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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 28 Jun 2012 04:50 AM PDT
Simon Johnson continues his push against conflicts of interest within the Federal Reserve system:
Three More Governance Questions for the Fed, by Simon Johnson, Commentary, NY Times: Over the last several weeks on this blog, I have expressed ... concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed's board because of the large, unexpected losses in his bank's London proprietary trading operation - and the fact that these activities and their disclosure are now under investigation by the Fed. ...
In addition,... I have three substantive governance concerns for the New York Fed... First and most important, why didn't Mr. Dimon step down from the board of the New York Fed in March 2008, when JPMorgan Chase bought Bear Stearns with financial support provided, in part, by the Fed? ...
The authorities worked closely with JPMorgan Chase... JPMorgan's downside risk ... was limited. ... The precise terms of this arrangement were, appropriately, subject to detailed negotiation... How was it appropriate for Mr. Dimon to remain on the board of the New York Fed while this negotiation was going on? ...
Second, I would like to raise a question about Stephen Friedman, who was a Class C director of the New York Fed - and chairman during the intense financial crisis period, from January 2008 through early 2009. ...
According to the rules established by the Federal Reserve Board,... [there is a] fairly comprehensive ban on holding financial stock... But Mr. Friedman at that time was and still is a senior executive at Stone Point Capital, where ... he is involved in the fund's investment decisions. ... How was Mr. Friedman allowed to own these shares while being a Class C director? ...
Mr. Friedman bought Goldman Sachs stock after the company was effectively rescued by the Federal Reserve... I don't understand how a Class C director could have thought it was acceptable to buy any financial services company stock. ...
Third, I have a further question about the role of Lee C. Bollinger, the president of Columbia University, who is a Class C director and chairman of the Federal Reserve Bank of New York. ...
According to the Federal Reserve Act (Section 4.20): the chairman of a Federal Reserve Bank "shall be a person of tested banking experience." Mr. Bollinger ... does not have banking experience. ... Please explain to me how having Mr. Bollinger as chairman of the New York Fed is consistent with the Federal Reserve Act.
Taken together, these three questions raise a much bigger issue. If the intent and letter of the Federal Reserve Act are being followed in some ways and not in others - without proper notification to Congress or written rules available to the public explaining exemptions and exceptions - how exactly does this help maintain the legitimacy of the Federal Reserve System?
Posted: 28 Jun 2012 12:06 AM PDT
Posted: 27 Jun 2012 01:26 PM PDT
Paul Krugman and Richard Layard:
A manifesto for economic sense, by Paul Krugman and Richard Layard, Commentary, Financial Times: More than four years after the financial crisis began, the world's major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. The reason is simple: we are relying on the same ideas that governed policy during that decade. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature and the appropriate response.
These ideas have taken root in the public consciousness, providing support for the excessive austerity of fiscal policies in many countries. ... As a result of their mistaken ideas, many western policy makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s. It is tragic that in recent years the old ideas have again taken root.
The best policies will differ between countries and will require debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this manifesto for economic sense to register their agreement online and to publicly argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.
Posted: 27 Jun 2012 08:19 AM PDT
There are two responses to the post below this one on the Laffer curve:
Miles Kimball explains why tax cuts are unlikely to increase revenue. This is worth reading.
Dave Henderson: Where are we on the Laffer Curve. Henderson says:
Cutting marginal tax rates will somewhat increase taxable income. But the odds are very high that it wouldn't increase nearly enough to increase tax revenue.
That is, he is asserting we are to the left side of the peak, but he leaves himself wiggle room even though there's little reason to do so based upon the evidence ("odds are very high"). He then says:
the question is not whether the Laffer Curve is right. The question is where we are on the Laffer Curve.
But he's already answered this question, we're to the left of the peak, or at least "the odds are very high" that we are. I'd be curious to hear what he thinks those odds are, and if they are non-trivial what evidence it is based on. So to me the real question is trying to figure out what point he is trying to make. We're to the left of the peak, almost surely, but the real question is whether we're to the left or right of the peak? Huh? Saying it could be true that tax cuts will increase revenue -- leaving wiggle room -- when all the evidence points in the other direction just gives the politicians and others who say tax cuts from present rates will increase revenue something to hang on to in their ideological battle against taxes. Why give them this opening when the evidence says the opening isn't there?
Along the way he tries to take a swipe at me based on play on words in the title -- but his assertion that I deny the existence of a revenue curve, or that it has a peak, is silly. I don't think we are anywhere near the peak (based partly, but only partly, on recent research showing it's near a 70% rate), but where have I ever said no such peak exists? As I said in comments, what I am laughing at is people -- politicians in the GOP in particular -- who still say that if we cut taxes it will increase revenue (and I am disappointed with economists who abet that by saying it could be true, or that the real question is what side of the peak we're on even though, as Henderson admits, that's all but a settled question: "Not one economist surveyed agrees with this claim [that tax cuts will increase revenue within five years]. I don't either." He doesn't agree, but it just might be true? Hmm.).
Update: Bryan Caplan also responds: Did the IGM Reject Laffer Optimism or Old-School Keynesianism?

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