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    The Mighty, Mighty Fed

    By Michael Maiello on Fri, 11/05/2010 - 10:31am |

    Yesterday, under the cover of darkness, while I was drinking bourbon, Deadman called me a lunatic for suggesting that the U.S. federal reserve should organize and run a Great Debt Do-Over to repair the balance sheets of American citizens so that they can re-engage the economy on firmer financial footing.  This is, said Deadman, a banana republic style idea that would tear our economy apart.  It also, he suggests, gives way too much power to the unelected and unaccountable board of the Federal Reserve.  Heck, one might even argue that the very reason the Federal Reserve Board is not directly accountable to the people is to keep them free from the pressure to do things like what I'm suggesting.

    My suggestion, by the way, is quite simple.  It's quantitive easing on steroids.  If the Fed can buy Treasury bonds and then credit the interest payments back to the Treasury, then the Fed can buy any piece of securitized debt that it wants (car loans, mortgages, credit card debt, student loan debt, you name it) and make the same deal with the ultimate borrowers.  As the owner of such debt, the Fed could even forgive the loans.

    The Fed's charter is especially broad.  The Reserve Board can buy anything it wants and can loan money or even give money to anyone it wants.  The blogger Atrios, a trained economist, has suggested this many times.  The Fed doesn't have to just give money to banks.  It could give money to poor people.

    The Fed doesn't do this because it is ultimately run by bankers for banks.  Banks often own long-term debt, the value of which can be eroded by inflation.  So banks hate inflation.  So do investors, who are very similar to bankers and in some cases are one in the same.  The Fed doesn't act to help underwater mortgage borrowers or people up to their ears in credit card debt because those people are not the Fed's constiuency.

    Deadman makes the very good point that maybe we don't want the Fed making social policy.  If you want to give money to poor people or help people pay off their student loans, he might argue that the proper thing to do is to get a law passed through our representative government to do so.  Obviously, such a law would never pass because as a nation we're terrified that some one "undeserving" might get help.  Whatever the reason, Deadman is rightly skeptical of me using an undemocratic institution to try to accomplish what our democratic institutions will not.

    But, the Fed has two missions -- to achieve price stability and full employment.  It faces deflation and high unemployment.  To accomplish its mission, which was set forth in a democratic way (the Fed never even wanted the second part of its mission and routinely ignores it the same way congress routinely ignores its responsibility in declaring war) the Fed has to address the serious imbalances within the American economy.

    Why are Americans indebted?  We tend to take a very moral view of borrowers as people who are living beyond their means.  I don't subscribe to this at all for a few reasons.  First, we only tend to apply this judgment to individuals.  Companies that borrow get a moral pass.  In fact, I've seen large debt free industrial companies criticized by Wall street analysts for not "aggressively using their balance sheets."  We view personal debt as bad and corporate debt as good.  I say it's all value neutral.  Second, for the most part people incurred debt because of inflation in the costs of housing, education and medicine while wages remained stagnant.  Third, I can forgive the use of debt for luxuries like travel and electronics because of those very same stagnant wages.  The questions shouldn't be "Why did that dummy put an iPad on his credit card?" I prefer, "Why did a hard working fellow citizen not have enough money to pay cash when he's doing his part in one of the world's most productive economy of the last 50 years?"  Thomas Friedman might marvel at the industry of Indian and Chinese workers but American workers produce a heck of a lot more goods and services per hour.  Americans aren't overpaid and lazy.  They're underpaid and hard working.

    As I said, the Fed can address this in numerous ways.  I would suggest starting at the bottom of the economy and wiping out debt.  As the Fed moves up the economic ladder it could wipe out debt, or renegotiate terms for people.  Maybe interest due could be cut.  Maybe principal could be reduced but not eliminated.  Maybe the very rich will get nothing out of it.

    Would that be inflationary?  Yes, but that's the point.  The Fed can only do this when we're facing deflation.  We want some inflation.  The Fed routinely targets between 2-3%.  So now is the time when this could be done, once, without disastrous consequences.  If the government is really worried about it, the money supply can also be controlled through taxes.  Even as the Fed helps the middle and lower classes the Federal government could raise taxes on the wealthy and then take that money out of circulation.

    But is it wrong to help out borrowers like this?  Does it create a moral hazard?  I'd point out that the corporate bankruptcy process does this all the time.  In that process there is a stick.  Equity holders are often wiped out in favor of lenders.  Management gets axed.  Nobody wants their company to go through bankruptcy because it's painful.  In this Fed action I admit there's a lot less stick.  But the Fed would just have to be clear that this is a one time thing and it has a good argument -- it wouldn't be able to do this under any circumstance other than the rare deflationary one we're seeing now.  I think people would get the idea that they will never again see this in their lives.  Also, I don't have a lot of sympathy for moral hazard arguments after the easy ride Wall Street got in 2008/2009.

    Ultimately I think the biggest objection to this would come from people who look around and say "Americans really don't need to consume more, they need to temper their desires."  I've never been sympathetic to that point of view.  I think hard working people deserve more consuming power, not less.  I think you get one shot at life and that it's important to see the world and enjoy its comforts.  I'm a bit of an aesthete and I suppose anyone who calls themselves that (and spells it like that and uses the phrase "a bit of" in front of it) is also something of a fop and a snob.  I think most people's lives are harder than they need to be, even in America, and that we should do something about it.  I think that the worst tragedy is to die on the job, if you're working for some one else.

    I think I'm not going to concede to lunacy here.  I think I've made a practical as well as a moral case for a debt do-over right now.  I believe that heading into the next economic cycle without first fixing the wealth and debt imbalances in America will simply doom us to another bust 2-5 years down the road.  Americans will not and should not accept a falling standard of living.  But that's what stagnant wages and high debt burdens insure.  Remove the debt and you remove the impediment to demand.  Remove the impediment to demand and you create reasonable inflationary demand.  In a reasonably inflationary environment American businesses can not only create jobs but give raises and that is the stuff of long booms. 

    Comments

    Destor:

    If you haven't read it yet, please read and then tell us what you think of Union Atlantic by Adam Haslett -- a novel winning prizes right and left that is allegedly based, in part, on insider knowledge of banking excess that, according to the NYT, bears a not-so-far-fetched resemblance to, among others, the AIG fiasco.

    http://www.nytimes.com/2010/02/14/books/review/Schillinger-t.html

    One of the main characters is the Federal Reserve chief -- in this case, a man with a conscience (unlike Geithner)  who thinks it may be time to name names and refuse a bailout .... but who is beset by a combination of industry and government pressure to do "whatever is necessary" to, in effect, keep the potential impact under wraps.

    In any case, people-up relief? Yes, please.

     


    by wws on Fri, 11/05/2010 - 11:19am

    I did read Union Atlantic and I loved, loved, loved it.  I am also quite jealous of the author though my own fiction project right now centers on the mortgage crisis and owes a lot to Haslett.


    by Michael Maiello on Fri, 11/05/2010 - 11:27am

    I'm delighted to hear of your book project, Destor and can't wait to read it. As I read Union Atlantic -- all in one go, unable to put it down. When will yours be available? (btw, will yours have pets channeling FDR and RFK?)


    by wws on Fri, 11/05/2010 - 11:36am

    Mine will only be available if I sell it.  But I have high hopes.  I don't have pets channeling great and controversial leaders.  But mine is framed around a Q&A with a billionaire in Tycoon Magazine (The Unfiltered Minds Of The Filthy Rich) that I think will amuse.


    by Michael Maiello on Fri, 11/05/2010 - 11:52am

    i skimmed through Deadman's thread to get some of the context here. I think part of the misunderstanding/ disagreement comes from his perspective as someone working in finance. There's a certain implicit etiquette in the way monetary policy has to be conducted that is getting flouted in your suggestion. I.e. you don't throw 'free money' directly at the plebs, much like you don't use the dessert fork on your starter. It's just not done. I think people bred in that kind of culture would accept it more readily if you construct it in terms of

    1. Agencies buying up mortgage backed securities and modifying the underlying mortgages, and

    2. having Citi buy up consumer debt instruments and renegotiating them, and

    3. having the Fed buy up Agency and Citi debt to fund the operation

    4. let the agencies and Citi get wound down, with the Fed taking the hit on the worthless agency/bank debt.

    Same policy ultimately, just less upsetting to those obsessed with monetary convention...

     


    by Obey on Fri, 11/05/2010 - 11:58am

    That's a good way of going about it, Obey.  The problem is forcing Citi to renegotiate in good faith.  The banks failed on that under HAMP and I think they would fail again.  But, we do own a good amount of Citigroup so maybe we could exert some influence.  This actually would have been a smart thing to do right when TARP happened and we had ownership stakes in so many banks.


    by Michael Maiello on Fri, 11/05/2010 - 12:02pm

    Well, looking at BofA's share price relative to book value, it seems like the market's expecting TARP part deux pretty soon. Hopefully they'll think of something useful this time.


    by Obey on Fri, 11/05/2010 - 12:27pm

    If I'm understanding this correctly, isn't the reason they would more readily accept such a construct because it puts people in finance in a position to do a massive skim job off the top? Sooner or later, we've just got to stop letting these a-holes put America's wealth in their own pockets for literally providing nothing in return. Fuck them. Let's eat our desert with a salad fork for a while.

     


    by kgb999 on Fri, 11/05/2010 - 4:03pm

    Um...I think, if you're going to eat the desert, you'd do better with a spoon.  Or better yet, a shovel.


    by anna am on Fri, 11/05/2010 - 4:18pm

    Ooops. Hey, it passes spell check!


    by kgb999 on Fri, 11/05/2010 - 6:07pm

    Thank you to the kind soul who linked back to Deadman for me!  I was lazy, I admit it.


    by Michael Maiello on Fri, 11/05/2010 - 12:47pm

    Destor, I like your post. It's been decades since I hopeloessly studied those macro-economic charts in buisness school, so I don't know the feasibility of your plan. But I'm of the school that there are no bad ideas. Ideas lead to ideas lead to ideas lead somewhere, often to conclusions, or products. IMO one of the key faults of Obama's team is that they have not thought outside the box--hate that cliche, but it works--which is what you're doing, I applaud you for that.

    Personal debt is one of the fundamental problems of the economic mess. I don't know if there is a way to erase part of it without creating "moral hazard", a term reserved for consumers. A mortgage principal reduction seems like a first cousin, and that's being done, why not other forms of debt reduction. I think, for example, that massive mortgage reconciliation centers should be set up acrosss the country to get parties together and clear out the backlog. 

    We have been in the economic equivalent of WWII, but there is no perception that Obama's team has or is capable of performing in that type of crisis mode. They really need a shake-up and some new ideas. The best possible signal that they intend to do so would be to cashier Geithner now. 


    by Oxy Mora on Fri, 11/05/2010 - 12:53pm

    Here's an idea that might help people with debt without explicitly giving them anything.  It's unfortunately not progressive as it will help people with money the most but... what if the government said, for one year and one year only, your credit card and student loan payments, not just the interest but the whole darned payments, are tax deductible?  Or even jsut for a few months.  This would basically signal "now is the time to spend all available dollars on paying down debt and here, we'll help make it worth your while."

    Of course as I write that it brings to mind one of the most unfair parts of the tax code -- that business debt interest payments are tax deductible while consumer debt interest payments are not.


    by Michael Maiello on Fri, 11/05/2010 - 1:03pm

    Oh for God's sake, Destor, you want ordinary people to deduct credit card interest instead of giving the wealthy a tax rate reduction? Are you nuts? Laughing


    by Oxy Mora on Fri, 11/05/2010 - 1:31pm

    This is so galactically ridiculous, on so many levels, I can't even begin to list them. I literally have become exhausted after just considering listing them. I'm just leaving this comment hoping that D, (who is also much more diplomatic than me), will correct you kindly. I'm going to go take a nap now. And maybe a shower.

    Alright. Just one. Tell me how reducing debt is materially different from reducing the interest rate on that debt, which is what the current Fed policy does. If you reduce someone's principal, that has exactly the same effect as letting them refinance at some lower rate, at some equilibrium values. It's just a question of how much principal you reduce, or how much you reduce the interest rate. Either way, the effect is a lower monthly payment; the present value of the cash flows is the same.

    Or maybe you think that you are shifting benefits to consumers? Well, if you bail out consumers who were bad credit risks, you bailed out the companies who took those bad risks, since they were the ones who were going to eat the loss if there was a default. So if you buy a bunch of bad credit card debt, you are basically saving the credit card companies' bacon. If the borrower was going to pay that debt anyway, all you did was give that person some cash, which you would have done just as easily by cutting the fucking interest rate and lowering their payments.

    This is just a taste of the many levels mentioned above. Lunacy - no. Idiocy - yes. Now, must sleep.


    by Steve (not verified) on Fri, 11/05/2010 - 1:00pm

    You really don't understand how reducing says a $5,000 loan balance to $2,500 isn't the same as reducing the interest rate on that $5,000 debt?  You must have a hell of a time reading balance sheets.  Obviously the terms of a debt are important.  But the amount of debt is important too since it's the amount of debt being carried that directly affects any reasonable calculation of net worth.  A $5,000 obligation at 7% is better than a $5,000 obligation at 9% but from a net worth standpoint it's better not to have any obligation at all.

    Also, cutting the interest rate at the level where the Fed operates does not, in fact, mean that itnerest rates necessarily get cut for consumers carrying debt.  That only happens if either the debt is floating rate or if the bank is willing to refinance a fixed rate and all too often these days the banks aren't willing.  But the Fed could do it for them.


    by Michael Maiello on Fri, 11/05/2010 - 1:10pm

    Let's try an example that is not an improperly posed straw man. I've loaned you $10k for 1 year at 10% simple annual interest. You're a poorly paid publishing intern living in the big city, but to keep your street cred you've bought each successive generation of every Apple product, as is your right as a hardworking American. Now you are struggling. Fortunately, the Fed comes along and gives you two options:

    1) The evil, bank-loving option: reduce your rate to 5%

    2) The noble, populist option: reduce your principal to $9,545

    Which do you choose?

    As for the banks' willingness to refinance, credit card debt is supremely easy to roll over, as is almost every other kind of debt save mortgages. As for mortgages, I find it hard to believe that banks would systematically refuse to refinance where that step would prevent defaults, which reduces the set of potential unique beneficiaries of your plan to people who have bad credit, but can afford to pay their mortgage, but would simply rather pay less. It didn't sound like this was your target audience.


    by Steve (not verified) on Fri, 11/05/2010 - 2:18pm

    Not sure that either of our examples are straw men or are improper.  They are different.  But let's just take yours... sure, I'll take the rate reduction.  But you know what?  That doesn't do much for me.  The scale of the change in terms is not large enough to do what I suggest needs doing, which is to pick up the American consumer and put him right back on truly firmer ground.  What you're doing only marginally helps and creates a tremendous risk down the road for if our refinancer can't pay back all of that principal before the Fed starts hiking rates again, he may verily well find himself screwed.

    A substantial principal reduction carries less of that future risk.  Even if rates spike our borrower is protected by not owing as much.  Like I said, I agree with you that better terms can help.  But the here is less the terms than it is the sheer amount of debt on the consumer's balance sheet.

    Put it this way... say I owe somebody $10,000 and the bank says "Destor, you're a good guy.  Don't pay us for a year.  We won't charge you any interest until you start making payments again next year."  That is a sweet deal.  And I would be foolish to take it.  The smart thing to do would be to try to pay back every penny before interest charges kick in.  Because even though it would cost me nothing to carry that $10,000 debt for a year it still represents a future risk, a piece of personal balance sheet weakness that must be rectified.  You see how, ultimately, it's the principal that matters most?

     


    by Michael Maiello on Fri, 11/05/2010 - 2:28pm

    Sorry, I was assuming the interest rate was fixed, so there's no "risk" that the rates will change, as you put it.

    Actually, under these terms, your payments are basically identical (you owe $10,500). Technically, the populist option is better by about 55 cents, so you chose wrong.

    As for the "risk" created by all the extra principal, you are ignoring the fact that a future liability is still a liability. Under the scenario above, you owe me $10,500 at the end of the year either way. Just because a larger part of that liability is in the form of interest payments doesn't mean it's not owed. In other words, it feels kickass and edgy to talk about modifying loans for The People, but barring wholesale forgiveness, this mechanism is functionally equivalent to what the Fed is doing now.


    by Steve (not verified) on Fri, 11/05/2010 - 3:18pm

    Which is why I'm basically advocating forgiveness of some or all of the outstanding debts.  It's not about sounding edgy, it's all about putting an end to a balance sheet condition that isn't serving most people very well.


    by Michael Maiello on Fri, 11/05/2010 - 3:23pm

    Hilarious! I was so sure you'd say this I answered it when I first wrote the above, but then I thought it sounded presumptuous. So I'll just write what I was going to write before:

    If you get desperate and say we should just start forgiving debt, then you might as well just give people cash. There's zero difference, except I'm guessing you'd only give it to people with debt. Except that almoste everyone has some kind of debt.

    When's the last time we started just sending checks to people? Right - the Bush administration. And that policy worked extremely well. Very stimulative. Worked out great for the poor.


    by Steve (not verified) on Fri, 11/05/2010 - 4:06pm

    Not the same at all.  Cutting everyone the same check regardless of their circumstance is too broad brush to do much good.  That's why this needs to be tailored to individual balance sheets.  They didn't write the same check to Chrysler that they wrote to GM because the companies had different financial circumstances.  BofA and Goldman Sachs didn't get the same deal.  Why?  Different circumstance.


    by Michael Maiello on Fri, 11/05/2010 - 4:13pm

    Didn't you just tell Genghis at the bottom of this thread that everyone was getting a piece so it would all be fair and square? I'm having trouble keeping up with what this idea even is now, except that the Fed's gonna give a lot of money away. Can you explain it simply so I can keep arguing or realize that I've been wasting my time all afternoon, or both?


    by Steve (not verified) on Fri, 11/05/2010 - 4:33pm

    I said if it concerned him so much you could certainly give tax credits to non-debtors.  But it's not my primary concern.  My goal is to fix the balance sheets of individual Americans because their economic weakness is weighing on the whole society.  If that means unequal treatment then so be it.

    And of course you're wasting your afternoon.  There's no way in Hell the Fed would ever act to help individuals like this so don't worry about it.


    by Michael Maiello on Fri, 11/05/2010 - 4:39pm

    Wasting an afternoon? What a tiddler. I can waste DAYS.  

    And that's without even bothering to read what the other guy's saying. 

    Soooo hey, Destor. What's the topic? Can you sum up in a word?


    by quinn esq on Fri, 11/05/2010 - 7:48pm

    Compassion.


    by Michael Maiello on Fri, 11/05/2010 - 7:58pm

    Ok. I'm for that one.

    Not to worry so much about the "deserving" nonsense.


    by quinn esq on Fri, 11/05/2010 - 8:52pm

    Are you sure you wanna get Ric Flair up outta that chair? 

    Really?


    by quinn esq on Fri, 11/05/2010 - 1:10pm

    There are three very stimulative reasons to reduce the principle versus lowering the interest rate on mortgage debt.

    1.) Reducing the principle on mortgage debt allows the upside-down homeowner to sell his property. Without a reduction in the principle, the homeowner is stuck because he can't clear his debt obligation with the sale of the property.

    2.) Reducing the principle greatly stimulates the housing market (see #1) while readjusting the market to reflect the value of the asset "post-bubble." It therefore actually addresses directly the "Troubled Asset" part of the whole TARP initiative. (I know. What a concept!)

    3.) Getting this monkey off the backs of the stressed homeowner would increase the now moribund mobility of the labor market, encouraging the ability of the workers to move to wherever the jobs might be.

    Contrary to your assertion that there is no material difference between reducing principle and reducing interest rate, I would argue that, in fact, the difference as outlined here on mortgage debt would recommend the reduction of principle as the ONLY way to go to effectively address the problem. Reducing the interest rate could actually exacerbate the problem by causing more stressed homeowners the ability to "slug it out" and remain stuck in a more manageable but inescapable mortgage/home.


    by SleepinJeezus on Fri, 11/05/2010 - 2:34pm

    I can imagine few things less "stimulative" than a sharp nationwide increase in home sales at greatly reduced prices, so if #1 leads to #2, count me out. I'm pretty sure our entire economic policy apparatus shares this sentiment, and they are right.

    I see no evidence that mobility is more than a tangential contributor to unemployment - perhaps you are in favor of cutting back on unemployment benefits as well, since they allegedly also encourage people to stay put and collect instead of moving to find a new job? Can't say I'm with you.

    If I'm wrong, then I hope that you aren't the last one standing in one of these communities where people are unemployed but trapped in their homes when half the town's principal is modified, they sell their houses for peanuts and all move away. Sounds like a recipe for prosperity.

    I'm not arguing that reduced rates are likely to help much with the housing problem or the economy generally. I think unemployment is the core issue, and as I mentioned in D's post (of which this post is kind of a troll that I'm now feeding, I guess) I don't think the Fed's move will make much difference. I'm simply arguing that this idea is, even ignoring the obvious questions that are discussed elsewhere (moral hazard, who deserves to be helped & who doesn't, how much do you give away), absolutely no better and kind of laughably silly in its financial illiteracy.


    by Steve (not verified) on Fri, 11/05/2010 - 3:55pm

    I suppose I'll have to take being called an idiot and financial illiterate by a more mainstream thinker as some sort of compliment in the long run.


    by Michael Maiello on Fri, 11/05/2010 - 4:01pm

    I don't know you and didn't call you anything (alright, kinda called you financially illiterate). You seem fine to me. I just think this idea is kooky. Don't get all "lame-stream media" on me.


    by Steve (not verified) on Fri, 11/05/2010 - 4:10pm

    Fair enough!


    by Michael Maiello on Fri, 11/05/2010 - 7:59pm

    You are wrong about unemployment benefits. Workers draw benefits from the state in which they paid into the system regardless where they move. At least that's the way it works between Idaho and Nevada. Not sure why that would impact worker mobility unless you accept to correlative assertion that the benefits cause people not not bother looking for work.


    by kgb999 on Fri, 11/05/2010 - 6:14pm

    "I can imagine few things less "stimulative" than a sharp nationwide increase in home sales at greatly reduced prices, so if #1 leads to #2, count me out. I'm pretty sure our entire economic policy apparatus shares this sentiment, ...."

    A "sharp nationwide increase in home sales" is precisely what the country needs as a sign that we have actually taken effective first steps in recovering from this economic disaster. And "greatly reduced prices" are quite simply a fact of life. Thats' the economic reality of the collapse of the housing bubble, and we are fools to ignore it AND its impact on Main Street America.

    But, boy, I sure don't disagree with that last line of yours that is quoted above. And therein lies much of the problem.

    I seem to recall something about a housing bubble causing this present financial meltdown; that housing prices had become over-inflated and that there was a crash in the market. I remember hearing something about a "Troubled Asset Relief Program," wherein the financial instruments that contained these inflated assets were identified as toxic. I remember being told that we were spending 100's of billions of dollars to help correct the impact of the collapse of this bubble and to alleviate the pain that will accompany the necessary market correction

    And what we have seen since is these dollars used to help the banks offset their losses whilst leaving the mortgage holders to fend for themselves. The banks are held harmless without being enlisted to actually help address the core problem affecting the rest of our economy, which is the collapse of the housing market that robs the middle class of a vast percentage of ther wealth. And it does absolutely nothing to help those who have been affected in a way that leaves them in financial ruin.

    The reality - as these homeowners know only too well - is that housing prices are what they are, post-bubble. And all the pretense in the world that tries to ignore that reality and its impact can't change that. Simply pouring money into the banks won't offset the systemic impact of that reality. And we are suckers if we allow the banks to pull off this gargantuan heist of taxpayer dollars under the pretense of alleviating the pain for us all.

    And, yeah, don't even get me started on a priggish discussion of "moral hazard" that completely ignores the rapacious financial industry and their near-total lack of regard for ANYTHING but their own bottom line.

     


    by SleepinJeezus on Fri, 11/05/2010 - 8:40pm

    A friend who is not only passionate, but also savvy about all matters econ sent me this excerpt and link:

    The commenter is talking about a new book called Moral Sentiments and Material Interests:
    "While the writings of the great political philosophers of the past are usually both penetrating and nuanced on the subject of human behavior, they have come to be interpreted simply as having either assumed that human beings are essentially self-regarding (e.g. Thomas Hobbes and John Locke) or, at least under the right social order, entirely altruistic (e.g. Jean Jacques Rousseau, Karl Marx). In fact, people are often neither self-regarding nor altruistic. Strong reciprocators are conditional cooperators (who behave altruistically as long as others are doing so as well) and altruistic punishers (who apply sanctions to those who behave unfairly according to the prevalent norms of cooperation).

    As the authors go on to explain, the desire to punish free-riders is an innate human quality that exists in all human societies, from the smallest hunter-gatherer groups to highly complex societies like our own. But, from the quote above, the key phrase is “according to the prevalent norms of cooperation.”

    There is a tremendous amount of effort expended to define what “the prevalent norms of cooperation” are, and who it is that is operating in violation of them. The current war of words between who is the biggest free-rider, the “banksters” or the “deadbeat borrowers,” is a case in point.

    Another commenter says: 

    "I doubt that F. Beard’s is proposing the anarchy of simply showering cash on little people, but rather (I’d like to think) the idea of more direct stimulus that disintermediates the parasitic banksters. There is no reason a public consortium for taxpayer-shareholders cannot assemble great talent to design and create useful, wealth-generating investments and productive capacity. Think an inventive public works program, a la New Deal2.0: solar/wind-farms, earth-sheltered and or geothermal systems, scaled-up fuel cell production, Apollo-scale battery reasearch labs, new urbanism, mag-lev or other high-speed public transit. Of course, the “liberal” Democratic Party and its bankster patrons have no such vision, imagination, or will. They are rather addicted to this present bribery-fueled neo-feudal arrangement.

    Banksters have abdicated by pissing on us and calling it trickle-down. It’s long past time for a bubble-up approach to restore economic dynamism of a true democratic meritocracy by empowering the enormous untapped creative potenital of lots of “little people”, and good government can do that." 

    And provides this link:

    http://www.dailykos.com/story/2010/10/31/915297/-Must-Reads:-Yves-Smiths-NYT-Op-Ed,-Joe-Stiglitz-WaPo-Interview

    Like Urquart, "I couldn't possibly comment" (because I know next to nothing about finance) but what do you think?


    by wws on Fri, 11/05/2010 - 1:35pm

    I don't know enough about sociology, biology or anthropology to precisely put my finger on why we're so concerned with free riders.  I do know that I try not to let it get to me but that certain types of of free riding does get to me too.  It seems pretty deep down and I'm sure it has some survival components to it.

    But the idea that we need banks as intermediaries... it certainly is time to question that.  I think you could argue that most people in the investment world do, in fact, question that.  That when a start up seeks venture financing in exchange for equity rather than a bank loan that they are, indeed, seeking a way around the more traditional finance role.

    When the U.S. government administered the Marshall Plan in Europe it didn't do it through banks.  It made direct loans to businesses on the kind of favorable terms that only a government that can take virtually unlimited losses could do.  In fact, it made more grants than loans.  Why?  Because an entire economy needed to be rebuilt.  We could do something like that here.


    by Michael Maiello on Fri, 11/05/2010 - 1:45pm

    Ahem. Geithner's attempted free ride on his taxes?


    by Oxy Mora on Fri, 11/05/2010 - 2:29pm

    Reminds me that during all the bailout discussion at the time it was happening, member "Econ" Ellen over at TPMCafe was suggesting just giving every citiizen a couple grand instead of doing the bailout. I'm pretty sure she was serious, she said it often enough, implied that doing so had a much greater chance oft being a corrective.


    by artappraiser on Fri, 11/05/2010 - 1:58pm

    I guess we would have to hire Ken Feinberg to review the credit card, auto, business and mortgage debt to make sure it isn't fraudulent or fake, and ensure that the settlements are fair. This would take time and cost a lot, and the voters would not see immediate reuslts. Ellen was right, there is an easier way!

    A better solution would be to let Helicopter Ben live up to his name, fly helicopters across the country dropping $100 bills. Sure, the sick or the aged will lose out to the faster more nimble healthy and young, but that is exactly the demographic who are most likely to spend! Additionally, those who grab the cash don't even have to pay off their debts, let the banks eat it, why pay off debt when you can spend and enjoy it now?


    by NCD on Fri, 11/05/2010 - 2:05pm

    Destor, I'm going to try to restate others' objections very simply. Why does a poor debtor have any more right whatsoever to buy an iPod or go on vacation than a poor non-debtor?


    by Michael Wolraich on Fri, 11/05/2010 - 3:35pm

    They don't.

    So give them a tax credit if everything has to be fair and square.  But don't oppose something that would actually fix the economic mess we're in just because it doesn't affect everyone equally.  What we're doing now isn't equitable either.


    by Michael Maiello on Fri, 11/05/2010 - 4:00pm

    Destor, I'm having a bit of deja-vu here and am wondering if it's real memory or imagination. Seems like I recall the suggestion made by a blogger at TPM that we should open the floodgates to immigrants in order to spur our economy. Was that you, somebody else, or merely my derelict brain cells causing trouble again?

    Methinks a big chunk of our budgetary woes stems from the fact that we've equated economic stability with selling houses and cars and trees and gas. All at the expense of other priorities. Call it tax-and-sprawl for the Democrats, debt-and-sprawl for Republicans. It's part of the reason I'm fed up with both parties.


    by Watt Childress on Fri, 11/05/2010 - 4:34pm

    I don't remember the exact post but that sounds like something I'd say and it's also something I believe so I'll take credit for it.  But don't get mad at Democrats over little old me.  I don't represent the party at all.  I'm far more radical.  I'm also a fanatical urbanite.  I like more, more, more all the time.  I would definitely be happier if we had a larger more vibrant, more diverse, more active population.  But the America of my dreams is probably too cosmopolitan for many.


    by Michael Maiello on Fri, 11/05/2010 - 4:35pm

    Lots of food for other thoughtful discussions. I'm a big fan of cosmopolitanism so far as it nurtures the arts and cultural diversity. Knee-jerk urbanism, not very much. If more was always better, there'd be no reason for any of us to stop at a single six-pack.

    I've been known to SAOL (shout amen out loud) while reading your blogs. Yet it seems we'll agree to disagree when it comes to conserving natural resources for the good of creation or conserving taxpayer dollars for budget priorities.


    by Watt Childress on Fri, 11/05/2010 - 4:46pm

    I'm supposed to stop at a six pack?  Sheesh, Watt!

    I promise though, I don't want to rape the environment.  Have a great weekend!


    by Michael Maiello on Fri, 11/05/2010 - 5:04pm

    You too! Here's to more brain cells for us all!


    by Watt Childress on Fri, 11/05/2010 - 5:42pm

    Destor, very well said, thanks for hanging in there. It will take decades to restructure this economy. In the meantime we need to create jobs in order to keep the thugs out so we have a chance to make the changes.

    For a new subsidy how about modifiying your idea along these lines, to take into account the value choices of others, and A-man's comment, for example, about mortgage subsidies being bloated already.

    A tax credit or tax deduction on a multiple choice basis. 1. Mortgage 2. Credit Card 3. Student loan 4. My State's Dept of Education 5. and this is the killer, the Feel the Flames Baptist Church, or other evangelical non-political religious organization.

     


    by Oxy Mora on Fri, 11/05/2010 - 5:19pm

    Love it.  People based help that's people directed.


    by Michael Maiello on Fri, 11/05/2010 - 5:47pm

    Just because the world isn't fair doesn't mean that I shouldn't object to a policy for being unfair. Moreover, you introduced fairness in the first place. You appealed to a general sense of fairness (because poor people deserve more) to defend a stimulus argument (even though this really doesn't seem like the most efficient way to create jobs), and now you're telling me that fairness doesn't matter.


    by Michael Wolraich on Fri, 11/05/2010 - 6:39pm

    Good point.

    But, uh... poor people do deserve more, don't they?

    And we can't adequately address the problem if we demand that everyone get equal benefit.  But we can if people don't mind that some might get something for nothing while they don't.  So I'm appealing to a broader sense of fairness... maybe something more like affirmative action or progressive taxation -- not strictly treating everyone even on a dollar per dollar or event for event basis, but serving the cause of fairness more broadly.


    by Michael Maiello on Fri, 11/05/2010 - 8:03pm

    Hey, as long as the proposal is pareto-optimal, what are people bitching about? Trickle-up, trickle-down, trickle-sideways, it's all good. Seriously, you just need to show that this proposal does more to set the economy back on a decent growth path than stuff like Ellen's universal flat-rate tax rebate. If helping out debtors helps out everyone more than anything else, I don't see what basis there is for complaint.


    by Obey on Fri, 11/05/2010 - 8:40pm

    Heck, Ellen's plan would have done way more good than all the others.  Mine is like hers, just nuanced in ways that would make her scoff.


    by Michael Maiello on Fri, 11/05/2010 - 9:02pm

    What I like about yours is that ... it can actually happen. When things start going south again, and people start casting about for more serious solutions, this is something that can be implemented without Congress being able to get in the way. At least if it is structured along the lines I suggested this afternoon. I liked Ellen's too, but the Fed can't actually just throw money around that way without legislation - it's too blatantly in the territory of fiscal policy.


    by Obey on Fri, 11/05/2010 - 9:15pm

    Now that's a very good point. 


    by Oxy Mora on Fri, 11/05/2010 - 11:09pm

    This brings up something I've been mulling (over). I don't think Obama has used the bully pulpit enough to speak directly to the wealthy, why shouldn't the wealthy be willing, in the context of this economic stagnation cum high deficit mess to forego tax relief? I mean, has anyone asked them to make a sacrifice? This is where a different leadership style, or a different mindset, is required. 


    by Oxy Mora on Fri, 11/05/2010 - 10:42pm

    Sorry for letting this response to my blog - and the firestorm of subsequent comments - pass without notice, but I have a decent excuse as it was my birthday today, and the celebration of which should also suffice for why the following will not be entirely coherent and/or lucid ...

    look, as far as i see it, you're not a lunatic. you definitely are on the fringe, though, and imho, you have incredibly naive ideas about the best way an economy should run. i really think you're just a socialist at heart. on some level, i empathize with your leanings but just don't think that's the best way to achieve the highest standards of livings for the broadest number of people. 

    in the end, what you are arguing for is essentially a bailout for the people, which i suppose has some emotional appeal as a reasonable counter for the bailout we had for the banks. again, i empathize, but i'm sticking to that whole two wrongs not making a right philosophy. (fwiw, some sort of bailout of the banks was necessary as to avoid a panic which would have shut down the entire economy, though i think the execution of what ultimately took place was excessively messy, unfair and all in all, dreadful.) 

    there are so many things i find wrong with your argument (which makes me realize that I may be more right economically than i would like to admit) that i don't know quite where to begin so ill just thrown out a few things...

    • i think you overestimate the broadness of the Fed charter. 'Giving money to poor people' i don't think falls under the letter of its charter and certainly doesn't fall into its intent.
    • I don't view personal debt or corporate debt as negative or positive. (I took on a lot of debt to finance my college education) But both companies and individuals need to understand that any debt they take on must be able to be serviced by their future ability to generate income. and guess what, we actually do have a perfectly legitimate 'stick' approach when a consumer takes on too much debt - and its the same thing as the corporate one. personal bankruptcy. you may lose some remaining assets, and your ability to borrow more is destroyed for several years, but your existing debt goes poof and you don't go to jail or anything. and it's even better for those people whose only 'sin' was buying a house that was too expensive for you, feel free to walk away from it. almost all mortgages are non-recourse. 
    • you feel strongly that american workers get short shrift in terms of their fair due in the current economy. given the immense and growing income disparities between rich and poor, white and blue collar, i agree with you. but i still think the solution must be addressed legislatively and with some sort of thought, not by fiat. 
    • there is absolutely no chance moral hazard wouldn't apply here. the whole 'yeah, but if you do this stupid shit again, we're not saving your ass next time' argument is horrific (it's a problem that was unwisely not addressed in the bank bailout - and again I empathize with your feelings here)
    • you forget (or dont care) that much of our consumer debt is owned by foreign entities and governments. do you really expect them to accept this solution? again, i have a feeling you could care less about this due to your political leanings, but trust me, you would feel the consequences rather quickly should foreign investment suddenly cease or substantially dry up.
    • I think you just feel that hard work should automatically equate to wealth and the ability to buy whatever you want. a kind of utopia perhaps. (I think I take back my socialist comment, since from what i can gather, you're really a communist, and would actually take it a step further and change marx's line to 'from each according to his ability, to each according to his unlimited desires') now i happen to agree that one of the major ways in which our economy went wrong is that rewards started to flow to people who were very clever but didn't create or produce anything of real value (ie many of my friends on wall street) but i still think capitalism - with a healthy dose of regulation and a fair amount of ex post facto socialist policies thrown in - is the best path to prosperity. 

    by Deadman on Sat, 11/06/2010 - 2:12am

    Told you he was more diplomatic!


    by Steve (not verified) on Sat, 11/06/2010 - 8:32am

    He is.  But I owe you an apology for getting testy yesterday.  I very much enjoyed debating with you.


    by Michael Maiello on Sat, 11/06/2010 - 11:40am

    Happy birthday!  Smart stuff.  Needs some thought on my part but more later for sure.


    by Michael Maiello on Sat, 11/06/2010 - 11:39am

    I was a journalist who covered Wall Street for ten years and I now work in finance, in a marketing capacity but closely with people who make investment decisions.  I feel like I'm pretty well grounded in this stuff, even if my conclusions are out there.  I don't consider myself a socialist or communist, though I think we could incorporate elements of that into what we have, which is managed capitalism, just managed in a more subtle way than the Chinese have.

    One thing I do want you to know is that I have not overstated the Fed's flexibility to act.  A few years ago I was working on a story and an investment manager told me that the Fed had vastly greater powers than most people think.  When Congress created the Fed it very specifically gave it a flexible mandate.  While tradition dictates that it acts mostly through its control of interest rates and by giving bank holding companies access to its discount window, that is not the extent of what it can do.  The Fed can, under it's charter, loan you $5 at no interest with repayment in 100 years.  It doesn't only because it would serve no purpose for it to do so.

    Well... some investment manager told me that.  I didn't believe it either.  I called the New York Fed, was put through to an economist and explained what I'd been told.  He confirmed it.  I get along with that economist very well and have kept in touch.  I actually ran my "great debt do over" idea by him before I posted it anywhere and... well... he doesn't by any means support it but he grants that it is within the Fed's charter to do exactly what I've described.  The Fed never will, he says, because there'd be a huge political backlash and because he believes it would be more inflationary than I think.  He also thinks I'm looking for a free lunch for the economy and... yeah... I am.  That might be the most damning critique.  As you have said, there are always consequences.

    You mentioned foreign creditors being ticked at this kind of solution.  I have to wonder what you mean.  The Fed or Treasury would obviously buy this debt back at prevailing rates.  If my debt is owned by a sovereign wealth fund and trades at 40 cents on the dollar, the Fed buys it for 45 cents and settles with me for 50 cents, the SWF doesn't have any cause to be angry, does it?  It ultimately got a nickel more than the market would pay.  Frankly, our foreign creditors should like this solution.  They get taken out above market rates.  I expect a thank you note.

     


    by Michael Maiello on Sat, 11/06/2010 - 2:12pm

    fair enough. point taken on their charter - i havent read it, don't know the history so well, so im not about to argue with you or your sources. i think anything that far afield would raise quite the ruckus and certain judicial and legislative challenges, but i know a lot of conspiracy theorists believe the Fed runs the whole joint anyway.

    Good point on the foreign creditors. Although I would assume the Fed would have to buy consumer debt with government funds (new debt), which would cheapen the dollar, destroying the value of all the debt already owned by foreign nations (something you think we have room for, something I think would unleash an inflation shitstorm).

    btw, our backgrounds are eerily similar ... financial journalist for three-plus years, working in the industry for the past 11 (and somehow in the process avoiding to get my share of all that funny money and undeserved riches!!!!) 

    btw, i thought both you and steve (my good friend from college and an American hero) had a interesting, pretty testy-free discussion all in all. 


    by Deadman on Sat, 11/06/2010 - 3:18pm

    Cool.  I like Steve.


    by Michael Maiello on Sat, 11/06/2010 - 3:38pm

    Americans have backed ourselves into an indebted, polluted, overbuilt mess chasing economic growth by way of consumption. I think moral collapse is more descriptive of our situation than moral hazard. We consume without regard for limited resources and will continue to do so if government subsidizes this behavior. Basic needs, not appetites, are worthy of priority public support.

     


    by Watt Childress on Sat, 11/06/2010 - 3:50am

    Good discussion. Here's my take on this. I am a cultural liberal and I own a profit making small industrial services company. Nothing is fair in life. A subsidy is a politically enabled value judgement. Some win, some lose. George Bush skewed assets so far to the wealthy it will take a generation to reverse it. We lost that ecoonmic war.

    When the collapse occured in 2008 I got a call from my bank. My company had had a credit line for about 10 years, the loan amount varied according to sales level. The bank froze the credit line at what happened to be a low level. There was nothing wrong with my credit record or payment history. The bank's reason..."everybody is getting a hair cut". Was that fair? I as a small businessman was a tool in the bank's plan to repair its balance sheet. Not only that, but credit card interests rates were increased--the other method the banks are using to refund themselves.

    If Obama is to have any hope of getting the employment number up he must focus every resource on small businesses, they are the engine. I have done some hiring in the business. I love the idea of a 100% writeoff on equipment, I'll probably buy a truck I don't need, it's just too good to pass up the idea of cutting my business income taxes. So subsidies, yes, the more the better. Make them count. Let's try to get that employmnent number up. If we don't we'll be looking at Huckabee or Jeb Schiavo Bush as President.

     


    by Oxy Mora on Sat, 11/06/2010 - 10:01am

    America's 2 economies, Robert Reich:

    Next time you hear an economist or denizen of Wall Street talk about how the “American economy” is doing these days, watch your wallet.

    There are two American economies. One is on the mend. The other is still coming apart.

    The one that’s mending is America’s Big Money economy. It’s comprised of Wall Street traders, big investors, and top professionals and corporate executives,

    The Big Money economy is doing well these days. That’s partly thanks to Ben Bernanke, whose Fed is keeping interest rates near zero by printing money as fast as it dare. It’s essentially free money to America’s Big Money economy.

    Free money can almost always be put to uses that create more of it. Big corporations are buying back their shares of stock, thereby boosting corporate earnings. They’re merging and acquiring other companies.....But there’s another American economy, and it’s not on the mend. Call it the Average Worker economy.

    Last Friday’s jobs report showed 159,000 new private-sector jobs in October. That’s better than previous months. But 125,000 net new jobs are needed just to keep up with the growth of the American labor force. So another way of expressing what happened to jobs in October is to say 24,000 were added over what we need just to stay even.

    Yet the American economy has lost 15 million jobs since the start of the Great Recession........

    A simple calculation from the above figure of 24,000 jobs added above those needed for the growth of the labor force shows it would take 600 years for the 15 million lost jobs to 'come back' to the 'average worker economy', at the rate of job growth in October, which was the best month since May!

    link


    by NCD on Sat, 11/06/2010 - 1:42pm

    I was just at TPM reading this when you posted this here.  Reich makes an excellent point.  Here's where I differ from him (though I'm not sure we actually differ) -- I think the easy money policies are entirely appropriate but it's all about who gets the money.  I say bottom up would be more effective than the current top down approach.


    by Michael Maiello on Sat, 11/06/2010 - 1:56pm

    You are right, Helicopter Ben, and our political system, seem beholden to the Big Money so that is where he drops the newly printed cash. The 'average worker economy' be damned.

    Perhaps this different emphasis on big money vs, workers is why the Germans and many other countries have expressed displeasure at Ben's never ending Wall Street 'bonus priming'. It is a safe bet these other countries are run with the average citizen's welfare more in the forefront than here.


    by NCD on Sat, 11/06/2010 - 2:28pm