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March 14, 2014

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Paul Krugman: Fear of Wages

Posted: 14 Mar 2014 01:20 AM PDT

The labor market is a long way from being full healed:

Fear of Wages, by Paul Krugman. Commentary, NY Times: Four years ago, some of us watched with a mixture of incredulity and horror as elite discussion of economic policy went completely off the rails. Over the course of just a few months, influential people all over the Western world convinced themselves and each other that budget deficits were an existential threat, trumping any and all concern about mass unemployment. The result was a turn to fiscal austerity that deepened and prolonged the economic crisis, inflicting immense suffering.
And now it's happening again. Suddenly, it seems as if all the serious people are telling each other that despite high unemployment there's hardly any "slack" in labor markets ... and that the Federal Reserve needs to start raising interest rates very soon to head off the danger of inflation. ...
Over all...., the prudent thing would surely be to wait ... until there's solid evidence of rising wages, then wait some more until wage growth is at least back to precrisis levels and preferably higher.
Yet for some reason there's a growing drumbeat of demands that we not wait, that we get ready to raise interest rates right away or at least very soon. What's that about?
Part of the answer, I'd submit, is that for some people it's always 1979. That is, they're eternally vigilant against the danger of a runaway wage-price spiral, and somehow they haven't noticed that nothing like that has happened for decades. ...
Then there's sado-monetarism: the sense, all too common among in banking circles, that inflicting pain is ipso facto good. ...
Finally, although the current monetary debate isn't as openly political as the previous fiscal debate, it's hard to escape the suspicion that class interests are playing a role. A fair number of commentators seem oddly upset by the notion of workers getting raises, especially while returns to bondholders remain low. It's almost as if they identify with the investor class, and feel uncomfortable with anything that brings us close to full employment, and thereby gives workers more bargaining power.
Whatever the underlying motives, tightening the monetary screws anytime soon would be a very, very bad idea. ...
Is wage growth actually taking off? That's far from clear. But if it is, we should see rising wages as a development to cheer and promote, not a threat to be squashed with tight money.

Links for 3-14-14

Posted: 14 Mar 2014 12:06 AM PDT

'U.S. Says One Thing, Does Another on Mortgage Fraud'

Posted: 13 Mar 2014 09:28 AM PDT

Are you surprised by this?:

U.S. Says One Thing, Does Another on Mortgage Fraud, Watchdog Says, by Matt Apuzzo, NY Times: Four years after President Obama promised to crack down on mortgage fraud, his administration has quietly made the crime its lowest priority and has closed hundreds of cases after little or no investigation, the Justice Department's internal watchdog said on Thursday.
The report by the department's inspector general undercuts the president's contentions that the government is holding people responsible for the collapse of the financial and housing markets. The administration has been criticized, in particular, for not pursuing large banks and their executives. ...
Meanwhile, the Justice Department repeatedly exaggerated its accomplishments using inaccurate data, the report found. ...

'The Free Market’s Weak Hand'

Posted: 13 Mar 2014 09:20 AM PDT

James Kwak:

The Free Market's Weak Hand, by James Kwak:

"Except where market discipline is undermined by moral hazard, owing, for example, to federal guarantees of private debt, private regulation generally is far better at constraining excessive risk-taking than is government regulation."

That was Alan Greenspan back in 2003. This is little different from another of his famous maxims, that anti-fraud regulation was unnecessary because the market would not tolerate fraudsters. It is also a key premise of the blame-the-government crowd (Wallison, Pinto, and most of the current Republican Party), which claims that the financial crisis was caused by excessive government intervention in financial markets.

Market discipline clearly failed in the lead-up to the financial crisis. ... However, one thrust of post-crisis regulation has been to attempt to strengthen market discipline. This is consistent with the overall Geithner-Summers doctrine that markets generally work close to perfectly, and that regulation should mainly attempt to nudge markets in the right direction.

David Min (the lead rebutter of Wallison and Pinto's theory of subprime mortgages, which relied on a made-up definition of "subprime") has a new paper explaining why this is likely to fail. ...

Ultimately, one of Min's suggestions is that we simply cannot rely heavily on market discipline as a means of constraining risk-taking by financial institutions. This leaves us with relatively unfashionable tools like higher capital requirements and structural reforms (size and complexity limits). But that's not nearly sophisticated enough for the Geithner-Summers-Bernanke crew.

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