dagblog - Comments for "Heartbreak Motel: The employed, the unemployed and the unemployable "

Just saw this. I appreciate

Oxy Mora — Mon, 07 Nov 2011 16:31:33 +0000

In reply to Solid, solid original post,

Just saw this. I appreciate your comments very much.

Solid, solid original post,

acanuck — Sat, 05 Nov 2011 21:17:11 +0000

In reply to Heartbreak Motel: The employed, the unemployed and the unemployable

Solid, solid original post, Oxy. And a great batch of thoughtful, informed comments. For once, I've got nothing to add. Except that this is dagblog as God intended it.

A lot of good comments, and

Oxy Mora — Sat, 05 Nov 2011 03:18:46 +0000

In reply to I don't know if the Fed is

A lot of good comments, and like Saladin says, much to chew on. Thanks for the reference to the Fulwiler article.

About the dual mandate, it begs the question, "If the Fed didn't have the mandate on employment, what would they do differently?" I think the answer is clearly, "nothing". So much for the mandate. However if we began careening into a double dip or worse, I think the Fed would in fact dream up some tools.

There had been chatter before the FOMC meeting that QE3 was possible, but in the form of Agency MBS portfolio expansion---whereas at the moment the portfolio is remaining stable with payoffs reinvested. I think the Fed got a little bit of growth improvement news and held off--much to the liking of Fisher and others who had previously dissented.

I like the concept of banks as more a utility than a gun slinging brokerage or investment banking outfit. On top of that I like the idea of helicopter cash drops when things go sour.

Anecdotally, at the beginning of Sept the Fed announced a sanction against Goldman Sachs, the first of 14 banks having been reviewed for deceptive mortgage servicing practices. Goldman was ordered to hire a consultant to review practices and the Fed stated monetary penalties were expected. I thought an interesting twist was the suggestion by the Fed that the fines might be directed toward "remediation to borrowers" who suffered injury. Of course, any fines would probably be a pittance, but if there is a transfer of wealth from GS directly to citizens, I would count that as a direct stimulus. But most likely it was Fed P.R.

I'm headed out for the weekend. To be continued.

I don't really have a lot of

Dan Kervick — Sat, 05 Nov 2011 01:34:31 +0000

In reply to Oxy, FWIW the helicopter drop

I don't really have a lot of faith in our democratic system as presently constituted, Saladin. I just think our efforts should be focused on reforming and fixing our economy and making it more democratic, rather than doing things in our desperation that might make it more authoritarian and elite-governed - such as granting more powers to the Fed. I would like to see some fairly radical monetary system reforms instead, the bring the monetary powers of the US government back under more direct democratic control.

But we really have to throw all the bums out of Congress. The epicenter of our national disaster right now is the US Congress. That's where it is all melting down. Until we get a progressive Congress, the United Sates and its democracy are like a chained giant, that can't even make the most simple and obvious uses of its vast powers to pursue the public good.

I don't know if the Fed is

Dan Kervick — Sat, 05 Nov 2011 01:27:35 +0000

In reply to Good comments. I've been

I don't know if the Fed is bad at forecasting. What would make people think so?

My whole beef in a lot of the recent discussions about the Fed is that there is just massive misunderstanding among even some very well-informed people about the nature and scope of the powers the Fed has. You constantly hear the argument that because the economy is bad and unemployment is so high, the Fed must be doing something wrong.

To my mind, this argument is like saying that because some people are hungry, the Church must be doing something wrong, and needs to adjust its loaves and fishes creation target.

Part of the problem is that some legislators once got the bright idea that they should give the Fed a "mandate" to pursue maximum employment consistent with price stability. But this is like some lawmaker giving me a mandate to pursue the maximum number of swooning women consistent with my marital vows. If I try really really hard, maybe I could get one or two females to swoon; and if I try harder than that, I might run into problems with my marital vows. But the fact is, I really don't have a lot of power to make women swoon, no matter what kind of damn mandate I am given. Similarly, the Fed has very little control over the number of people employed in our economy, mandate or no mandate. In non-recessionary times, it can tweak employment up or down a bit by exerting some cooling or heating. But in a profound recession, once it has flooded the banking system with reserves and lowered interest rates as low as they can go, they are pretty well tapped out. Everything else beings suggested - building up bank reserves even further, declaring NGDP "targets" etc. - are mainly desperate gimmicks, attempts to get the economy moving by having Ben Bernanke do a rain dance and hoping that impresses the faithful into action.

For a really good article on how the modern central banking system actually works, I highly recommend this article by Scott Fullwiler:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1658232

Good points all, I fully

Saladin — Sat, 05 Nov 2011 01:17:32 +0000

In reply to No matter how money is

Good points all, I fully agree that democratic institutions should control discretionary spending, there in lies a recipe for disaster. I also agree that we some sort of decentralized system that function as banks. I really think we need to consider the public utlity argument. I would like to see progressives start this discussion.

Much to chew on. Best,

I largely agree with your

Saladin — Sat, 05 Nov 2011 01:07:49 +0000

In reply to Well, my hunch is this: I

I largely agree with your analysis, and must tip my hat to you for your very cogent reading of the current situation. Perhaps negative interest rates could be considered? Or writing off targeted assets, like housing?

I do have a general philosophical concern that our money creation is done through lending at interest, which I believe promotes inequity. I also have concerns of how to maintain an eternal growth model in a world with real resource constraints. Hopefully those will be problems for my children.

No matter how money is

Dan Kervick — Sat, 05 Nov 2011 01:04:41 +0000

In reply to "When people call for the Fed

No matter how money is created, Saladin, some system must exist for picking and choosing whom to give it to, and for determining whether to give it to them outright, or whether to demand some partial or total repayment - or repayment with interest - later on at some point in the future. This can't all be decided from some central office, but clearly requires a decentralized system with a lot of local decision-makers making decisions on the basis of local conditions. I would be happy to see us move to a system of public utility banks, or government operated banks, that operate on a non-profit basis. That would certainly cut the lending costs and interest rates, and also allow for the rapid countercyclical expansion of credit during busts. A private system cannot lose money indefinitely and remain solvent. But a public system could choose to lend out more than it receives back, for very extended periods of time, as an aspect of our nation's monetary operations. That would just be a way of expanding the money supply.

But I don't thing we can have an effective monetary and financial system - public or private - without having the functional equivalent of banks, and without having the creation of money driven primarily by lending decisions at the local level.

My point about expanding the powers of the Fed in the way I criticized can be viewed this way. One thing I would like to see happen is for Congress to move some monetary operational discretion away from the Fed, and give it back to Congress and Treasury. Congress could require the Fed to credit some fixed annual value of money to special Treasury department accounts at the Fed. The Treasury could then spend out of those accounts as a purely monetary operation, without funding the spending by taxing and borrowing. No additional taxes; no additional government debt. To prevent serious inflation, there would have to be a cap on the amount placed in these accounts.

What I wouldn't like to see happen is for Congress to give the Fed further discretion to spend the money it creates on the purchase of goods and services in the real economy. Suppose the Fed were empowered to build a bridge, or open a store, or hire some workers. That's a very dangerous and anti-democratic move: the agency with the power to create all the money its needs out of thin air would also have been given the power to spend that money on all sorts of things. That means we are turning over some of the fiscal operations of the government, which are ordinarily under some degree of public control, and moving them over to a hierarchical organization of unelected officials, who make these spending decisions in secret, without direct public input. Why would a democratic people want to do such a thing?

Well, my hunch is this: I

Dan Kervick — Sat, 05 Nov 2011 00:32:10 +0000

In reply to In my hurry to make a "Bud"

Well, my hunch is this: I don't think the reason economy is stagnant is because there is not enough liquidity in the banking system. Banks now possess gargantuan stores of reserves in their Federal Reserve bank accounts. Companies are sitting on very large stores of excess cash, which are also being saved in banks. Interest rates for borrowing are extraordinarily low, with the Fed keeping them right up against the zero bound. So why isn't all that money being lent out rapidly? Why isn't that money being invested in hiring lots more workers to produce lots more goods and services?

Because the movements of the financial system do not depend on the supply of credit alone, but on the value of the promises that can be exchanged for that credit. No matter how much liquidity exists in the financial system, an matter how low the prevailing interest rates are for borrowing it, people with money to lend still will not lend it if they cannot get a reasonable assurance of return on their investment. Suppose you're a little entrepreneur with a business proposal. You want to make some new product to sell, or open a store. You take your proposal to a bank. What they care about is whether your business will succeed, and whether the money they lend you will ultimately be returned to them, with at least some interest. They are interested in the value of the promise you can give them for future money in exchange for the money they give you now.

And there's the problem. There are very few people around with valuable promises that they can exchange for credit. Why? Because as industrious as they might be, and as clever as their idea might be, they live in a business environment surrounded by unemployed people, by underemployed people, by people whose real incomes have been shrinking for years, by people who owe more money than they wish they owed and are not in a mood to spend. They don't have enough potential customers with enough disposable income. So a banker looking at that clever business plan says, "I don't think this plan is going to succeed. I would like to make some money, and have all the money I need to lend, but this doesn't look like a way to make money. I will do better by hanging onto my money. At least that way I won't lose money."

Obviously not all such plans are losers. Money is still being lent. But there are not enough profitable opportunities available. And that's not something you can fix by making money easier when it is already as easy as it can be.

I think the Fed's attitude is something like this: "The system is already flooded with money, and yet the money isn't moving. We don't think adding even more money to the system will have any significant impact. The Federal Reserve can do a lot to create easy conditions for financing. But the Federal Reserve cannot create a country full of customers with ample stores of disposable income."

What could create those customers? Congress. There are vast stores of amassed savings in this country - savings that are doing little economic work - just sitting somewhere receiving tiny rates of interest. Congress can lay hold of some substantial portion of those savings via taxation, and transfer them as income to people who are desperate for more income. Congress could also use that money to authorize the direct hiring of millions of unemployed people, so that they get not just a temporary boost in income, but jobs and income security.

Oxy, FWIW the helicopter drop

Saladin — Fri, 04 Nov 2011 23:17:01 +0000

In reply to Good comments. I've been

Oxy, FWIW the helicopter drop comment comes from Bernake himself about the importance of fighting deflation. It wasn't about unemployment--an issue he doesn't seem to take seriously--and with global demand for resources causing mild inflation it doesn't seem that we are at risk of deflation any longer.

I agree with you that the institutional structure is out of date, but then again what does that mean? Path dependency means that our international financial system's design is largely set. I think progressives should still explore it, I strongly disagree with Kervicks contention that it works just fine, or that it is powerless to fight joblessness, it could do much much more. However it would probably take another collapse or revolution to change the functional design (one is more likely then the other, but both are unfathomable).

DK also has great faith in our democratic system that I don't really share (it makes him a pleasure to read though), however I can conceive of multiple ways we could require banks to be focused on regional economies again. For example we could simply scrap them and use community credit unions instead, or force them to change into community building institutions. Banks were useful in promoting economic development through rewarding productivity, but I believe that we have moved into a new phase of history where we no longer need to continually increase productivity--we have abundance, and can easily ramp up production of material items if necessary are most pressing needs are in the traditional external factors things like health, education, environmental sustainability. Maybe we should mandate that money is invested into those instead of productivity. Obviously there are lots of issues here, but I think that progressives should be researching these issues and thinking about it, even while trying to build democracy.