naked capitalism

ndk says:

Persisting in a failed course of action is not a sign of intelligence.

Exactly! And that’s precisely what Geithner and Summers will do!! Direct lending to consumers (was turning AmEx into a bank not good enough?) isn’t even clever.

Again, our two major policy tools at this juncture are quantitative easing and Keynesian stimulus.

Keynesian stimulus can crowd out private demand because the government has to borrow in order to fund its programs. While that seems like it’s no big deal with interest rates so low, those are nominal rates. Real interest rates matter much more, and they’d go up through Keynesian stimulus. You can’t watch those go up at this point because deflation’s severity is masking the pricing of bonds. Instead, you’d witness it only through increasing severity of deflation. Our hope is that Keynesian stimulus is a net positive to demand, because the private sector will begin to recycle this spending. But it’s no more than hope, and Japan has already experienced that it is counterproductive when government debt is high. “Stimulus” may actually drain economic vitality further.

We’re already using stealth quantitative easing. It isn’t working, because risk-adjusted returns on investment are judged to be around or below 0%. That means the bank just deposits the extra cash with the Fed and walks away. To fix this, we’d have to reduce the risk involved or allow these investments to become so cheap that that return goes above zero. Allowing the investments to deteriorate that badly defeats the purpose of the program in the first place. Reducing the risk is extremely difficult and costly to do, and fraught with unintended consequences if it’s even possible.

I’m very sorry to keep repeating myself, but this is maddening. Policymakers, we’re counting on you guys to think about this stuff before you do it! Don’t keep throwing things at the wall and hoping something sticks! With the best of intentions, you are making things worse!

mmckinl says:

The powers that be are working overtime to figure out a way to service 50 trillion in US aggregate debt and it is just not working, nor will it.

There will have to be a massive debt writeoff because without it the U.S. as an on going concern is insolvent.

Anonymous says:

Arggh! Can we just switch the Dow/bar love meter off please. Everyone thinks the good times are back. No one seems to think death is part of the natural process in life anymore, damm zombies.

Skippy

River says:

This sentence by Paulson tells all exactly what the Treasury Secretary is betting all the marbles on…

“Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Paulson said..

One would think that Paulson, et al, would look at the results that history provides. Where has a bubble been reinflated, Hank?

Paulson and Bernanke are willing to gamble all on an attempt to accomplish what has never been accomplished. Does anyone need further proof of the dire straights the economy is in?

FairEconomist says:

This seems fine to me, at least in principle (details matter, of course). This is the “Bank of the Fed” approach I’ve been advocating since the TARP was proposed, applied to consumer loans rather than working capital loans. Much as with working capital, private money that had been going into consumer loans, via securitization, is now fleeing into treasuries. If the Fed can’t avert the flight, a reasonable patch is for the Fed to act like a bank, accept “deposits” in the form of sold Treasuries, and then loan the money out. Since the Fed hasn’t the infrastructure to loan directly, it has to use indirect processes like this.

If the Fed makes bad loans using this process, we have a problem. But, that’s not guaranteed and they’ve done fine in the auction facilities. Again, we need details to know whether this will work.

lineup32 says:

No choice but to reinflate the consumer credit bubble otherwise we have a shrinking economy with massive layoff’s that go far beyond the manufacturing floor and into the whole structure of the demand side employment.
This reminds me of the Vietnam era with the Adminstration either Republican or Democrat taking the same actions with daily briefing’s and of course light at the end of the tunnel.
Like today the media are quick to point out how the men running the show were the best and brightest were running the show.

Anonymous says:

“Trying to shore up consumers is a wrongheaded way to stimulate the economy.”

I don’t understand how putting money in consumers pockets, money they will go forth and spend, is the “wrongheaded” way to stimulate the economy.

In the end, don’t we want people to go buy stuff? Isn’t that stimulative?

I ask in seriousness. Help a newbie out. The idea floated in the link NDK provided on Japan just seems off-point; it implies that Americans won’t spend it if we’ve got it. The Japanese might not, but us…?

I’m not anonymous. I’m zak822

Anonymous says:

The U.S. recession probably deepened as consumer spending plunged in October by the most since the 2001 downturn and businesses slashed investment, government reports may show this week.

The GDP Price Deflator tells us the rise in nominal GDP that is attributable to a rise in prices.

ndk says:

The idea floated in the link NDK provided on Japan just seems off-point; it implies that Americans won’t spend it if we’ve got it. The Japanese might not, but us…?

zak822, fiscal stimulus is public sector spending. It’s spent by definition.

Do not talk about Keynes or Keynesian economics unless you have read Keynes’ writings and understand his political views.

Tortoise, I read his General Theory from cover to cover. I thought it was a magnum opus of economics and I gleaned a lot of novel insights from it. That deferral of consumption is not always possible and not usually beneficial was my favorite. I don’t believe it’s the bible, nor do I believe fiscal stimulus is the right policy at this point.

Why do you think quashing debate is the right policy?

ndk says:

You seem to think that any spending and any deficit spending are, you know, the K word economics. I beg to differ, my friend. I would submit that saving Citi is not. Reducing taxes for the wealthy is not. Lending more money (at 20-25%) to the already insolvent poor is not.

Any fiscal deficit is Keynesian stimulus. You can do anything with it: saving Citi, reducing taxes, lending money, dig ditches in South Dakota, whatever. His key insight was that the government could create a propensity to investment when none existed. Ideally, the investment would be one that led to further beneficial multipliers. But the private sector is extremely hungry to invest right now, and it probably has higher multipliers than the public sector’s spending does. If it doesn’t, we should just convert to central planning now.

As for “fiscal stimulus”… Fiscal stimulus is what Reagan applied in 1982 — was he a K——-n? Was it the right policy? I would love to hear your views.

Yes, it was the right policy, in my opinion, and in a sense it was Keynesian. It was a different world, with major inflation and high unemployment. His policies, combined with Volcker’s monetary stranglehold, raised real interest rates significantly. That was needed then. We need lower real interest rates today.

Essentially, I think everyone is way too ignorant of real interest rates. The conventional wisdom is that higher deficits are always inflationary and lower deficits are deflationary. I disagree; that depends on a lot of things. I do believe that higher deficits raise real interest rates, and depending on the environment, that can be good or bad.

ndk says:

The point that paragraph is trying to make is that deficit spending is not always Keynesian. It’s only Keynesian when it’s used specifically for policy goals.

I’m going to start using “fiscal deficit” or “deficit spending” instead of Keynesianism, because it’s not attached to a particular individual or subject to variable interpretation. Sorry about that, and thanks a lot for chasing down the terminology.

Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle.

Yves Smith says:

I am late to this thread, but a basic element of a Keynesian prescription is the deficit spending needs to go to those with a high propensity to spend. The whole point of the exercise is to increase consumption. That is why the so-called stimulus package of earlier this year was ineffective. Gary Skilling did an analysis that showed that 80% of the tax rebate was saved.

And BTW, “Keynesianism” has a lot of elements that Keynes would not have approved of. He thought that government-generated stimulus was warranted only in cases of severe demand shocks, not the kind of fine-tuning that later economists have attempted.