with anything but belt tightening. The lack of wage growth is simply the biggest hole in the inflation story, as it suggests that underlying inflation inertia is practically nonexistent. That this is not obvious to all monetary policymakers is somewhat shocking.

******

"Finally, we need to consider the likely position of Federal Reserve Chairman Ben Bernanke. It is difficult to believe that an academic so knowledgeable about the history of the Great Depression would be eager to repeat the mistakes of 1937. Nor would he be likely to confuse a change in relative prices with an outbreak of accelerating inflation. Nor would he fail to recognize the importance of wages in setting in motion accelerating inflation. Nor would he ignore the depth of the labor market hole. And, I would hope, that he is already beginning to see the possibility of another jobless decade unless we can quickly and definitively surpass the previous employment peak (never too early to think about the outcome of the next recession, even while riding the current wave upward). All of which suggests he will not be leading the charge toward tightening anytime soon.

Signs of the (tumultuous) times.

Gold hits $1450.

Brent hits $122.

The Fed sends a signal that it is planning its exit strategy from low interest rates.

China raises rates for the fourth time.

Trichet talks tightening.

US government shut-down looks increasingly likely.

Ryan's "Path to Prosperity." Here's the chilling math.

Let's walk through the numbers of GOP hatchetman Paul Ryan's plan to see what happens if we follow what he proposes and subtract $580 billion from U.S. eocnomic output over a 10-year period.

We start off with a currrent GDP of $14,700 bln.

Year 1 14120
Year 2 13540
Year 3 12960
Year 4 12380
Year 5 11800
Year 6 11220
Year 7 10640
Year 8 10060
Year 9 9480
Year 10 8900

You can see that by year 10, economic output has shrunk 40%.

Given that the unemployment rate shot up about 5 percentage points when the economy contracted a mere 5% in 2009, we can guestimate that unemployment would increase by 40%. That means we'd have a 50% unemployment rate. Half the workforce would be unemployed.

This is Ryan's "Path to Prosperity."

It's catastrophic. This is a Great Depression.

Alternatives to Alternative Energy?

H. T. Goranson, Lead Scientist at Sirius-Beta Corp, Senior Scientist with the US Defense Advanced Research Projects Agency, and the author of The Agile Virtual Enterprise says that we need to be developing Alternatives to Alternative Energy. His claim is that presently proposed energy sources are not radical enough to solve the growing global energy challenge.

His view is that what is needed is an international Manhattan project to do the basic science that could lead to technological breakthrough. He argues that the cost, though large, is minimal in relation to the cost of not doing so. Good short read.

Paul Ryan's absurd "Path to Prosperity"

Proponents of MMT are well versed in the concept of sectoral balances, which states that the sum of government financial balances plus non-governmental financial balances (domestic and foreign) must equal zero.

Sectoral balances explain why, when the government runs a deficit, the non-government runs a surplus equal to the size of the government's deficit to the penny.

This is tautology, not theory.

Now here comes Paul Ryan, the new GOP hatchet man, who proclaims that he is going to put America back on a "Path to Prosperity," by cutting $6 trillion out of the Federal Budget over the next 10 years.



Anyone with even a casual understanding of sectoral balances (like, if you read the first paragraph of this post), would instantly be able to understand, when armed with a little 1st grade arithmetic, that the people of this country (and many foreigners) are about to be relieved of $6 trillion in wealth and savings.

How that adds up to a path to prosperity in any way other than some warped idea of prosperity in Ryan's mind, is a mystery to me.

Outside of Ryan's mind, it is a path to poverty and dystopia.

White House rejects GOP's one-week stopgap funding measure

Is Obama finally starting to grow a backbone?

The White House rejected a one-week stopgap spending measure that would have included an additional $12 billion in cuts, bringing the total amount of cuts up to $22 billion if passed.

The president has thrown down the gauntlet it appears. Now the likelihood of a government shutdown is very high.

What gets affected in the case of a government shutdown? All non-essential services are cut. In addition, government workers not deemed “essential” are furloughed while essential employees (members of Congress, uniformed military personnel and federal employees working in areas of national security and law enforcement are deemed essential) continue to work in a non-pay status. National parks and museums close, visa and passport applications are halted, veterans’ benefits cease and so do payments to federal contractors.

There have been shutdowns in the past. Most recently we saw shutdowns in 1995 and 1996. These did not cause major disruptions, but the situation was decidedly different back then as Congress had already appropriated funds to meet spending needs prior to those shutdowns. In the current case, there are no appropriations after April 8.

In addition, the unemployment rate was 5.5 percent in 1996 compared to today’s 8.8 percent level. The economy’s ability to weather a hit to demand is much more questionable now than it was then. Many business leaders agree. Verizon CEO Ivan Seidenberg, who is also the Chairman of the Business Roundtable, said that a government shutdown would do “serious damage” to the economy.

Stay tuned.

What's next? Roll back the Clean Air and Clean Water acts?

A bill that is being quietly backed by the billionaire Koch Bros is getting ready to easily pass in the House.

The bill would preclude the Environmental Protection Agency from regulating greenhouse gas emissions. Koch Industries is a major refining and chemical business and passage of the bill is an obvious gift to this company as it will reduce costs related to having to comply with strict greenhouse gas emissions of which Koch is a big producer.

Score another one for these not-so-secretive billionaires who not only fund the Tea Party, but support the drive for austerity as well as cuts in Social Security, Medicare, Medicaid, environmental protection and other causes in their interest and against the interests of the American people.

Here's a list of policy issues the Kochs are involved in:


By the looks of it they own the Republican party and they are intent, it seems, on rolling back the environmental clock. Read what Henry Waxman (D-CA) had to say, here.

So what's next for these two? A repeal of the Clean Air and Clean Water acts? After all, it would be a lot cheaper if their factories just dumped chemical waste into our rivers and waterways than to go through all the expense of having to make sure these pollutants were disposed of properly, right? Or how about just letting their smokestacks belch toxic smoke into the air?

If it's good for the Koch's you better be sure they're funding it. The problem is, the Koch's are bad for America.

Someone tell the AMA that climate change is a hoax (not!)

AMA: Confronting health issues of climate change

"The shift in the planet's climate is affecting the health of patients -- and physicians are starting to see the results."

The Lancet (London) agrees: The Lancet’s landmark Health Commission: “Climate change is the biggest global health threat of the 21st century”

"The report notes that “Climate change will have devastating consequences for human health from”:

• changing patterns of infections and insect-borne diseases, and increased deaths due to heat waves

• reduced water and food security, leading to malnutrition and diarrhoeal disease

• an increase in the frequency and magnitude of extreme climate events (hurricanes, cyclones, storm surges) causing flooding and direct injury

• increasing vulnerability for those living in urban slums and where shelter and human settlements are poor

• large scale population migration and the likelihood of civil unrest."

Dean Baker on Redistribution (really corruption)

Rep. Ryan is scheduled to release his budget proposal on Tuesday. Word is out that it slashes social spending.

Dean Baker reminds us that the actual problem is redistribution to the top:

"The basic economic reality is very simple and everyone in Washington knows it. There is no way that future generations of workers will be poorer than the current one due to benefits like Social Security and Medicare. They could end up poorer if we continue to see the benefits of growth shifted to the top. The latter is the result of the corruption of politics in Washington. And at the moment, Mr. Ryan is the poster boy for that corruption. If he gets his way, your children and grandchildren can count on a very bleak future."

It's Time for Representative Ryan to Man Up

[Emphasis added]

Why is the price of gasoline rising?

Free market ideologues would have you believe that recent gasoline price increases have to do with supply and demand. Yet a glance at the facts indicates there is no problem with supply, which recently hit a 20-year high, while demand is actually falling.





Meanwhile, open interst in gasoline futures has gone up by a factor of 18 in the past five years.



While gasoline supplies have risen and demand has fallen, open interest in gasoline on the NYMEX has increased by a factor of 18 in the past five years!! Speculators now have a claim on nearly 300 million barrels of gasoline, whereas they had practically none in 2006. And that’s just NYMEX. There’s a lot more being held in over the counter transactions.

Hudson Exposes More of "The Maestro's" Intellectual Fraud

Michael Hudson is out with a great post here this week, looking into the regulatory lapses that occurred under the Fed "leadership" of Alan Greenspan, and Greenspan's apparent current lapse back into his old "religion", that helped get us here in the first place.

Hudson hits it hard. Here is a choice excerpt:

“Were you wrong?” Congressman Henry Waxman prompted him to elaborate. “Partially,” the Maestro replied. “I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.” The fact that they simply sought predatory gains for themselves – in the form of losses for their customers and clients (and it turns out, taxpayers”) was “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Whoa! What "functioning structure" of "how the world works" could THAT be? Could he be speaking of the depraved, Godless, secular philosophy of Ayn Rand's "Objectivism"? Greenspan's fetishism associated with Ayn Rand's Objectivism is reported on here.

For background, here is a link to a transcript of an old Playboy magazine (sorry no pictures ;) interview of Rand from way back. Excerpts:

Rand: "The Objectivist ethics, in essence, hold that man exists for his own sake, that the pursuit of his own happiness is his highest moral purpose, that he must not sacrifice himself to others, nor sacrifice others to himself.

Here is another beauty that should set Austrian hearts aflutter :

PLAYBOY: According to your philosophy, work and achievement are the highest goals of life. Do you regard as immoral those who find greater fulfillment in the warmth of friendship and family ties?

RAND: If they place such things as friendship and family ties above their own productive work, yes, then they are immoral.

The utter depravity continues at the link. But my question for Greenspan (and other apostles of Rand) would be, if one testifies to an admiration for the philosophy of Ayn Rand, why would one be surprised when people then act in accord with that philosophy? And why should you be surprised when then injustice, greed, fraud and depravity are the results? How could Greenspan be surprised that people act in their own selfish interests when that is EXACTLY the secular philosophy or what Hudson may call his "religion" that he professes a "faith" in? How does this man's mind work?

At least Greenspan is in semi-retirement and is no longer in as influential a position as he was as Fed Chairman; but Hudson identifies a current "relapse" into his "religion" in a recent op-ed Greenspan wrote, and gives him no quarter, it's a good read.

Moving forward, past the era of Greenspan, perhaps our immediate concerns should focus on our current group of policymakers, and what their influences are.

It has been reported that current House Budget Committee Chairman and Simpson-Bowles Deficit Commission member, Rep. Paul Ryan, a while back spoke at a ceremony honoring the legacy of Ayn Rand . Ryan was reported to have said:

“The reason I got involved in public service, by and large, if I had to credit one thinker, one person, it would be Ayn Rand,” Ryan said at a D.C. gathering four years ago honoring the author of “Atlas Shrugged” and “The Fountainhead.” …

This is a statement anyone should be concerned about, just based on the Greenspan policy making record. And most assuredly, this is a statement that the so-called "religious right" in the GOP should be VERY concerned about.

How does the depraved philosophy of Ayn Rand figure in Ryan's or other current policy maker's decision making? And what kind of macro economic outcomes should we expect because of this?

Wachovia Makes the News

The Guardian (UK) reports on How a big US bank laundered billions from Mexico's murderous drug gangs

"Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year's "deferred prosecution" has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

"More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico's gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

"The conclusion to the case was only the tip of an iceberg, demonstrating the role of the "legal" banking sector in swilling hundreds of billions of dollars – the blood money from the murderous drug trade in Mexico and other places in the world – around their global operations, now bailed out by the taxpayer."

Yves Smith comments too:

"I suspect you never imagined 'too big to fail' and 'too big to jail' were this intimately connected."

Wachovia Paid Trivial Fine for Nearly $400 Billion of Drug Related Money Laundering

Stone State Advisers has a post at Zero Hedge that speaks to the issues. It's the incentives:

On Wachovia, Whistle-Blowers, and Incentives

Tim Duy: The Fed Lacks a Coherent Communications Strategy

Tim Duy of Fed Watch complains that Fed communications are undisciplined and often send confusing messages when circumstances (like now) require clarity and confidence.

Running the Fed Like an Economics Department

"It seems to me that the Fed lacks a coherent communication strategy – there is no willingness on the part of the leadership to enforce talking points. As a consequence, there is enormous pointless chatter from Fed officials that might be interesting in some sense, but provide misleading guidance about policy direction. Recent talk about scaling back the size of the large scale asset program, for instance. Almost certainly not going to happen – so why talk about it? Sadly, it appears to be an almost deliberate effort to create uncertainty among market participants at a time when the opposite is so important."

Electrified Rail

Since the only policy proposals currently under consideration by U.S. politicians involve the word "cut", I've found a proposal that would truly serve the public purpose. Constructing an electrified and expanded rail network system would help protect our country from oil price volatility. Read the details here.

30 Must-See Charts on Housing

Michael David White of HousingStory.net posted thirty charts that paint a bleak picture for residential real estate for the foreseeable future. White calls it "overwhelming and obvious evidence of a 5-alarm housing crisis."

A Silent Radioactive Sky Is Falling On Your Home

Add to this the second lien problem (Yves Smith explains here) resulting from HELOC's and using houses as ATM's. Many creditors holding these loans are out on a long limb high off the ground, ground which is littered with broken glass. The banks are hell-bent on not getting stuck with the bill, so that leaves homeowners and Uncle on the hook.

What this means from the MMT/Minskian point of view is that Ponzi finance is still in the implosion stage, with considerable deleveraging yet to come and still falling housing values threatening debt-deflation.

Rasmussen Poll Shows That 57% Majority Is Crazy

You can't make this stuff up.

Rasmussen: 57% Okay With Government Shutdown If It Leads to Deeper Budget Cuts

"A majority of voters are fine with a partial shutdown of the federal government if that’s what it takes to get deeper cuts in federal government spending.

"A new Rasmussen Reports national telephone survey finds that 57% of Likely U.S. Voters think making deeper spending cuts in the federal budget for 2011 is more important than avoiding a partial government shutdown. Thirty-one percent (31%) disagree and say avoiding a shutdown is more important. Twelve percent (12%) are not sure."

Rasmussen has a GOP bias, but still. Over half of US voters don't understand demand and think that cutting spending will result in more jobs? Wow. MMT has it's work cut out for it.

Dennis Kelleher (Mr. Blue of The Rebel Capitalist) calls for a national debate on the deficit and debt, and he gives a good short summary of the MMT position.

Time for a National Debate on Deficit and Debt

Monsanto Sued To Invalidate GMO Patents

"A landmark lawsuit filed on March 29 in US federal court seeks to invalidate Monsanto’s patents on genetically modified seeds and to prohibit the company from suing those whose crops become genetically contaminated.

"The Public Patent Foundation filed suit on behalf of 270,000 people from sixty organic and sustainable businesses and trade associations, including thousands of certified-organic farmers. In Organic Seed Growers and Trade Association, et al. v. Monsanto, et al. (U.S. District Court, Southern District of New York, Case No. 11 CIV 2163), PUBPAT details the invalidity of any patent that poisons people and the environment, and that is not useful to society, two hallmarks of US patent law.

"'As Justice Story wrote in 1817, to be patentable, an invention must not be 'injurious to the well being, good policy, or sound morals of society,' notes the complaint in its opening paragraphs, citing Lowell v. Lewis.

"The suit points to studies citing harm caused by Monsanto’s Roundup herbicide, including human placental damage, lymphoma, myeloma, animal miscarriages, and other impacts on human health."

Lawsuit seeks to invalidate Monsanto’s GMO patents

A key issue in this suit is whether Monsanto has suppressed research into the public safety of its products.

An often overlooked feature of MMT is its primary focus on the availability of real resources as the true concern of economics and economic policy. This involves sustainability and negative externalities, in addition to production.

View "Inside Job" Online Free

The Internet Archive makes Charles Ferguson's award-winning documentary available for viewing here.

'Inside Job' provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

It is also available at Open Culture here.

This video documenting the rise and fall of Ponzi finance is of particular interest, because Ponzi finance and the conditions that lead to it are central to Hyman Minsky's financial instability hypothesis, which lies at the core of MMT's analysis of credit.

Here is Charlie Rose's interview with Charles Ferguson. (h/t Zero Hedge)

Bruce Bartlett Dumps on Proposed Constitutional Amendment

Conservative Bruce Barlett lays into fellow conservatives on the proposed balanced budget amendment:

"Today, all 47 Senate Republicans introduced a constitutional amendment to balance the federal budget.... Presumably, this is the amendment that Republicans plan to demand as their price for increasing the federal debt limit. Of course, simply refusing the raise the debt limit would balance the budget overnight — the nation would default on its debt and we would be plunged into the worst fiscal crisis in history, but the budget would be balanced. I have previously explained the idiocy of right wing advocates of debt default.... and the idiocy of a balanced budget amendment.... However, the new Republican balanced budget proposal is especially dimwitted."

Dopiest Constitutional Amendment of All Time?

From the MMT standpoint, a balance budget amendment would be tantamount to fiscal suicide, leaving government unable to address sectoral balances in accordance with the principles of functional finance using fiscal policy. The only hope would be backdoor fiscal policy through the Fed, e.g, through injecting nongovernment NFA by purchasing nongovernment assets, as it did in QE1.

If a balanced budget amendment were ever to be ratified, it would be a fail that would make the Eighteenth Amendment, prohibiting the use of alcohol, look tame with respect to consequences.

Dian L. Chu: Why Monetary Policy Is A Blunt Instrument

Dian L. Chu posted, Excess Liquidity & Cheap Money Runs Rampant on Wall Street, at EconMatters.com, which reinforces MMT's position that monetary policy is a blunt instrument.

"In short, the Fed cannot do anything fast, let alone making monetary policy changes at the first sign of bubbly market conditions like we have today as exemplified currently with runaway food and energy prices.... This has always been one of the drawbacks to the U.S. monetary system--the Fed over compensates in markets through excessively lopsided market intervention, which inevitably just creates another unintended consequence down the line.

"We are just now working through some of the vestiges of the last housing bubble created by excessively loose monetary policy, and lo and behold, we are creating yet another inflation bubble in food and energy with a new round of excessively loose monetary policy.

"What is that definition of insanity, doing the same thing over and over again, and expecting different results? And here we are—trapped in this seemingly never ending cycle of bubble creation....will we ever learn?"

Janet Tavakoli: Buffettgate

Janet Tavakoli posted at Huffington Post on the lax ethical environment at Berkshire Hathaway as evidenced by the circumstances under which David Sokol recently left the company.

"Berkshire Hathaway has a bigger problem than Sokol's actions. Its reputation has revolved around the lip-service paid by Warren Buffett to a high standard of corporate governance. His actions and attitude to this matter raise serious questions for the future of Berkshire Hathaway."

Buffettgate: Berkshire Hathaway's Problem at the Top

Cullen Roche of Pragmatic Capitalism agrees.

************************

UPDATE: Vitaliy Katsenelson clarifies at Zero Hedge:

Buffett, Sokol, Caesar’s wife must be above suspicion

************************

WAIT! It gets exponentially worse:

Forget David Sokol, Is The SEC About To Tell Charlie Munger To "Suck It In"?

"Since 2008 there are many instances of Munger and Buffet talking up BYD. But there is no reference, no disclosure, no evidence that Munger has a personal 3% stake in the company that at times was worth close to $1 billion dollars."

Hidden Premises and MMT vs nonMMT, Part Deux

I know this was also the topic of my last post at Mike Norman Economics, but I really think that it is absolutely vital and largely ignored. That is, the importance of the hidden assumptions regarding the operation of the macroeconomy that lie behind MMT versus nonMMT arguments. The idea that the private sector cannot generate sufficient demand to employ all willing workers is key to our view (for most of us, derived from Keynes or Kalecki). This is why we see government spending as, far from crowding out the private sector, benefitting the market economy. Meanwhile, many nonMMTers operate with a mental model in which the private sector is fully capable of expanding to the level necessary to generate full employment. In fact, it is eager to do so, and the best thing the government can do is stay out of the way.

These hidden premises are rarely mentioned out loud (that’s why they are called “hidden!”), yet they are very powerful in terms of creating the framework in which arguments are presented. See for example this article from a recent Wall Street Journal:

http://tinyurl.com/3c2poga

Read the opening paragraphs (emphasis added):

If you want to understand better why so many states-from New York to Wisconsin to California-are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

“Depressing?” “It gets worse?” “Makers” versus “takers?” Note that there is no explanation for this tone having been taken. The author, Stephen Moore, assumes that we are all on the same page. In his mind, it is self-evident and widely accepted that the contributions of police officers, firemen, teachers, building inspectors, soldiers, sailors, airmen, marines, etc., are inferior to those of restauranteurs, gas-station attendants, WSJ columnists, financial market CEOs, pharmaceutical industry lobbyists, and so on. Otherwise, why should we be upset about these trends?

But this goes deeper than evaluations of the worth of those working in the public versus private sectors. After all, that’s a going to be a sticky argument. How does one quantify what a police officer does versus an investment banker? Personally and as an economist, I am quite comfortable with the idea that what those in government do can be every bit as useful as what those in the market do, and that enterprises in each can also be a waste of resources. But there is no need to even go there, for if the private sector is unable to generate sufficient demand to hire everyone who is willing to work, then the creation of employment by the government means that more, not fewer, jobs will arise in the market. In other words, we could even grant Mr. Moore’s dubious premise that public sector employees are leeches and we still arrive at a position where we need more, not less, government involvement, because that means more private-sector jobs.

Recall these statements from above:

Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million).

More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined.

What happens to those jobs in construction, farming, fishing, forestry, manufacturing, mining and utilities, Mr. Moore, if we start laying off government workers? What makes you think that it would be helpful to lower the overall level of aggregate demand by eliminating teachers, firemen, policemen, etc.? I’ll tell you what makes him think that: he believes that the economy automatically tends toward full employment. He didn’t say it, but that’s what he is thinking. He sees the government as crowding out the private sector rather. Furthermore, this is so second nature to him that he doesn’t mention it–and that’s what so dangerous. Three guesses who made this relevant statement (here are three clues: JMK):

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

The full-employment assumption is so deeply ingrained that it operates below the surface, framing the discussion and never being questioned because participants in the debate forget that it is even there.

I want to repeat what I said in the earlier blog post–we need to be hitting on this harder, we need to be pulling it to the forefront. The private sector cannot generate sufficient demand. In such a world–even if you operate with perverse assumptions about the worth of public sector employees versus private sector ones–government involvement in the economy causes us to have a larger market sector, not a smaller one. If we made that idea the one that ramifies into every corner of our minds and is so obvious that it no longer needs to be mentioned, then 90% of our battle is won.

Two asides. One, it’s interesting how often those on the right refer to government workers as leeches at the same time they place firemen, policemen, and members of the armed forces on a pedestal. I pointed this out to a very conservative guest at our Christmas party this year and she went quiet, stared at the floor for a moment, and finally said “I’d never thought about that.” Second, I do think Mr. Moore has a point on one front, just not the one he thinks he does. He’s right that it’s a damn shame that we’ve lost so many manufacturing jobs; but it’s not the government that is as fault, it’s our willingness to import from often oppressive countries that follow next to no health, safety, or environmental regulations. And yet I’ll wager that’s something he eagerly encouraged as being “capitalism,” even though our main competitor in this area is a communist dictatorship.

Foreign institutions were the biggest borrowers from the Fed during the financial crisis

New disclosures that come out of a recent Freedom of Information Act ruling shows that during the height of the financial crisis the Fed lent billions of dollars to foreign institutions.

The data shows that the Fed's discount window was accessed heavily during the Lehman crisis back in October 2008 and through the spring of last year. Two of the biggest borrowers were the European bank, Dexia SA, which took $26.5 billion in a single day and Depfa, a subsidiary of German Hypo Real Estate Group. They borrowed $24.6 billion.

Curiously, some of the most troubled US institutions hardly made any use of the discount window at all. Citigroup, for example, only took a total of $3.85 billion.

By supplying this HUGE dollar liquidity the Fed precluded what would have been a gigantic dollar spike. It was something that I was screaming about at the time, here, here, here, here and here.

If the Fed hadn't done this then the ECB and other central banks would have had to sell their currencies and buy dollars in the forex market in order to meet local institutions' liquidity needs. Instead, the Fed just basically gave them the dollars and exposed itself to unlimited foreign exchange risk. Where was the outrage back then? There was none.

Krugman v. MMT continued

Steve Randy Waldman jumps off from Krugman's recent post in The MMT solvency constraint. As usual, some of the heavyweights join the debate in the comments. Good stuff by some very savvy people. I'll leave it at that, and let you check it out if you are interested in some deep thinking on the subject.

The Rogue Economist also riffs on the Krugman controversy in When does a country loss access to the bond markets? Also a post on the value of MMT. He concludes:

"Krugman wrote the post to illustrate his differences with the MMT crowd. Which is again unfortunate, because I’ve found that MMT descriptions of how the macroeconomy works is the most technically correct , provides a seriously objective framework to understand what actions cause which vs. what, and is the only economic framework that incorporates how credit and investment actually functions and affects the overall economy.

"To put it in analogy, MMT looks at a fire and notices that firemen are the most effective method to combat the fire. By comparison, the classical explanators are those who notice that whenever there is a fire, there always seems to be a lot of firemen. So hence, the best way to decrease the number of fires is to decrease the number of firemen.

"Previously, if you were in any finance type of work, you could safely ignore macroeconomic prognoses on your industry based on the classical view, and your ignorance of the prognoses would not affect you in any way. Now you ignore macro analyses based on the MMT framework at your peril." (hat tip to Stephan Ewald)

Thanks for the kudos. All MMT'ers take a bow.

The Rogue Economist first broached MMT with some questions about "Chartalism" in February, 2010, here and here.

UPDATE: Robert Vienneau of Thoughts On Economics posts on Krugman v. MMT here.