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Power Point I did for a conference discussion.

Financial Architecture Fundamentals

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Yes, he’s got that part very right!!!

>   On Mon, May 25, 2009 at 11:06 PM, Roger wrote:
>   
>   Federal Reserve Vice Chairman Donald Kohn:
>   
>   Interactions between Monetary and Fiscal Policy in the Current Situation
>   
>   [I]n the current weak economic environment, a fiscal expansion may be much more
>   effective in providing a sustained boost to economic activity.
>   Doesn’t say anything about when. Looks like it’s already too late to forestall a pileup.
>   

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From Jim Sturgeon

I’ll put in my two cents. The crooks should be convicted as a regular part of the legal system and examples set to deter future attempts. However, the acquisitive heart and I expect the felonious one, beats about the same from generation to generation (to paraphrase JKG the elder). It’s the institutions that change. We should have a way of dealing with crooks as a matter of institutional (no pun) policy. That much it seems goes without saying, although it seems to be rather more difficult to do than it should.

The most recent economic crisis, triggered by a rapid run-up in the nominal (money) price of various assets, is a more difficult institutional adjustment. Warren is correct that whatever real assets were created as we ran up the money price of debt and other monetary instruments are still in place. And whatever scientific/technological knowledge was created is still present and available for use. We are not now dumber than we were in 2000 or 2005. What has been lost is the balance sheet value of some (probably many) wealth holders. But of course if this was never a reflection of the real value of the assets then it is not so much a loss as a readjustment. People feel poorer because they once felt richer; buoyed by the fool’s gold in their portfolio. Feeling poorer, they now pull in on the reins of their consumption with all the well known results. Agreed there is a need for new rules and the enforcement of both old and new ones so as to control and regulate the financial sector. I also think we would benefit by reducing the strength of that sectors siren’s song that lures so many able minded to its call.

There is a relationship between the financial crises and the real economy, but it is of our making. By this I mean we have put in place a system of rules and policies by which the pecuniary forces in the economy animate or arrest the real forces. This frequently contributes to an already poorly functioning labor sector (market). What would help is to readjust this relationship with an eye toward lessening the impact on the real sector due to the exuberance (irrational or otherwise) in the financial sector. This is a matter of policy, law and regulatory changes necessary to adjust the institutional controls. The first and most obvious one is the labor market. The Full Employment Act of 2009 should be written and passed with an ELR provision (build a high speed rail system for openers and then I’ll add about 50 other obvious projects that would build real wealth in the US). This would significantly dampen the effect of the financial sector on the labor market and bring some stabilization to aggregate demand. Economists and others ought to give at least as much attention to the labor market and real sector as they have to the financial sector.

I don’t know if the above is what Warren has in mind when he says it is the response wherein the problem lies, but it seems to me the response so far is mostly framed with the same logic and played with most of the same players that have helped us misunderstand the relationship between finance and production.

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>   On Fri, May 22, 2009 at 8:52 AM, Michael Pede wrote:

>   
>   Singh May Set Record in India Asset Sales After Election Victory
>   

Asset sales are deflationary.

>   
>   Taiwan’s Unemployment Rate Climbs to Record 5.77%
>   
>   Vietnam’s Central Bank Keeps Key Rate Unchanged at 7%
>   
>   Philippines Can Meet 2009 GDP Growth Target, Central Bank Says
>   
>   Indonesia Says Recovery in India, China to Add to GDP Growth
>   

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• Producer Price Index MoM (Released 8;30 EST)
• Producer Price Index YoY (Released 8:30 EST)
• PPI Ex Food & Energy MoM (Released 8:30 EST)
• PPI Ex Food & Energy YoY (Released 8:30 EST)
• Initial Jobless Claims (Released 8:30 EST)
• Continuing Claims (Released 8:30 EST)
• Jobless Claims ALLX (Released 8:30 EST)

Producer Price Index MoM (Mar)

Karim writes:

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Producer Price Index YoY (Mar)

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PPI Ex Food & Energy MoM (Mar)

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PPI Ex Food & Energy YoY (Mar)

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Initial Jobless Claims (May 1)

Karim writes:

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Continuing Claims (May 1)

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Jobless Claims ALLX (May 1)

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(email exchange)

>   
>   On Tue, May 12, 2009 at 10:35 AM, wrote:
>   
>   We are talking trillions of dollars from our pocket…
>   

The Fed is lending to its member banks. That is the same as the banks taking in deposits insured by the FDIC. Banks specific loans are only seen by regulators as a matter of public purpose.

Do you want every loan by every bank revealed? If so, lobby congress, as the majority in congress doesn’t want that.

Your beef is with congress, not the Fed.

Also, loans to member banks are not ‘dollars from our pocket’ unless they aren’t repayable, and the regulators monitor banks for capital compliance and they’ve done an ok job so far in that regard. Relatively few FDIC losses given the magnitude of the slowdown.

>   
>   Where is accountability for keeping the dead alive?
>   

Funding banks is not keeping the dead alive. All banks are always publicly funded via FDIC insured deposits. So happens the Fed is offering funds cheaper and for longer term than the FDIC, so it’s getting the business.

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(email exchange)

>   
>   On Tue, May 12, 2009 at 11:22 AM, J A Kregel wrote:
>   
>   And you can add to this the undeclared policy (confirmed to me last week) that
>   Chinese reserve diversification to hedge dollar exposure will be primarily in
>   stockpiling natural resources, not currency diversification
>   

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• Construction Spending MoM (Released 10:00 EST)
• Construction Spending YoY (Released 10:00 EST)
• Pending Home Sales MoM (Released 10:00 EST)
• Pending Home Sales YoY (Released 10:00 EST)

Construction Spending MoM (Mar)

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Construction Spending YoY (Mar)

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Pending Home Sales MoM (Mar)

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Pending Home Sales YoY (Mar)

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• ICSC UBS Store Sales YoY (Released 7:45 EST)
• ICSC UBS Store Sales WoW (Released 7:45 EST)
• Redbook Store Sales Weekly YoY (Released 8:55 EST)
• Redbook Store Sales MoM (Released 8:55 EST)
• ICSC UBS Redbook Comparison TABLE (Released 8:55 EST)
• S&P Case Shiller Home Price Index (Released 9:00 EST)
• S&P CS Composite 20 YoY (Released 9:00 EST)
• S&P Case Shiller US Home Price Index (Released 9:00 EST)
• S&P Case Shiller US Home Price Index YoY (Released 9:00 EST)
• Consumer Confidence (Released 10:00 EST)
• Consumer Confidence ALLX 1 (Released 10:00 EST)
• Consumer Confidence ALLX 2 (Released 10:00 EST)
• Richmond Fed Manufacturing Survey (Released 10:00 EST)
• Richmond Fed Manufacturing Survey ALLX (Released 10:00 EST)

ICSC UBS Store Sales YoY (Apr 28)

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ICSC UBS Store Sales WoW (Apr 28)

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Redbook Store Sales Weekly YoY (Apr 28)

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Redbook Store Sales MoM (Apr 28)

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ICSC UBS Redbook Comparison TABLE (Apr 28)

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S&P Case Shiller Home Price Index (Feb)

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S&P CS Composite 20 YoY (Feb)

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S&P Case Shiller US Home Price Index (Feb)

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S&P Case Shiller US Home Price Index YoY (Feb)

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Consumer Confidence (Apr)

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Consumer Confidence ALLX 1 (Apr)

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Consumer Confidence ALLX 2 (Apr)

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Richmond Fed Manufacturing Survey (Apr)

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Richmond Fed Manufacturing Survey ALLX (Apr)

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Clever, those Chinese. Now they get to keep their currency down to support their exports while claiming they are acting altruistically to support Obama.

Fortunately for us this keeps the imports flowing our way and supports our standard of living.

I don’t think we did this by design, but instead it falls under better lucky than good.

China to Keep Buying Treasuries, Top Official Says

by Dune Lawrence and Kevin Hamlin

Mar 23 (Bloomberg) — China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth.

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• ICSC UBS Store Sales YoY (Released 7:45 EST)
• ICSC UBS Store Sales WoW (Released 7:45 EST)
• Redbook Store Sales Weekly YoY (Released 8:55 EST)
• Redbook Store Sales MoM (Released 8:55 EST)
• ICSC UBS Redbook Comparison TABLE (Released 8:55 EST)
• Producer Price Index MoM (Released 8:30 EST)
• PPI Ex Food and Energy MoM (Released 8:30 EST)
• Producer Price Index YoY (Released 8:30 EST)
• PPI Ex Food and Energy YoY (Released 8:30 EST)
• Housing Starts (Released 8:30 EST)
• Building Permits (Released 8:30 EST)

ICSC UBS Store Sales YoY (Mar 17)

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ICSC UBS Store Sales WoW (Mar 17)

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Redbook Store Sales Weekly YoY (Mar 17)

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Redbook Store Sales MoM (Mar 17)

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ICSC UBS Redbook Comparison TABLE (Mar 17)

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Producer Price Index MoM (Feb)

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PPI Ex Food and Energy MoM (Feb)

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Producer Price Index YoY (Feb)

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PPI Ex Food and Energy YoY (Feb)

 
Core coming down very slowly, given the extent of the drop in headline CPI.

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Housing Starts (Feb)

 
Probably the end of the housing bust.

New Homes Inventory (Feb)

 
New home inventories are exceptionally low, especially population adjusted.

This was a very severe inventory liquidation.

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Building Permits (Feb)

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Karim writes:

Yes, but slightly, progressively, lower for the last two weeks.

Yes, and with increasing consumption the decline in GDP isn’t sustainable.

And this is before the fiscal adjustments kick in.

Some overnight eco news that caught my eye:

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World Coordinated Stimulus Needed: White House

Mar 9 (Reuters)

NOT!!!

We are much better of doing it all unilaterally.

This is the cost of having leadership that does not understand our monetary system.

Summer’s comments, ahead of next month’s G20 summit in London, suggest the U.S. administration wants all industrialised nations to pull together to engineer a demand-led recovery.

That will be music to the ears of British Prime Minister Gordon Brown who has trumpeted internationally-coordinated stimulus measures as the best way to tackle the downturn.

Him too.

“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Summers.

Yes, but we are better off if the demand is here and they export to us.

Summers, who served as Treasury secretary under the Clinton administration in the 1980s, said the view that the market was inherently self-stabilising had been dealt a “fatal blow.”

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times,” he said.

No, it is self correcting, but the ugly way as the automatic stabilizers increase the deficit via falling revenue and rising transfer payments until the deficit gets large enough to turn it all around.

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Mosler Health Care Proposal

1. Government funding for a full time, $8 per hour job that includes full federal health care coverage for the worker and dependents.
   
   This immediately triggers market forces that will result in all businesses providing health care benefits as a matter of competition.
2. As a matter of economics and public purpose it is counter productive for health care to be a marginal cost of production.
   
   No economist will disagree with this. Unless going to work makes one more prone to needing health care, making the cost
   a marginal cost of production distorts the price structure and results in sub optimal outcomes.
   
   Therefore government should fund at least 90% of health care costs paid for by businesses.
3. Long term vision subject to revised details:
• Everyone gets a ‘medical debit card’ with perhaps $5000 in it to be used for qualifying medical expenses (including dental) for the year.
• Expenses beyond that are covered by catastrophic insurance.
• At the end of the year, the debit card holder gets a check for the unused balance on the card, up to $4,000, with the $1,000 to be spent on preventative measures not refundable.
• The next year, the cards are renewed for an additional $5,000.
• Advantages:
1. Doctor/patient time doubled as doctor/insurance company time is eliminated.
2. The doctor must discuss the diagnosis and options regarding drugs, treatments, and costs with the patient rather than an insurance company.
3. Individuals have a strong incentive to keep costs down.
4. Doubling the time doctors have available for patients increases capacity and service without increasing real costs.
5. Total nominal cost of approx. $1.5 trillion ($5,000×300 million people) is about 10% of GDP which is less than being spent today, so even when catastrophic costs are added the numbers are not financially disruptive and can easily be modified.
6. Eliminates medical costs from businesses, removing price distortions and medical legacy costs.
7. May obviate the need for Medicare and other current programs.
8. Eliminates issues regarding receivables and bad debt for hospitals and doctors.
9. Eliminates the majority of administrative costs for the nation as a whole for the current system.
   Patients can ’shop’ for medical services and prices as desired.
• Disadvantages: Those more in need of the rebate at the end of the year may elect to forgo treatment beyond the $1,500 not subject to the rebate.
• Doctors may be able to more easily convince patients of unneeded treatments and expensive drugs vs insurance companies.

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The 7 Deadly Innocent Frauds of Economic Policy

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Paul runs James River Capital Corp and sent this out today:

Everyone, including our public officials running this country, think in terms of the private sector and not the public sector. They are so used to running their own businesses or their own lives, that they are unable to think in terms of how the government works. The private sector, you and me, needs to borrow money or earn money in order to spend. The public sector never needs to earn money or borrow money. The Government prints US dollars and only the Government is able to print US dollars making the US Government the monopoly producer of US dollars. It is strange that so many smart people struggle with this concept. Every dollar that the government spends ends up in the private sector. The only way that those dollars are reduced is if the government taxes those dollars back from you. If the government taxes more than it spends then the Government runs a surplus and the private sector is depleted of its savings which eventually leads to a contraction in the economy. If they spend more than they tax then they run a deficit and the private sector increases its financial savings and this is stimulative to the economy.

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(email exchange)

Cliff,

Martin Wolf is spot on below. Our biggest risk is the reluctance of our leaders to implement the fiscal adjustments on an as needed, size no object, basis to reverse shortfalls in aggregate demand.

>   
>   On Fri, Feb 20, 2009 at 11:11 AM, Cliff wrote:
>   
>   Warren,
>   
>   Many people ask me why Japan did not have large
>   inflation with their large deficits,
>   

They weren’t even large enough to fully offset the deflationary forces.

>   
>   and they ask will the U.S. be like Japan or will
>   inflation recur in the next few years.
>   

Depends on crude prices. If they go up inflation as we know it comes back. This is very likely.

We need a hard policy to cut our imported fuel consumption to prevent ‘inflation’ and declining real terms of trade.

>   
>   Please see the article below, and can you
>   comment on the article and the related two
>   questions posed above.
>   
>   Thanks, Cliff
>   

Japan’s lessons for a world of balance-sheet deflation

by Martin Wolf

Feb 17 (Financial Times) — What has Japan’s “lost decade” to teach us? Even a year ago, this seemed an absurd question. The general consensus of informed opinion was that the U.S., the U.K. and other heavily indebted western economies could not suffer as Japan had done. Now the question is changing to whether these countries will manage as well as Japan did. Welcome to the world of balance-sheet deflation.

As I have noted before , the best analysis of what happened to Japan is by Richard Koo of the Nomura Research Institute.* His big point, though simple, is ignored by conventional economics: balance sheets matter. Threatened with bankruptcy, the overborrowed will struggle to pay down their debts. A collapse in asset prices purchased through debt will have a far more devastating impact than the same collapse accompanied by little debt.

Most of the decline in Japanese private spending and borrowing in the 1990s was, argues Mr Koo, due not to the state of the banks, but to that of their borrowers. This was a situation in which, in the words of John Maynard Keynes, low interest rates - and Japan’s were, for years, as low as could be - were “pushing on a string”. Debtors kept paying down their loans.

How far, then, does this viewpoint inform us of the plight we are now in? A great deal, is the answer.

First, comparisons between today and the deep recessions of the early 1980s are utterly misguided. In 1981, U.S. private debt was 123 per cent of gross domestic product; by the third quarter of 2008, it was 290 per cent. In 1981, household debt was 48 per cent of GDP; in 2007, it was 100 per cent. In 1980, the Federal Reserve’s intervention rate reached 19-20 per cent. Today, it is nearly zero.

When interest rates fell in the early 1980s, borrowing jumped. The chances of igniting a surge in borrowing now are close to zero. A recession caused by the central bank’s determination to squeeze out inflation is quite different from one caused by excessive debt and collapsing net worth. In the former case, the central bank causes the recession. In the latter, it is trying hard to prevent it.

Second, those who argue that the Japanese government’s fiscal expansion failed are, again, mistaken. When the private sector tries to repay debt over many years, a country has three options: let the government do the borrowing; expand net exports; or let the economy collapse in a downward spiral of mass bankruptcy.

Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph. The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.

Third, recognising losses and recapitalising the financial system are vital, even if, as Mr Koo argues, the unwillingness to borrow was even more important. The Japanese lived with zombie banks for nearly a decade. The explanation was a political stand-off: public hostility to bankers rendered it impossible to inject government money on a large scale, and the power of bankers made it impossible to nationalise insolvent institutions. For years, people pretended that the problem was downward overshooting of asset price. In the end, a financial implosion forced the Japanese government’s hand. The same was true in the U.S. last autumn, but the opportunity for a full restructuring and recapitalisation of the system was lost.

In the U.S., the state of the financial sector may well be far more important than it was in Japan. The big US debt accumulations were not by non-financial corporations but by households and the financial sector. The gross debt of the financial sector rose from 22 per cent of GDP in 1981 to 117 per cent in the third quarter of 2008, while the debt of non-financial corporations rose only from 53 per cent to 76 per cent of GDP. Thus, the desire of financial institutions to shrink balance sheets may be an even bigger cause of recession in the US.

How far, then, is Japan’s overall experience relevant to today?

The good news is that the asset price bubbles themselves were far smaller in the US than in Japan. Furthermore, the U.S. central bank has been swifter in recognising reality, cutting interest rates quickly to close to zero and moving towards “unconventional” monetary policy.

The bad news is that the debate over fiscal policy in the U.S. seems even more neanderthal than in Japan: it cannot be stressed too strongly that in a balance-sheet deflation, with zero official interest rates, fiscal policy is all we have. The big danger is that an attempt will be made to close the fiscal deficit prematurely, with dire results. Again, the U.S. administration’s proposals for a public/private partnership, to purchase toxic assets, look hopeless. Even if it can be made to work operationally, the prices are likely to be too low to encourage banks to sell or to represent a big taxpayer subsidy to buyers, sellers, or both. Far more important, it is unlikely that modestly raising prices of a range of bad assets will recapitalise damaged institutions. In the end, reality will come out. But that may follow a lengthy pretence.

Yet what is happening inside the US is far from the worst news. That is the global reach of the crisis. Japan was able to rely on exports to a buoyant world economy. This crisis is global: the bubbles and associated spending booms spread across much of the western world, as did the financial mania and purchases of bad assets. Economies directly affected account for close to half of the world economy. Economies indirectly affected, via falling external demand and collapsing finance, account for the rest. The US, it is clear, remains the core of the world economy.

As a result, we confront a balance-sheet deflation that, albeit far shallower than that in Japan in the 1990s, has a far wider reach. It is, for this reason, fanciful to imagine a swift and strong return to global growth. Where is the demand to come from? From over-indebted western consumers? Hardly. From emerging country consumers? Unlikely. From fiscal expansion? Up to a point. But this still looks too weak and too unbalanced, with much coming from the US. China is helping, but the eurozone and Japan seem paralysed, while most emerging economies cannot now risk aggressive action.

Last year marked the end of a hopeful era. Today, it is impossible to rule out a lost decade for the world economy. This has to be prevented. Posterity will not forgive leaders who fail to rise to this great challenge.

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• Empire State Manufacturing Survey (Released 8:30 EST)
• Empire State Manufacturing Survey ALLX 1 (Released 8:30 EST)
• Empire State Manufacturing Survey ALLX 2 (Released 8:30 EST)
• Net Long Term TIC Flows (Released 9:00 EST)
• Total Net TIC Flows (Released 9:00 EST)
• NAHB Housing Market Index (Released 13:00 EST)
• NAHB Housing Market Index TABLE 1 (Released 13:00 EST)
• NAHB Housing Market Index TABLE 2 (Released 13:00 EST)

Empire State Manufacturing Survey (Feb)

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Empire State Manufacturing Survey ALLX 1 (Feb)

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Empire State Manufacturing Survey ALLX 2 (Feb)

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Net Long Term TIC Flows (Dec)

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Total Net TIC Flows (Dec)

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NAHB Housing Market Index (Feb)

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NAHB Housing Market Index TABLE 1 (Feb)

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NAHB Housing Market Index TABLE 2 (Feb)

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• Personal Income MoM (Released 8:30 EST)
• Personal Income YoY (Released 8:30 EST)
• Personal Income ALLX (Released 8:30 EST)
• Personal Spending (Released 8:30 EST)
• PCE Deflator YoY (Released 8:30 EST)
• PCE Core MoM (Released 8:30 EST)
• PCE Core YoY (Released 8:30 EST)
• ISM Manufacturing (Released 10:00 EST)
• ISM Prices Paid (Released 10:00 EST)
• Construction Spending MoM (Released 10:00 EST)
• Construction Spending YoY (Released 10:00 EST)

Personal Income MoM (Dec)

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Personal Income YoY (Dec)

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Personal Income ALLX (Dec)

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Personal Spending (Dec)

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PCE Deflator YoY (Dec)

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PCE Core MoM (Dec)

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PCE Core YoY (Dec)

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ISM Manufacturing (Jan)

 
Karim writes:

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ISM Prices Paid (Jan)

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Construction Spending MoM (Dec)

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Construction Spending YoY (Dec)

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