Friday, October 31, 2014
Posted by Yves Smith at 6:58 am |
Yves here. Readers will take issue with some of former Fed staffer and banking expert Walker Todd’s comments on monetarism and Fed policy, but he nevertheless reaches the right general conclusions. The monetarist orientation of his post is a bit more understandable when you keep in mind that the central bank is run by monetary economists.
Todd treats quantitative easing as “money printing”. That sounds appealing but isn’t quite apt. The Fed was swapping assets, in this case cash for Treasury bonds or mortgage backed securities held by the public. The central bank seemed to think this would be useful due to its belief in the discredited but nevertheless very much alive “loanable funds” theory. In simple terms, if you make interest rates low enough, people will save less and spend more, and businesses will borrow and invest more because money is on sale.
In fact, what has happened is that many of those people who swapped bonds for cash went out and bought other financial assets, goosing stock prices, lowering yields on risky debt, and sending money sloshing into emerging economies. There appears to have been a modest amount of economic lift from that due to wealth effect among the rich. But big companies for the most part didn’t invest. They borrowed cheaply and are holding wads of cash that they can use to keep propping up their stock prices. Similarly, banks haven’t done much small business lending, in part because institutionally many have exited that business, and smaller enterprises themselves haven’t been too keen to borrow because in most regions and sectors, the recovery isn’t all that robust.
The Fed appears to have recognized that QE was largely a failed experiment before it announced the taper last year, but the market reaction was so lousy that it backed off and then tried again with lots more “we’re watching the market’s back” assurances. Cynics among my readers contend that the GDP figures today benefitted unduly from a 0.9% reduction in the GDP deflator, which would provide financial markets with a tailwind when QE was being halted officially.
Given that we’ve had three QEs so far, Todd has reason to argue against repeating this experiment. Another thread of his argument echoes that of Audit the Fed, which was the product of a left-right alliance, that the Fed never gave Congress an adequate explanation of the logic and expected effects of QE so it could be held accountable for this experiment.
This video, in which economist Mariana Mazzucato discusses her book The Entrepreneurial State, explains how most of what you think you know about innovation is wrong. Innovation is not led by the private sector; it lacks the long term horizons and risk appetite to do so. Instead, the most innovative countries and regions have the state playing a very active role, not just in funding basic research or making sure markets work properly, as in limiting anti-competitive practices that can stymie new entrants. Instead, the state plays an active role along the entire value chain. One result of the wide-spread misperception that the private sectors deserves most of the credit is that businesses are able to skim a disproportionate level of the returns for themselves.
Yves here. We’ve written about the pitfalls of electronic health records in the past. One of the surprising reactions is the “dazzled by technology” response of some readers. While there are problems with relying on paper-based records, and electronic records could in fact remedy many of them, a large swathe of the public seems unwilling to hear that what is good in theory may not turn out well in practice.
The sorry fact is that electronic health records, which in theory should reduce errors and allow for more consistent delivery of medical services, were instead designed only with patient billing and control over doctors in mind. As a result, they are if anything worsening medical outcomes. One indicator: as we reported, the latest ECRI Institute puts health care information technology as the top risk in its 2014 Patient Safety Concerns for Large Health Care Organizations report. Note that this ranking is based on the collection and analysis of over 300,000 events since 2009.
This is another example of crapification. Electronic medical records have been implemented, with apparent success, in other economics. For instance, when I lived in Australia from 2002 to 2004, it was normal for doctors to make use of them during patient visits, making entries into the system, and I never got the impression they found it onerous. Here, in New York City, I still see doctors making considerable use of paper records. As the article indicates below, the reason is the US systems are costly, lower productivity, and make doctors less likely to review patient information.
Today’s Water Cooler: Steve Israel and Dem turnout, Hong Kong and Ferguson, Cuomo, the “sharing” economy, smart sewage, and Soyuz T-13.
Topics: Water Cooler
Posted by Lambert Strether at 1:58 pm |
The New York Times yesterday published a new story by Ben Protess and Jessica Silver-Greenberg on how Federal prosecutors are investigating reopening cases against big banks and hitting them with additional charges. Reader Richard D, who was curious about the story, wrote, “It is hard for me to know whether this is a momentous event, or a nothingburger.”
It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.
But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.
Posted by Yves Smith at 6:55 am |
Draghi’s near zero rates have resulted in banks that don’t engage in casino banking to start imposing negative interest rates on savers. The case described in the post is likely to lead other banks to follow suit if there isn’t a big backlash.
Yves here. The US media has given considerably more attention to the TransPacific Partnership, the western sister of an ugly multinational-enrichment-scheme-billed-as-a-trade-deal called the Transatlantic Trade and Investment Partnership. The comparative silence about the US-European deal has led many observers to assume that it is more or less on track.
Yves here. The ECB stress tests are starting to resemble the process that Japan’s Ministry of Finance used in dealing with zombie banks in its post-bubble years. The MOF would gradually acknowledge how bad the loan books were as the banks were able to make writeoffs (not that anyone was really fooled; foreign analysts were regularly making their own assessments). So the exercise is to pretend that the amount of disease revealed is credible, when those in the know recognize full well that is it much worse.
Today’s Water Cooler: QE ending (?), 2014, Ferguson PD’s budget, surveillance and secret law, Silicon Valley’s sense of entitlement.
Private Equity Consultants Flounder Over Question About Abusive “Evergreen Fees” at CalPERS Board Meeting
If you want to understand why private equity general partners have gotten away for so long with what the SEC has come perilously close to calling outright embezzlement, along with other serious compliance abuses, you need look no further than the last CalPERS board meeting to get a clue.
Posted by Yves Smith at 6:55 am |
Yves here. Readers regularly debate issues of growth, groaf, and sustainability. This post makes an urgent case that we are farther along toward collapse, based on our consumption of biological resources, than most official sources acknowledge.
One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.
SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It’s unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It’s virtually never done to have a commissioner from the same party buck the chairman.