Friday, February 27, 2009

Obama: "I will deceitfully give your money to bankers"

The best site for a pure, Post-Keynesian, 100% fiscal approach to the crises is Mosler Economics. It is very difficult to understand, but I've invested some time there and I think he has excellent insights. Recommended.

The best site I've found so far for a Rational-Expectations, 100% monetary approach to the crises is The Money Illusion. He has not written the required posts yet to really explain what he means, and what a purely monetary approach to the recession would look like, but I look forward to them.

As far as I can tell, traditional monetary policy has the Fed buying short term Treasury securities to drive up their price, and lower interest rates to zero. The Fed can do this up and down the yield curve, and can also buy other securities, (mortgages, bank debt, etc. etc.) to similarly impact interest rates. Basically, the Fed just increases its balance sheet in non-conventional ways, to impact money supply, further reducing real rates, until monetary policy is correct to drive the economic changes desired. I still struggle with how you can reduce real rates when nominal rates are at zero--is there anything to it beyond simply expanding scope?--but hopefully he will post on that soon. Let's run with this distinction between monetary and fiscal policy.

While it is true that the Fed can increase its balance sheets and buy assets, changing interest rates (price), it is also true that the Fed can overpay for assets, and therefore also include a transfer -- which is traditionally the realm of fiscal policy. We are clearly here now, so I don't think the difference between monetary and fiscal is useful at this margin. Much better just to count dollars and see whose accounts are being credited and debited.

One thing that is clear is that the Obama administration believes that there is no political will to further bailout banks. There will be no new TARP, which while useless, was at least honest(ish). Further transfers from savers to banks will happen via stealth and deceit. This excellent post on Interfluidity shows just how much effort the Obama administration is putting into being dishonest.
In an astonishing abuse of the customary language of finance, the "convertible preferred" shares the government intends to purchase, in addition to mandatory conversion after seven years, are convertible to common stock at the option of the the banks, rather than at the option of the taxpayers holding the securities
Geithner makes me long for Paulson, who was more honest. Obama may yet make me long for Bush. More on the Obama administration's deception here.

I would also add that it was public opposition to the Government bailing out the Japanese financial system that has kept them in 25+ years of stagnation. People seem to believe that US equities are poised for takeoff, but the Japanese example suggests that that is by no means certain.

One final thought. As for about a year ago, the US private sector was as indebted as it has ever been. It is rapidly de-leveraging, which is driving the economic recession. If the Obama administration is going to inflate to reduce real debt burdens, it better do it soon when foreigners will take most of the haircut. The longer the delays, and the deeper the deflation goes (and the more the American private sector saves), the more the inflation haircut will come from voters. Japan, which has been in a deflationary spiral for years, must think at least a little about how much savings is held domestically. Most commentators put this down to incompetence by the BoJ, but the Money Illusion suggests that, after 25+ years, it has to be a actual goal.


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