Posts Tagged ‘brad delong’

The big banks are still socializing the losses; or, Sympathy for the stockholder

20 October 2011

The original bank bailout may have been repaid in full, but the big banks are still socializing the losses. This time, it’s among their shareholders. Brad DeLong offers some specifics:

‘Investors in Goldman Sachs have lost more than half their money since 2007 . . .

‘Investors in Morgan Stanley have lost more than three-quarters of their money since 2007 . . .

‘Investors in Citigroup have lost 93% of their money since 2007 . . .

‘Investors in Bank of America have lost 85% of their money since 2007 . . .

‘Investors in Bear Stearns, Lehman Brothers, and Merrill Lynch lost more than 90% if their investments as well . . .’

DeLong’s charts (click above link to see them) show that even after bank stocks started to rebound in fall 2009, the losses have still been huge.

One might think this is just a case of the rich getting poorer, but it’s not that simple. In fact, the distributional consequences seem to run the other way. The stockholders, most of whom are middle-class and upper-middle-class folks, are getting hammered. About half of the population owns stock (granted, the wealthy own most of it), so about half of The Other 99% own stock and are seeing their retirement portfolios shrink along with the rest of their savings. (If you own stock at all, you probably own a lot of big bank stock, because they are weighted heavily in index funds, other mutual funds, and pension funds.)

How has the reduced market value of these firms affected the executives and highest-paid employees at the big banks? Not much, apparently. While I don’t have precise data handy, there have been reports all through this Lesser Depression of huge payouts to bankers, including yesterday’s news of Morgan Stanley. It’s happening in England, too.

DeLong’s post includes some excellent comments about how the banks’ poor performance has affected their shareholders and their high-level employees so differently. There’s a technical term for it: looting.

P.S. The Wall Street Journal reports that bank losses have been huge of late. Goldman Sachs lost money in the second quarter of this year, and has had six straight year-over-year quarterly losses. Goldman’s stock is down 39% for the year, and Bank of America’s is down 50%. No mention of how (or whether) bonuses will be affected.

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The deficits between politicians’ ears

17 August 2011

‘This isn’t hard. Hire people to build things with the free money the world is offering us.’

— Jay Ackroyd, at Eschaton (Hat tip: Brad DeLong)

Well, yeah. We should worry about the long-term deficit, but when the world is ready to lend us more money at zero real interest rates, the world clearly has other priorities. And so should we — like the 16% of the labor force that’s either unemployed or underemployed. What might we do with all this money the world is so eager to lend us?

The closest thing to a proposal to build things that’s come out of Washington lately is an infrastructure bank, to fund various improvements in the nation’s roads, bridges, levees, and such. A recent Bloomberg editorial praises the idea, and Pres. Obama is urging Congress to create such a bank. The obstacle, not surprisingly, is Congressional Republicans who view all domestic spending as “pork.” In this case, however, the pork is more like bacon bits. From the WSJ:

‘Under the White House plan, the infrastructure bank would augment current highway and transit programs. The bank would receive $30 billion over six years and would issue grants, loans and other financial tools.’

$5 billion a year? Barely a drop in the giant bucket that is the U.S. output gap. And barely a dent in our nation’s gaping infrastructure needs, which the American Society of Civil Engineers (ASCE) estimates as costing $2.2 trillion over 5 years. Way to think big, Mr. President. As Krugman wrote recently, the battle in Washington is between Republicans who want to do nothing and Democrats who want to do very, very little. And outside the beltway, we have a Republican presidential front-runner who thinks that doing anything to help the economy before November 2012 is not only wrong but treasonous.

But heroically assuming for a minute that Washington actually wanted to employ people to fix the nation’s infrastructure, the ASCE’s website provides ample details about where to do it. Talk about “shovel-ready projects.” Meanwhile, my former professor David F. Weiman recounts some of the infrastructural marvels of the New Deal. Even a longtime Great Depression researcher (me) was amazed:

‘The New Deal’s Public Works and Works Progress administrations spurred rapid productivity growth in the midst of the Depression. New roads and electrical power networks paved the way for post-World War II economic expansion built around the automobile and the suburban home. Astonishing 21st-century innovations such as next-day FedEx deliveries and Wi-Fi still rely on these aging investments. We associate FDR with massive hydroelectric dam projects — including the Grand Coulee and Hoover dams in the West, and the Tennessee Valley Authority in the South — but the New Deal also electrified rural America through cooperatives that distributed cheap, reliable power. Nearly 12 percent of Americans still belong to these collectives. Without the New Deal, they would be stuck in the much darker 1920s.

‘As would modern travelers. Without the New Deal, New York commuters would be without the FDR Drive, the Triboroughand Whitestone bridges, and the Lincoln and Queens-Midtown tunnels. There would be no air traffic at LaGuardia and Reagan National airports. D.C.’s Union Station, wired for electricity during the New Deal, would have a very different food court. Between New York and Washington, Amtrak runs on rails first electrified during the New Deal.

‘Out West, the New Deal gave us Golden Gate Bridge access ramps, the Oakland-San Francisco Bay Bridge, the first modern freeways, and San Francisco and LAX airports. Between the coasts, it brought more than 650,000 miles of paved roads, thousands of bridges and tunnels, more than 700 miles of new and expanded runways, improvements to railroad lines, and scenic routes such as the mid-South’s Natchez Trace Parkway. Without the New Deal, of course, some of these would have eventually been built by state and local governments or the private sector — years after America’s recovery from the Depression.

‘Moreover, private infrastructure improvements would have bypassed poor regions such as the South. Because of its vision and virtually unlimited borrowing capacity, the New Deal underwrote Southern modernization with new roads, hospitals, rural electrification and schools. These public investments paid off. After 50 years of stagnation, average Southern incomes began to catch up with the national average during the New Deal era.’

Granted, economic historians have long criticized FDR’s New Deal deficits as being too small to restore the economy to full employment, but neither were they insignificant. An average of 3.5 million workers a year worked in New Deal jobs. From the above it’s clear that a great many of those jobs produced great gains for America’s infrastructure, economy, and society.

What more could the Fed do? (cont’d)

11 August 2011

The New York Times joins the chorus of complaints that the Fed has not done enough to jump-start this stalling economy. In yesterday’s lead editorial the gray lady ruefully notes that Ben Bernanke basically ruled out further quantitative easing when he said at the Fed’s June meeting that it would not happen unless there was a heightened risk of deflation. Then the editorial offers a paragraph’s worth of additional measures the Fed could take. One by one:

‘For starters, the Fed could take modest steps, like shifting its portfolio toward bonds with longer maturities, which would help to keep long-term rates low and nudge investors into riskier investments.’

In other words, QE3, or QE2 on steroids. Normally the Fed targets the shortest of short-term rates (the fed funds rate) and does so through its open market purchases and sales of short-term T-bills. And T-bills are the security of choice because the Fed does not want to make too big a splash (at least not directly) in the markets for particular bonds. The logic here is the reverse: of course the Fed wants to make a splash in the bond market by lowering long-term interest rates — that’s the penultimate goal of monetary policy, behind stimulating business investment and consumer spending. In today’s extraordinary circumstances, ending the Little Depression seems more important than not disrupting the bond market. So it’s hard to argue against this one, other than to note that the Fed would probably be monetizing a lot more of the federal debt than otherwise, which could raise inflation fears. (Of note: In the early 1930s Keynes thought the central banks should buy up long-term debt so as to lower long-term interest rates, too. So this isn’t exactly a new idea.)

‘It could reduce the interest it pays on the banks’ huge reserves or even tax the reserves to try to encourage more lending.’

Absolutely. Reduce it to 0%, which was the rate on reserves prior to 2008. Bernanke’s main rationale paying interest on reserves, as I understand it, was to reassure the markets that the huge pools of bank reserves, which the Fed created in response to the crisis, would not lead to a runaway inflation when the economy began to recover and banks loaned those reserves out. The idea was that as the economy recovered the Fed would “soak up” those reserves by raising the interest rate on them so that banks would be less inclined to loan them out. At this point, however, hardly anyone seem to be worried about the inflation threat posed by those reserves. They’re more worried about how they continue to just sit there. Lowering the rate to zero can only help, though maybe not by much.

‘It could also resume buying Treasuries or other securities to provide additional monetary stimulus.’

This is a lot like the first suggestion. It could get more radical if the “other securities” are things like mortgage-backed securities, in which case it’s more like QE1 (when the Fed effectively bought up many of the toxic subprime securities, thereby taking them off the market). This brings to mind the dramatic proposal by Joseph E. Gagnon of the Peterson Institute for International Economics, which has gotten a lot of attention lately. Gagnon: “First and foremost, the Federal Reserve should announce an additional $2 trillion of asset purchases, including longer-term Treasury bonds, agency mortgage-backed securities (MBS), and foreign exchange. This is more than three times the size of the woefully underpowered quantitative easing of late last year (dubbed QE2) and it should be accompanied by a clear statement that more is forthcoming if the economy continues to underperform.” I haven’t digested Gagnon’s proposal yet, but this is what a radical proposal looks like. Krugman and Brad DeLong seem to like it.

‘A more aggressive strategy would be letting inflation rise above the Fed’s comfort level of 2 percent or so to, say, 4 percent. That could help the economy by easing the repayment of debt.’

This would have promise if the Fed could actually control the rate of inflation like that. As I’ve written before, I don’t think it can, not when the economy is in a depression and seems to be tending on its own more toward deflation than to 4% inflation. The Fed has already flooded the banking system with reserves; when they don’t get loaned out (as so many of them haven’t), they don’t raise aggregate demand, the money supply, or the price level.

In sum: The first two steps seem worth taking, but are probably too modest to have much impact. The third step can be about as big as the Fed wants it to be; it has the most potential, though as with QE1 just moving a lot of assets from the private sector onto the Fed’s balance sheet doesn’t necessarily generate a surge of private investment. The fourth step looks impossible at present, even without the inevitable political resistance to the Fed backing down on inflation.

A platinum opportunity?

5 August 2011

I’m late to the party on this one, but here’s a novel way to increase the money supply and government revenues: Have the Treasury issue platinum coins of huge denominations. (The usual way of increasing the money supply through Fed actions hasn’t been working so well lately — the Fed has created hundreds of billions in bank reserves, but the banks haven’t been loaning them out and so they haven’t been converted into money.) Brad DeLong:

‘[The Treasury should mint] 100,000 of them, worth $10 million each. Billionaires will want to hold some to be cool. Multi-millionaires will want to hold some so that people think that they are billionaires. Use the proceeds to buy back a lot of long-term debt: that’s $1 trillion of quantitative easing by the Treasury right there.’

Yale Law Professor Jack Balkin appears to have gotten the platinum ball rolling. Paul Krugman is intrigued. So is Matt Yglesias. I still need some time to think it over.

‘The market is rational and the government is dumb’

3 August 2011

The above quote is a favorite of former House Speaker Dick Armey (R-TX). He even used to write it on the blackboard on the first day of class when he was an economics professor. Armey has been out of government for years, but as a founding member of a Tea Party group, he’s been a big influence on that wing of the Republican Party. Not surprisingly, he seems pleased with the pounds of flesh they’ve extracted in the new Budget Control Act of 2011.

Armey and I have different ideas of “dumb.” He favors slashing government spending during our Little Depression and also favors a balanced budget amendment that would supposedly compel further slashing. I think those things are time-tested recipes (the times being 1932 and 1937) for worsening a depression. What do the markets think?

The stock market is on track for its eighth straight day of decline (as of 11:55 a.m., the S&P 500 is down 0.5%, and its biggest drop, 2.6%, was yesterday, when the Budget Control Act finally passed). 10-year Treasury bond prices have been rising, and T-bond interest rates falling, over the same span, now down to 2.57%. How to interpret those numbers?

Hard to do, because nobody (as far as I know) takes scientific polls of market participants to ask them why they did what they did. Armey would probably say, as some commentators have, that stocks have tanked because the $2.1 – 2.5 trillion in cuts over a decade aren’t enough. I would say, as have others, that the market is reacting to the dismal state of the economy and to the likelihood that, as basic macroeconomic theory tells us, the spending cuts will make it even more dismal.

What about bonds? The rosy view would be that T-bond prices have improved because the debt-ceiling vote means no default through 2012 and the spending cuts reduce the overall burden of debt. Armey and I might actually agree that the unrosy view is correct: T-bonds are in higher demand because of a worldwide “flight to safety,” as grim economic news causes people to move away from risky, cyclical assets like stocks and toward safe assets like T-bonds. Again, is the grimmer news the “failure” to slash spending more or the weakening economy?

I’m thinking Armey’s quote fits right now, except it’s the budget bloodletters who are dumb and the markets are rationally reacting by anticipating that they will cause further hemorrhaging of the economy.

P.S. At least one market participant agrees. From the Aug. 2 Financial Times:

‘Jim Reid, strategist at Deutsche Bank, . . . has warned the US could be approaching a “1937 moment” – when authorities removed post-Depression stimuli from still-fragile markets and triggered another recession. This risk, he says, has in fact only been magnified in the markets’ eyes by agreement on raising the US debt ceiling.’

(Hat tip: Brad DeLong)

Jobs, jobs, jobs, stimulus, Depression

28 January 2010

It’s been noted that President Obama used the word “jobs” more times (29) than other word in last night’s State of the Union address.  Much of that was in connection with a jobs bill that he plans to introduce, and about which he mentioned a few reasonable-sounding specifics.  But indications are that he and his party will try to do this one on the cheap, rather than open themselves to the “big spenders” charge or the predictable cries of deficit scolds who think there’s nothing wrong with the economy that a good bloodletting won’t cure.

And, according to polls, last winter’s American Recovery and Reinvestment Act (a.k.a. the stimulus bill) is unpopular.  It was too small to make much of a dent in the massive unemployment crisis, and the continued high and rising unemployment has led many to conclude, by that famous fallacy post hoc ergo propter hoc and with the encouragement of countless politicians and talking heads, that the stimulus actually caused the rise in unemployment.  Brad DeLong has an excellent column on “America’s Employment Dilemma” right here.

Some on the right have likened the Obama stimulus bill and the still-high unemployment to the New Deal jobs programs and the Great Depression:  the argument is, if they didn’t end it, then they must have caused it.  (Which is kind of like blaming Doctors Without Borders for an earthquake.)  Others make the less extreme but still ridiculous argument that because unemployment is still high, the fiscal stimulus must not have created a single job.  (Which is hogwash — Prof. Menzie Chinn of Econbrowser shows that private studies by IHS/Global Insight, Macroeconomic Advisers, and Moody’s Economy.com estimate that the stimulus has created 1.1 to 1.6 million jobs to date, and Chinn himself estimates that the number may be more like 2.9 million.  It’s wonkish stuff, but worth a look.)

Anyway, here’s an unpublished letter I wrote a few weeks ago to USA Today in response to a letter that made that bogus argument about how those New Deal programs that employed millions somehow didn’t employ anybody:

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Should Bernanke stay or should he go?

1 August 2009

His term ends in early 2010.  Obama’s decision on his fate will probably come much sooner. I tend to think he should be reappointed, not least because the apparent alternative is Larry Summers.  I’d like to see some other macro/policy economists get consideration — Brad DeLong, for example — but I’ve heard basically no other names mentioned besides Bernanke and Summers.

I think many if not most economists would give Bernanke about a D for his handling of the housing bubble and the expansion of 2005-2007 but at least a B for his handling of the financial crisis and macroeconomic fallout.   (It would be an A if not for the mixed signals in bailing out “little” Bear Stearns and not “big” Lehman Brothers.)  It seems like he’s learned that bubbles are not a benign phenomenon and that the Fed can act to stop them.

Last Sunday’s NYT had an excellent point-counterpoint on the question of Bernanke’s reappointment, a true heavyweight matchup between Nouriel (“Dr. Doom”) Roubini, arguing for, and Monetary History of the United States co-author (with Milton Friedman) Anna Jacobson Schwartz arguing against.  Both columns are well worth reading and re-reading over the next few months.

(This time you’ll have to find the Clash video yourself.  Sorry.)

Bottoming out?

17 June 2009

I’ve been skeptical all along.  So have Brad DeLong and Paul Krugman. It’s hard to say we’ve hit bottom when industrial production continues to fall, by 1.1% in May and by 13.4% over the past year, the worst 12-month showing since 1946.  Industrial capacity utilization is at a record-low 68.3%.  (The capacity utilization data go back to 1948.)

But it does appear that some economic indicators, like employment, are at least declining at a slower rate, so “bottoming out,” as opposed to “has already bottomed out,” may be appropriate.  The question is how long it’ll take for the economy to start growing again, as opposed to staying at a low level.  James Kwak of The Baseline Scenario offers a good rundown of the “green shoots” debate here.

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