Public Service Announcement
Please pass this on to your friends and family members.
Thoughts on human interaction over the next 25 years
The restructuring of Dubai Inc has begun. Nakheel shed 15% of its staff in December and has continued to pare its numbers since. Sheikh Muhammad’s own Dubai Holding has also cut staff. “Last year, people would talk about how many houses they owned,” says one Dubai veteran. “Now, they talk about how many friends have lost their jobs.” Other economies benefit from automatic fiscal stabilisers as the unemployed stop paying taxes and start spending welfare benefits. The UAE suffers from an automatic destabiliser: 30 days after a foreigner loses his job, he loses his right to stay. Once they leave, Dubai’s ex-expats will spend nothing in the economy they leave behind.It is true that the West, particularly the US post 1930s, has automatic stabilizers that increase the size of the Federal deficit when aggregate demand falls. In this way, unemployment triggers fiscal expansion, which funds net private sector savings and stabilizes aggregate demand. It could be done through simply cutting taxes, but Govts prefer to do it the hard way (exhibit A: the Obama administration).
If we want to prop up aggregate demand to promote full employment, what is the alternative to monetary policy aimed at producing negative real interest rates? Fiscal policy. Essentially, the private sector is saying it wants to save. Fiscal policy can say, "No you don't. If you try to save, we will dissave on your behalf via budget deficits." That fiscal dissaving would push equilibrium interest rates upward. But is that policy really welfare-improving compared to allowing interest rates to fall into the negative region?Private sector savings is funded by Federal deficits. If the private sector wants to save, it will either shrink aggregate demand and fail, or it will be generate larger deficits and succeed. Greg's fiscal policy makes no sense. For the private sector to save the public sector *must* dissave, the same way every asset must be balanced by a liability. It's an iron law of accounting. Public deficits, far from thwarting a private demand to save, are necessary and sufficient to enable that saving.
If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.Nope. Government is a currency issuer. Non-Government is a currency user. Government spending creates money, Government taxation "uncreates" it. The Government never needs to tax in order to spend. If the Government spends an extra $100B a year forever, with no increase in taxes, it will inject an extra $100B/year into the private sector, which may trigger inflation, or it may not, depending on what the private sector does with that money. Right now, money is being saved, so it will not trigger inflation, although it may help support aggregate demand and employment. If the Government increases taxes by $100B/year, that will sterilize the impact of the spending, and thus reduce the money the private sector has available to save. In inflationary times, this will reduce inflation. In deflationary times, it will further reduce aggregate demand, and increase unemployment.
Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.
Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K.
Let’s say you are a bidder for Bank A. You know your banking asset is worth $50, and you also know the asset Bank B has is worth $50. You call your buddy up, the trader at B, and make a deal. Happens all the time. You go to bid, and you bid $80 for B’s asset. Then you wait. If B doesn’t come through, you are screwed out a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your asset - $80 from B. You have each bid up each others assets and traded them. And now the government is screwed.At Enron, they called that something like the Death Star. Or Ping Pong.
If you can't or won't read the notes to a 10-K or 10-Q, you should not be investing in bank stocks. Let me put that another way. IF YOU CAN'T OR WON'T READ THE NOTES TO FINANCIAL STATEMENTS, YOU SHOULD NOT BE INVESTING DIRECTLY IN STOCKS.Cool, we are on the same page. Next:
But we are not doing this to fool investors; we're doing it because of regulatory capital requirements. The problem with things like reserve ratios is that while in theory they should be countercyclical, in practice they aren't.By reserve ratios, she almost certainly means capital requirements. The notion that reserves somehow constrain lending is completely wrong, and is at the heart of all the ineffectual monetary policy littering the financial landscape today. Bank lending is constrained by capital requirements on the supply side, and quality borrowers on the demand side, with the driving factor today being on the demand side.
'The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.Think about it -- the Government is a currency issuer, it has no need to "balance its books", nor will it ever bounce a check. Ever. Even Zimbabwe does not bounce cheques (although with it's recent move to the dollar, that might change). He is correct that there is no "fund", as SS obligations are merely part of the Government overall obligations. It certainly makes no sense for a currency issuer to keep a reserve of its own currency. Does American Airlines need to keep a reserve of it's frequent flier miles?
With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books'....And given that every cent of the fund has been spent, exactly how is the treasury supposed to repay that fund in light of $9.3 trillion (with a T) budget deficits when the "surplus" is a mere $16 Billion (with a B)?
Finally, why does everyone continue the charade of calling Social Security a "trust fund" when it's clearly not a fund and there cannot possibly be any trust in it?
Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem -- the people who borrowed money to buy homes they shouldn’t have bought.He's wrong. People would be OK if the Govt gave a small payment to the guy down the street who doesn't deserve them so long as they get the same payment. One is a transfer, while the other simply raises all boats. The problem is that the transfer is not going to the financial industry.
Now I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn’t deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.