Wednesday, September 24, 2008

Bailout could be contractionary

Once again, Warren Mosler is spot on in his analysis of what could a very contractionary result if Congress acts as if this bailout must be "paid for" in some way. Read below:

"It would be counter
productive to add the $700 billion to the budget deficit calculation if
the proposal goes through and is executed, since Congress is likely to
take measures to somehow constrain spending or increase revenues to try
to ‘pay for it’. This would be highly contractionary at precisely
the wrong time.

Note that if the Fed buys mortgage securities it doesn’t add to
the deficit, while the Treasury buying the same securities does? And in
both cases treasury securities are sold to ‘offset operating
factors’; either way, Fed or Treasury, the government exchanges
treasury securities for mortgage securities.

When any agent of the government buys financial assets, that
particularly spending per se doesn’t add to aggregate demand, or in
any way or directly alter output and employment.

Yet here we are listening to the Fed Chairman, the Treasury
Secretary, and members of Congress talking about $700 billion of
‘taxpayer money’ and a potential increase in the deficit of $700

And no one argues with statements like ‘it is even more than we spent
in Iraq’ and ‘that much money could better spent elsewhere’.
Unfortunately for the US economy, this supposed addition to the deficit
is likely to negatively impact future spending, perhaps at the time when
it’s needed most to support demand.

I recall something like this happened in 1937, when revenues
collected for social security weren’t ‘counted’ as part of the
Federal budget, and the millions collected to go into the new trust fund

were in fact simply a massive tax hike. Unemployment went from something
like 12% to maybe 19% (and stayed about that high until WWII deficit
spending brought unemployment down to near zero). After that happened
much was written regarding public vs private accounting and the cash
flow from social security and other programs was subsequently counted as
part of the federal budget calculation, as it is today, and for the same

Link to article


Billy said...

I guess I am mistaken but I am SURE that I heard when Paulson became TS he had to Sell his GS stock (at a favorable tax rate - maybe even zero).

I do not have time to research this but people on the radio keep saying that he is protecting his position.

I actually trust his motives even though I am going back and forth on the plan in my mind. As much as I liked Paul O'Neil until after he left I am glad that we have a wall street exec in this position now.


mike norman said...

Yes, Paulson would have had to sell his holdings or put them in some kind of blind trust. Paul O'Neil would have done nothing, but, ironically, the same nothing is getting done now as well.