Because he also gets it.
I hoped for a new "New Deal." And he delivers.
Saturday, November 22, 2008
Friday, November 21, 2008
Can't Wait Until Monday
It's amazing what a little confidence and reduced uncertainty can do.
"Msnbc.com's Al Olson reports that immediately after NBC News' report on Tim Geithner likely to be named Treasury Secretary, stocks rebounded sharply. The Dow Jones Industrial Average was trading in negative territory -- down about 38 points -- before the news. Moments after, the Dow zoomed more than 300 points." (MSNBC source)
I support the pick overall.
Geithner seems to get that traditional Fed policy will not solve this crisis:
"What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.
This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets, from subprime to prime mortgages and even to agency mortgage-backed securities, to commercial mortgage-backed securities and to corporate bonds and loans. In the current situation, effects were felt in the municipal and student loan markets."
-Senate Banking Committee Remarks, T. Geithner
"Msnbc.com's Al Olson reports that immediately after NBC News' report on Tim Geithner likely to be named Treasury Secretary, stocks rebounded sharply. The Dow Jones Industrial Average was trading in negative territory -- down about 38 points -- before the news. Moments after, the Dow zoomed more than 300 points." (MSNBC source)
I support the pick overall.
Geithner seems to get that traditional Fed policy will not solve this crisis:
"What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.
This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets, from subprime to prime mortgages and even to agency mortgage-backed securities, to commercial mortgage-backed securities and to corporate bonds and loans. In the current situation, effects were felt in the municipal and student loan markets."
-Senate Banking Committee Remarks, T. Geithner
Thursday, November 20, 2008
Mainstream economists just don't GET it
Mankiw is finally pointing out that the Fed pumping money into the economy isn't working. Duh. Been there, discussed that.
The sad thing is, he still doesn't get WHY. As is typical of his more classical perspective, he is focusing on inflation expectations being the culprit. It's not the big problem. It is true that with little wiggle room in nominal rates, and with prices falling and expected to fall further, that real rates should rise - which is problematic for the Fed (ie. there is a nominal liquidity trap, which people have been noting for months now will be a problem).
But that's just one small part of the problem. The BIG problem is the overall market uncertainty and consumer confidence drop. Banks, business, people are hoarding their money, reducing credit usage etc and pulling funds from their 401K's and stock market etc. All this means money demand is rocketing up - raising interest rates. And it's not just general market uncertainty, but also INFLATION uncertainty. Yes, deflation is likely in the short-run, but keep in mind that just a few months ago we were all concerned about stagflation. To the extent that is a longer-term concern, inflation uncertainty is higher now. This contributes to hoarding or lack of lending and borrowing --- people are taking a wait-and-see approach.
So, the Fed can announce a price target all they want, but the Fed only has so much control. They can't control inflation uncertainty due to supply-side effects, nor can they control general market uncertainty in times where aggregate demand is free-falling. Further, to the degree that the Fed can't control the money supply in times of crisis (ie. money is endogenous and led by demand for funds), this further limits the Fed's ability to effect the market. I am therefore skeptical that even an announced price target would have much of an effect given the current malaise.
As a matter of fact, Mankiw's very prescription would likely cause inflation uncertainty to skyrocket as X number of people would find the Fed action credible, Y number would not, and Z number would see the current economic crisis making it moot! That could mean an even bigger credit crunch!
Focus needs to be on 2 areas:
1. Quicker use of that $700 billion to buy equity in banks etc to get interbank funds flowing and to try to reduce uncertainty (which is the main culprit).
2. Government spending stimulus of a large-order - a new New Deal.
....Abandon Fed Funds targeting - it's not effective and actually can be doing more harm than good because if interest rates on riskier savings is unaffected by the Fed such that those rates keep rising due to uncertainty, but the Fed keeps trying to push it's interest rate on T-bills down further, all that does is INCREASE demand for hoarding.
I think monetary theory will be completely revamped after this crisis is over with, because I am becoming more and more convinced that the traditional idea that decreasing Fed Funds rate can stimulate the economy is outdated in times like these --- in normal times yes, but not now.
The sad thing is, he still doesn't get WHY. As is typical of his more classical perspective, he is focusing on inflation expectations being the culprit. It's not the big problem. It is true that with little wiggle room in nominal rates, and with prices falling and expected to fall further, that real rates should rise - which is problematic for the Fed (ie. there is a nominal liquidity trap, which people have been noting for months now will be a problem).
But that's just one small part of the problem. The BIG problem is the overall market uncertainty and consumer confidence drop. Banks, business, people are hoarding their money, reducing credit usage etc and pulling funds from their 401K's and stock market etc. All this means money demand is rocketing up - raising interest rates. And it's not just general market uncertainty, but also INFLATION uncertainty. Yes, deflation is likely in the short-run, but keep in mind that just a few months ago we were all concerned about stagflation. To the extent that is a longer-term concern, inflation uncertainty is higher now. This contributes to hoarding or lack of lending and borrowing --- people are taking a wait-and-see approach.
So, the Fed can announce a price target all they want, but the Fed only has so much control. They can't control inflation uncertainty due to supply-side effects, nor can they control general market uncertainty in times where aggregate demand is free-falling. Further, to the degree that the Fed can't control the money supply in times of crisis (ie. money is endogenous and led by demand for funds), this further limits the Fed's ability to effect the market. I am therefore skeptical that even an announced price target would have much of an effect given the current malaise.
As a matter of fact, Mankiw's very prescription would likely cause inflation uncertainty to skyrocket as X number of people would find the Fed action credible, Y number would not, and Z number would see the current economic crisis making it moot! That could mean an even bigger credit crunch!
Focus needs to be on 2 areas:
1. Quicker use of that $700 billion to buy equity in banks etc to get interbank funds flowing and to try to reduce uncertainty (which is the main culprit).
2. Government spending stimulus of a large-order - a new New Deal.
....Abandon Fed Funds targeting - it's not effective and actually can be doing more harm than good because if interest rates on riskier savings is unaffected by the Fed such that those rates keep rising due to uncertainty, but the Fed keeps trying to push it's interest rate on T-bills down further, all that does is INCREASE demand for hoarding.
I think monetary theory will be completely revamped after this crisis is over with, because I am becoming more and more convinced that the traditional idea that decreasing Fed Funds rate can stimulate the economy is outdated in times like these --- in normal times yes, but not now.
Wednesday, November 19, 2008
Wow
President of Chrysler:
"[As a condition of loan] We fully welcome the government as stakeholder, including as an equity holder [part owner]."
Wow I live in an interesting and scary time. I still don't get it though. If the problem is still largely liquidity and consumer's not buying autos in large part due to lack of financing, why don't we just take $25 billion or $50 billion and provide tax rebates to purchasers of automobiles with relatively high MPG. That helps consumers, helps the environment, helps automakers (from Japan or the USA or wherever).... It is true the effect on stimulating demand, dollar-per-dollar, would be less than government spending or a loan provided directly to US automakers, but it would still be substantial, and frankly seems a little easier pill to swallow.
"[As a condition of loan] We fully welcome the government as stakeholder, including as an equity holder [part owner]."
Wow I live in an interesting and scary time. I still don't get it though. If the problem is still largely liquidity and consumer's not buying autos in large part due to lack of financing, why don't we just take $25 billion or $50 billion and provide tax rebates to purchasers of automobiles with relatively high MPG. That helps consumers, helps the environment, helps automakers (from Japan or the USA or wherever).... It is true the effect on stimulating demand, dollar-per-dollar, would be less than government spending or a loan provided directly to US automakers, but it would still be substantial, and frankly seems a little easier pill to swallow.
Tuesday, November 18, 2008
Show Me the Money
"A second stimulus package should 'emphasize investment in infrastructure,' such as roads, bridges and other construction, as well as alternative energy projects"
I couldn't agree more. I'd extend that 'infrastructure' to retooling existing non-green infrastructure into green infrastructure such as providing:
1. direct financial assistance to State's with business plans for mass transit. This would help 2 issues: some State's financial problems and their need for revamped transportation options
2. government subsidization/investment in alternative fuel stations and productive capacity along the lines of Obama's energy plan to support a plethora of alternative energies
That along with general spending on regular infrastructure is a good second stimulus I would support.
I would note that this should NOT be the only spending regarding Obama's overall environmental strategy. The long-run strategy should include research and oversight and strategizing on exactly what kinds of green initiatives make the most sense for the US to pursue. It's always best to have a plan first, then start putting money where it matters.
I couldn't agree more. I'd extend that 'infrastructure' to retooling existing non-green infrastructure into green infrastructure such as providing:
1. direct financial assistance to State's with business plans for mass transit. This would help 2 issues: some State's financial problems and their need for revamped transportation options
2. government subsidization/investment in alternative fuel stations and productive capacity along the lines of Obama's energy plan to support a plethora of alternative energies
That along with general spending on regular infrastructure is a good second stimulus I would support.
I would note that this should NOT be the only spending regarding Obama's overall environmental strategy. The long-run strategy should include research and oversight and strategizing on exactly what kinds of green initiatives make the most sense for the US to pursue. It's always best to have a plan first, then start putting money where it matters.
UAW admission of self-defeat
I am watching the House Finance Services Committee, and just now the UAW President, speaking on behalf of the Detroit bailout, said something to the effect of:
"I made a promise to our union workers that they wouldn't have to pay for their health care.... it was the hardest decision I've had to make to change that to help out auto companies."
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/20/AR2005102002078.html
Hmmm. I wonder why Detroit is having such a hard time....
I'm all for more socialized healthcare, but only if it's done correctly. GM etc. are not government agencies - they are far more subject to negative turn in the economy and don't have access to a printing press. So by putting the entire cost of retiree health care etc. on their backs was never smart for automakers or UAW employees in the long-run. Union power got out of control in many parts of the Midwest thanks to UAW. Changes came too late. And now automakers, the UAW, and employees are paying the price in part because automakers refused to follow Honda, Toyota etc. and not let the Union walk all over them.
"I made a promise to our union workers that they wouldn't have to pay for their health care.... it was the hardest decision I've had to make to change that to help out auto companies."
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/20/AR2005102002078.html
Hmmm. I wonder why Detroit is having such a hard time....
I'm all for more socialized healthcare, but only if it's done correctly. GM etc. are not government agencies - they are far more subject to negative turn in the economy and don't have access to a printing press. So by putting the entire cost of retiree health care etc. on their backs was never smart for automakers or UAW employees in the long-run. Union power got out of control in many parts of the Midwest thanks to UAW. Changes came too late. And now automakers, the UAW, and employees are paying the price in part because automakers refused to follow Honda, Toyota etc. and not let the Union walk all over them.
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