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November 27, 2009

Economist's View - 4 new articles

DeLong: Time to Give Thanks for the Bailouts

Brad DeLong says those who argue that fiscal stimulus policies can't work and are too costly "rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious":

Why Are Good Policies Bad Politics?, by J. Bradford DeLong, Commentary, Project Syndicate: From the day after the collapse of Lehman Brothers last year, the policies followed by the United States Treasury, the US Federal Reserve, and the administrations of Presidents George W. Bush and Barack Obama have been sound and helpful. The alternative – standing back and letting the markets handle things – would have brought ... higher unemployment than now exists. Credit easing and support of the banking system helped significantly...
The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Every extra percentage point of unemployment lasting for two years costs $400 billion. A recession twice as deep as the one we have had would have cost the US roughly $2 trillion – and cost the world as a whole four times as much. In comparison, the bonuses at Goldman Sachs are a rounding error. ...
The Obama administration's fiscal stimulus has also significantly helped the economy. Though the jury is still out on the effect of the tax cuts in the stimulus, aid to states has been a job-saving success, and the flow of government spending on a whole variety of relatively useful projects is set to boost production and employment in the same way that consumer spending boosts production and employment.
And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes ... at current interest rates. For that price, American taxpayers will get an extra $1 trillion of goods and services, and employment will be higher by about ten million job-years.
The valid complaints about fiscal policy ... are not that it has run up the national debt..., but rather that ... we ought to have done more. Yet these policies are political losers now: nobody is proposing more stimulus. This is strange... Good policies that are boosting production and employment without causing inflation ought to be politically popular, right?
With respect to Obama's stimulus package, it seems to me that there has been extraordinary intellectual and political dishonesty on the American right, which the press refuses to see. For two and a half centuries, economists have believed that the flow of spending in an economy goes up whenever groups of people decide to spend more... – and government decisions to spend more are as good as anybody else's. ...
Obama's Republican opponents, who claim that fiscal stimulus cannot work, rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious. Remember that back in 1993, when the Clinton administration's analyses led it to seek to spend less and reduce the deficit, the Republicans said that that would destroy the economy, too. Such claims were as wrong then as they are now. But how many media reports make even a cursory effort to evaluate them?
A stronger argument, though not by much, is that the fiscal stimulus is boosting employment and production, but at too great a long-run cost because it has produced too large a boost in America's national debt. If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree... But interest rates on US Treasury securities are very low...
Those who claim that America has a debt problem, and that a debt problem cannot be cured with more debt, ignore (sometimes deliberately) that private debt and US Treasury debt have been very different animals – moving in different directions and behaving in different ways – since the start of the financial crisis. /blockquote>

What the market is saying is not that the economy has too much debt, but that it has too much private debt, which is why prices of corporate bonds are low and firms find financing expensive. The market is also saying – clearly and repeatedly – that the economy has too little public US government debt, which is why everyone wants to hold it.

Just one comment: Brad's right.


"Muddying the Waters on AIG"

John Berry defends the Fed and Treasury's assistance to AIG:

Muddying the waters on AIG, by John M. Berry, Commentary, Reuters: Neil Barofsky, inspector general of the Troubled Asset Relief Program, is making a name for himself with a misleading analysis of actions by the Federal Reserve and Treasury in combating the financial crisis.
A column in the New York Times called Barofsky "one of the few truth tellers in Washington"... Barofsky's report, which is logically flawed, uses loaded language to create the impression that saving the economy wasn't the Fed's goal at all. No, it was all about helping the central bank's friends on Wall Street.
"Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG counterparties...," the report says. ... The report duly notes that Fed officials deny a backdoor bailout was their objective. But the next sentence suggests the officials must be lying.
"Irrespective of their stated intent, however, there is no question that the effect of the Federal Reserve Bank of New York's decisions — indeed the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties." (Emphasis in the original.)
Well, AIG had sold the counterparties a great many credit default swap contracts covering collateralized debt obligations secured by mortgages. ...AIG owed the counterparties a whole pot full of money which it couldn't pay.
If AIG was to be kept out of bankruptcy, of course the very design of the federal assistance had to include funneling tens of billions of dollars to the institutions to which it was owed. There was no other way to avoid a bankruptcy that would have affected not just big financial institutions but thousands of municipalities, individual savers and other investors. ... The report does not offer an alternative way to avoid an AIG bankruptcy, and there wasn't one. It does, however, suggest the Fed should have used its power as a banking regulator to force the AIG creditors to accept less than full payment of what they were owed.
The report acknowledges that the New York Fed tried to negotiate such a haircut... But the French banking regulator said it would be illegal for the two French institutions involved to take a haircut unless AIG was in formal bankruptcy, and the Fed said it had to treat all the banks the same way.
Nevertheless, Barofsky insists the Fed should have used its authority to force concessions. Unsaid, but implied: The Fed didn't do that because its goal was to help its Wall Street friends.
Barofsky is getting great press and kudos on Capitol Hill by pandering to the public anger at Wall Street. Pity he's not really a truth teller at all.


Paul Krugman: Taxing the Speculators

Is it time to impose a financial transactions tax?:

Taxing the Speculators, by Paul Krugman, Commentary, NY Times: Should we use taxes to deter financial speculation? Yes, say top British officials... Other European governments agree — and they're right.
Unfortunately, United States officials — especially Timothy Geithner... — are dead set against the proposal. Let's hope they reconsider: a financial transactions tax is an idea whose time has come.
The dispute began back in August, when Adair Turner, Britain's top financial regulator, called for a tax on financial transactions as a way to discourage "socially useless" activities. Gordon Brown, the British prime minister, picked up on his proposal...
Why is this a good idea? The Turner-Brown proposal is a modern version of an idea originally floated in 1972 by the late James Tobin, the Nobel-winning Yale economist. Tobin argued that currency speculation — money moving internationally to bet on fluctuations in exchange rates — was having a disruptive effect on the world economy. To reduce these disruptions, he called for a small tax on every exchange of currencies.
Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks. It would, as Tobin said, "throw some sand in the well-greased wheels" of speculation.
Tobin's idea went nowhere... But the Turner-Brown proposal, which would apply a "Tobin tax" to all financial transactions ... is very much in Tobin's spirit. It would ... deter much of the churning that now takes place in our hyperactive financial markets.
This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there's broad agreement ... that a lot of what Wall Street and the City do is "socially useless." And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits. What's not to like?
The main argument made by opponents of a financial transactions tax is that ... traders would find ways to avoid it. Some also argue that it wouldn't do anything to deter the socially damaging behavior that caused our current crisis. But neither claim stands up to scrutiny.
On the claim that financial transactions can't be taxed: modern trading is a highly centralized affair. ... This centralization keeps the cost of transactions low... It also, however, makes these transactions relatively easy to identify and tax.
What about the claim that a financial transactions tax doesn't address the real problem? It's true that a transactions tax wouldn't have stopped lenders from making bad loans, or gullible investors from buying toxic waste backed by those loans.
But bad investments aren't the whole story of the crisis. What turned those bad investments into catastrophe was the financial system's excessive reliance on short-term money.
As Gary Gorton and Andrew Metrick ... have shown, by 2007 the United States banking system had become crucially dependent on "repo" transactions... Losses in subprime and other assets triggered a banking crisis because they undermined this system — there was a "run on repo."
And a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis — and could help us avoid a future replay.
Would a Tobin tax solve all our problems? Of course not. But it could be part of the process of shrinking our bloated financial sector. On this, as on other issues, the Obama administration needs to free its mind from Wall Street's thrall.


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