The Federal Reserve Board is a perverse animal. While ostensibly a public institution, the banking industry has the extraordinary privilege of being able to pick 5 of the 12 members of its most important governing body, the Open Market Committee (FOMC). The banks also get to have 7 other representatives sit in on the FOMC’s secret meetings. Given this structure, it is not surprising that people who do not believe that the banks necessarily place the interest of the general public first are suspicious of the Fed.
Robert Samuelson is nonetheless outraged that anyone could question the neutrality of this institution. He attacks a piece by Bloomberg News that called attention to the Fed’s secret lending during the financial crisis as “slander.” Samuelson argues that the loans were not secret, the Fed disclosed the amounts being lent under the programs, just not the identities of the borrowers. He argues that it was necessary not to disclose the identity of the borrowers in order to avoid the risk of creating runs on troubled borrowers.
Samuelson neglected to mention that the Fed refused to release the identities of the institutions receiving the loans available even after the fact. The names of these institutions were only made public as a result of a bill sponsored by Ron Paul and Alan Grayson for auditing the Fed. A version of this legislation was eventually included as an amendment to the Dodd-Frank bill. A successful lawsuit by Bloomberg also led to the release of additional data on Fed loans. In other words, the Fed tried very hard to keep the identity of its borrowers secret even long after the release of the identity of borrowers could have had any impact on their financial situation.
The point of the Bloomberg analysis in question is that making money available to banks during a liquidity crisis involves a substantial subsidy. The banks that have access to the Fed’s lending are advantaged over institutions that do not have access. This allows them to profit off public money when they lend it out.
It may be desirable to allow this profit in the context of a financial crisis, since it would be harmful to the economy to see a financial collapse, but there is no reason that the public should not expect some quid pro quo in exchange for the profits it gave to the banks. The Bloomberg analysis is intended to give the public an estimate of the size of the subsidy it gave to the banks, and in particular the nation’s largest banks, through the Fed’s lending windows. It was an extremely valuable public service.
The Federal Reserve Board is a perverse animal. While ostensibly a public institution, the banking industry has the extraordinary privilege of being able to pick 5 of the 12 members of its most important governing body, the Open Market Committee (FOMC). The banks also get to have 7 other representatives sit in on the FOMC’s secret meetings. Given this structure, it is not surprising that people who do not believe that the banks necessarily place the interest of the general public first are suspicious of the Fed.
Robert Samuelson is nonetheless outraged that anyone could question the neutrality of this institution. He attacks a piece by Bloomberg News that called attention to the Fed’s secret lending during the financial crisis as “slander.” Samuelson argues that the loans were not secret, the Fed disclosed the amounts being lent under the programs, just not the identities of the borrowers. He argues that it was necessary not to disclose the identity of the borrowers in order to avoid the risk of creating runs on troubled borrowers.
Samuelson neglected to mention that the Fed refused to release the identities of the institutions receiving the loans available even after the fact. The names of these institutions were only made public as a result of a bill sponsored by Ron Paul and Alan Grayson for auditing the Fed. A version of this legislation was eventually included as an amendment to the Dodd-Frank bill. A successful lawsuit by Bloomberg also led to the release of additional data on Fed loans. In other words, the Fed tried very hard to keep the identity of its borrowers secret even long after the release of the identity of borrowers could have had any impact on their financial situation.
The point of the Bloomberg analysis in question is that making money available to banks during a liquidity crisis involves a substantial subsidy. The banks that have access to the Fed’s lending are advantaged over institutions that do not have access. This allows them to profit off public money when they lend it out.
It may be desirable to allow this profit in the context of a financial crisis, since it would be harmful to the economy to see a financial collapse, but there is no reason that the public should not expect some quid pro quo in exchange for the profits it gave to the banks. The Bloomberg analysis is intended to give the public an estimate of the size of the subsidy it gave to the banks, and in particular the nation’s largest banks, through the Fed’s lending windows. It was an extremely valuable public service.
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The NYT continues its policy of affirmative action for people ignorant of the world by allowing Thomas Friedman to write two columns a week on whatever he chooses. Today he talks about the job crisis.
He does get some things right in pointing out that we have a huge shortage of jobs. He also notes the growing crisis posed by long-term unemployment in which millions of people are losing their connections to the labor market and risk being permanently unemployed.
However he strikes out in his dismissal of manufacturing as a source of jobs and calling for more high tech centers like Austin, Silicon Valley and Raleigh-Durham. When the dollar falls to a sustainable level it will have an enormous impact in improving the competitiveness of U.S. manufacturing. We stand to gain more than 4 million manufacturing jobs once we get the dollar down to a sustainable level.
To take this a step further, if we followed the German model (of which Friedman often speaks fondly) we would create another 3 million jobs in manufacturing by shortening the average length of the work year. The seven million new manufacturing jobs that would be added due to a more competitive dollar and shorter workyear is only a bit over 4 percent of the work force, but it is still a far larger number than those employed in Austin, Silicon Valley and Raleigh-Durham.
In addition, those seeing Austin, Silicon Valley and Raleigh-Durham as the future of the United States have not kept up with the present. Just as China and other low-wage countries can undercut the United States in manufacturing goods with their lower wages, so can developing undercut the United States in high tech production with their lower wages. India already has a large and growing trade surplus in software with the United States.
It is difficult to see how this trend will be reversed in the decades ahead, no matter how much we tax ordinary workers to subsidize the centers that Friedman advocates. The arithmetic is straightforward, high tech workers in the United States will not be able to compete with comparable skilled workers in the developing world making one-fifth as much. Furthermore, it is much cheaper to send software programs half way across the world than it is to send cars.
Friedman also wants to cut Social Security and Medicare for retirees as advocated by the co-chairs of President Obama’s deficit commission, former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. This policy will make Wall Street deficit hawks happy, but it is difficult to see how it will help the future strength of the economy.
The NYT continues its policy of affirmative action for people ignorant of the world by allowing Thomas Friedman to write two columns a week on whatever he chooses. Today he talks about the job crisis.
He does get some things right in pointing out that we have a huge shortage of jobs. He also notes the growing crisis posed by long-term unemployment in which millions of people are losing their connections to the labor market and risk being permanently unemployed.
However he strikes out in his dismissal of manufacturing as a source of jobs and calling for more high tech centers like Austin, Silicon Valley and Raleigh-Durham. When the dollar falls to a sustainable level it will have an enormous impact in improving the competitiveness of U.S. manufacturing. We stand to gain more than 4 million manufacturing jobs once we get the dollar down to a sustainable level.
To take this a step further, if we followed the German model (of which Friedman often speaks fondly) we would create another 3 million jobs in manufacturing by shortening the average length of the work year. The seven million new manufacturing jobs that would be added due to a more competitive dollar and shorter workyear is only a bit over 4 percent of the work force, but it is still a far larger number than those employed in Austin, Silicon Valley and Raleigh-Durham.
In addition, those seeing Austin, Silicon Valley and Raleigh-Durham as the future of the United States have not kept up with the present. Just as China and other low-wage countries can undercut the United States in manufacturing goods with their lower wages, so can developing undercut the United States in high tech production with their lower wages. India already has a large and growing trade surplus in software with the United States.
It is difficult to see how this trend will be reversed in the decades ahead, no matter how much we tax ordinary workers to subsidize the centers that Friedman advocates. The arithmetic is straightforward, high tech workers in the United States will not be able to compete with comparable skilled workers in the developing world making one-fifth as much. Furthermore, it is much cheaper to send software programs half way across the world than it is to send cars.
Friedman also wants to cut Social Security and Medicare for retirees as advocated by the co-chairs of President Obama’s deficit commission, former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. This policy will make Wall Street deficit hawks happy, but it is difficult to see how it will help the future strength of the economy.
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If someone has a gun and is shooting it repeatedly at another person, we might infer that the shooter wants to kill this person. In this vein, how could it never occur to analysts that the purpose of Chancellor Merkel and the ECB’s policy of austerity across Europe is to permanently weaken the power of labor across the continent?
It is hardly a secret that workers can be forced to make concessions on wages and benefits in periods of high unemployment. The power of workers will be further undermined if government supports like pensions and employment protection legislation are also removed. All of this is well-known and widely understood.
Therefore it is remarkable that the class implications of the Merkel-ECB policies never get mentioned in a NYT piece examining the contrasting approaches of Merkel and President Obama to the euro zone crisis. In fact the piece explicitly sends readers in the opposite direction, saying it is “a battle of ideas” in a quote from Almut Möller, a European Union expert at the German Council on Foreign Relations.
In fact the most obvious basis for the difference in the views between President Obama and the Merkel-ECB view is standard Keynesian story that it is in the interest of any individual business owner to have other businesses pay their workers more money. This creates more demand for her products.
In this context, President Obama would be very happy to see a prosperous Europe which would provide a stronger market for U.S. exports right now. However, Chancellor Merkel and the ECB seem more focused on keeping down their own labor costs.
If someone has a gun and is shooting it repeatedly at another person, we might infer that the shooter wants to kill this person. In this vein, how could it never occur to analysts that the purpose of Chancellor Merkel and the ECB’s policy of austerity across Europe is to permanently weaken the power of labor across the continent?
It is hardly a secret that workers can be forced to make concessions on wages and benefits in periods of high unemployment. The power of workers will be further undermined if government supports like pensions and employment protection legislation are also removed. All of this is well-known and widely understood.
Therefore it is remarkable that the class implications of the Merkel-ECB policies never get mentioned in a NYT piece examining the contrasting approaches of Merkel and President Obama to the euro zone crisis. In fact the piece explicitly sends readers in the opposite direction, saying it is “a battle of ideas” in a quote from Almut Möller, a European Union expert at the German Council on Foreign Relations.
In fact the most obvious basis for the difference in the views between President Obama and the Merkel-ECB view is standard Keynesian story that it is in the interest of any individual business owner to have other businesses pay their workers more money. This creates more demand for her products.
In this context, President Obama would be very happy to see a prosperous Europe which would provide a stronger market for U.S. exports right now. However, Chancellor Merkel and the ECB seem more focused on keeping down their own labor costs.
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That’s what millions of readers are asking after seeing a piece that asserted:
“The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region.”
Actually, the industry has created relatively few jobs in Pennsylvania and many of the jobs that it has created have gone to out-of-staters, providing little benefit to the people in the regions where fracking is taking place. News stories should not include unsourced assertions like this one in the AP piece. The article should have sourced the claim and made an effort to evaluate its accuracy if it came from someone with ties to the industry.
That’s what millions of readers are asking after seeing a piece that asserted:
“The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region.”
Actually, the industry has created relatively few jobs in Pennsylvania and many of the jobs that it has created have gone to out-of-staters, providing little benefit to the people in the regions where fracking is taking place. News stories should not include unsourced assertions like this one in the AP piece. The article should have sourced the claim and made an effort to evaluate its accuracy if it came from someone with ties to the industry.
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Fox on 15th yet again did some heavy editorializing in a front page story on the euro zone crisis. It referred to the plan to constrain debt as an effort to create an institutional structure that will “slap automatic penalties on governments that recklessly spend and borrow.”
How did the word “recklessly” get into this article and why did it make it past the Post’s editors? The point is that if the penalties are automatic, then they will not distinguish between countries that borrow “recklessly” and countries that might end up borrowing for reasons that are not reckless.
For example, a country like Ireland may end up borrowing because it had private banks that engaged in reckless lending and faced collapse. The country then had the choice of seeing its banking system go under or borrowing to rescue its banks. (It is possible that Ireland could have kept its banks operating at lower cost by giving creditors haircuts, but that is a debatable point.)
Alternatively, a country like Spain may end up borrowing because incompetent central bankers allow an enormous housing bubble to grow unchecked. When the bubble bursts it creates a severe recession leading to a huge loss of tax revenue and a massive increase in spending on unemployment benefits and other transfers.
An automatic enforcement mechanism does not distinguish between this sort of borrowing and borrowing that is done for reasons that may be viewed as reckless. That is precisely the point with an automatic mechanism, it is automatic. The Washington Post should be able to hire people who understand this.
Fox on 15th yet again did some heavy editorializing in a front page story on the euro zone crisis. It referred to the plan to constrain debt as an effort to create an institutional structure that will “slap automatic penalties on governments that recklessly spend and borrow.”
How did the word “recklessly” get into this article and why did it make it past the Post’s editors? The point is that if the penalties are automatic, then they will not distinguish between countries that borrow “recklessly” and countries that might end up borrowing for reasons that are not reckless.
For example, a country like Ireland may end up borrowing because it had private banks that engaged in reckless lending and faced collapse. The country then had the choice of seeing its banking system go under or borrowing to rescue its banks. (It is possible that Ireland could have kept its banks operating at lower cost by giving creditors haircuts, but that is a debatable point.)
Alternatively, a country like Spain may end up borrowing because incompetent central bankers allow an enormous housing bubble to grow unchecked. When the bubble bursts it creates a severe recession leading to a huge loss of tax revenue and a massive increase in spending on unemployment benefits and other transfers.
An automatic enforcement mechanism does not distinguish between this sort of borrowing and borrowing that is done for reasons that may be viewed as reckless. That is precisely the point with an automatic mechanism, it is automatic. The Washington Post should be able to hire people who understand this.
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Suppose you go out to sea in your beautiful new sailboat. (Don’t worry folks, I don’t have a boat and I don’t think I even know anyone who has a boat.) A couple hundred miles offshore, your boat gets attacked by a gang of pirates. They tear up your sails, smash your engine, and run off with your lifeboat. When your body is found 2 weeks later, NPR surveys the damage and says “that’s the power of the sea.”
That was the tone of a Morning Edition story (sorry, no link yet) which discussed the new euro zone agreement and whether the markets would be satisfied. This is not a question of governments being forced by the market to make changes any more than the victim of the pirate attack can be said to have been killed by the sea.
The European Central Bank (ECB) created the conditions in which countries are facing bankruptcy, first by failing to notice the largest asset bubbles in the history of the world. Its inadequate response to the downturn and continued obsession with inflation has deepened the downturn. And, its repeated assertions that it will not act as a lender of last resort and stand behind euro zone sovereign debt, has ensured that member nations would be vulnerable to speculative attacks that could make otherwise solvent governments face bankruptcy.
It is wrong to confuse the deliberate policy of the ECB with random outcomes of the market. Reporters should be highlighting the distinction, not concealing it.
Suppose you go out to sea in your beautiful new sailboat. (Don’t worry folks, I don’t have a boat and I don’t think I even know anyone who has a boat.) A couple hundred miles offshore, your boat gets attacked by a gang of pirates. They tear up your sails, smash your engine, and run off with your lifeboat. When your body is found 2 weeks later, NPR surveys the damage and says “that’s the power of the sea.”
That was the tone of a Morning Edition story (sorry, no link yet) which discussed the new euro zone agreement and whether the markets would be satisfied. This is not a question of governments being forced by the market to make changes any more than the victim of the pirate attack can be said to have been killed by the sea.
The European Central Bank (ECB) created the conditions in which countries are facing bankruptcy, first by failing to notice the largest asset bubbles in the history of the world. Its inadequate response to the downturn and continued obsession with inflation has deepened the downturn. And, its repeated assertions that it will not act as a lender of last resort and stand behind euro zone sovereign debt, has ensured that member nations would be vulnerable to speculative attacks that could make otherwise solvent governments face bankruptcy.
It is wrong to confuse the deliberate policy of the ECB with random outcomes of the market. Reporters should be highlighting the distinction, not concealing it.
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The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.
The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.
If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.
The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.
The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.
If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.
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Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)
The Washington Post decided to cover up the nature of the ECB’s strategy when it told readers that:
“By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency.”
The Post effectively defined the measures demanded by the ECB as being necessary to “stabilize the euro currency.” That would perhaps be an appropriate stance for the ECB’s public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.
Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)
The Washington Post decided to cover up the nature of the ECB’s strategy when it told readers that:
“By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency.”
The Post effectively defined the measures demanded by the ECB as being necessary to “stabilize the euro currency.” That would perhaps be an appropriate stance for the ECB’s public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.
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The Republicans have substituted “job creator” for the word “rich” in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.
Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.
NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.
The Republicans have substituted “job creator” for the word “rich” in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.
Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.
NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.
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Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF’s role in the world economy. In an oped column he told readers that:
“From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations.”
This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.
It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin’s strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.
This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers’ assertion that the IMF puts countries on a sustainable course.
In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post’s opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers.
Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF’s role in the world economy. In an oped column he told readers that:
“From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations.”
This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.
It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin’s strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.
This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers’ assertion that the IMF puts countries on a sustainable course.
In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post’s opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers.
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