Dean, Welcome to the Lake.

Bruce, Thank you for Hosting today’s Book Salon.

I’m looking forward to this conversation.

Dean, do you have any thoughts about where the next bubble might emerge? Do you agree that the seeds are being sown by the Treasury and Fed right now?

Thanks so much for being here today Bruce, and for Dean too.

For those who don’t know, Bruce is the former deputy assistant secretary for economic policy at the Treasury Department and worked for both Ronald Reagan and George Bush I. We met in the Green Room of CSPAN the other day and he told me that he was on the outs with his fellow Republicans over his support of Keynsian economics and the need for stimulus, even more so than his critique of George Bush.

He no longer considers himself a Republican and voted for Obama. I thought he would be perfect to host Dean’s salon.

Thanks Bruce and Dean!

Dean, who are the biggest malefactors here and how do we rein them in?

Hi Dean, Hi Bruce,
thanks for coming to the Lake.

Dean, where will the next bubble emerge? What are some likely scenarios?

The Fed is the big problem. But it’s an institutional problem. The Fed operates with far too much discretion.

I must take umbrage at some of the remarks in the introduction. I was a Wall St. economist until Feb 2000. On Nov 13, 1998, I wrote a report titled “Beginning the Next Bubble,” as Greenspan’s easing to bail out LTCM, on top of a strong economy, was sure to cause the next bubble, which was the tech one.

So some on Wall St. were not seduced by Greenspan and saw it coming.

BTW, I know Greenspan read my reports because he once returned on with a technical correction handwritten on it.

Good Afternoon Dean and Bruce! Welcome to FDL this afternoon.

Dean, I have not had an opportunity to read your book but have read your diaries at Oxdown with interest and thank you for educating me.

Do you ever get frustrated by stories like this one from today’s WaPo0 about the South Korean blogger who “predicted” the bubble last year. Especially since you (and a few others such as FDL’s Ian Welsh) have been aware and predicting it for years now?

Dean I made the mistake of bringing your book on vacation with me in Jamaica over Christmas. While my companion was trying to read mindless potboilers on the beach I kept interrupting by reading aloud pages from your book about Chinese currency. I became impossible to tune out.

WRT that, how do you feel about Geitner’s support for a strong dollar?

Then you understand what you mean by the Greenspan seduction. Maybe it didn’t work on you, but I bet you were impressed with your self the day you knew that Greenspan had read and commented on something you wrote.

Dr. Baker, Bruce, welcome to FireDogLake. I bought the book this morning and am looking forward to the discussion.

Dr. Baker, Friday night I saw you on Whoring for the Robber Barons Kudlow and Company. Congratulations on doing a terrific job of maintaining a dignified and reasonable tone amidst Larry’s manic rants.

I agree with your Oxdown post about nationalizing the large money center banks. Intimately connected to the money center banks, however, I am interested in what you see as the best resolution for the taxpayers as far as credit default swaps are concerned. IMHO and again wrt money-center banks, from a communications perspective, it makes more sense to start any discussion of nationalization with CDS’, and from there move onto the money center bank’s insolvency. IMHO, this better and more fairly positions government action as the rescuer of taxpayer equity. It also opens into a discussion about a less competitive environment for not too big to fail smaller banks, who did a better job of assessing risk.

It’s a great honor to have you here.

YIKES,

What I wanna know is how you smart fella screwed it up so bad back then? There were left economists who got it right back then but they were dismissed as nut cases.

What were your thoughts back then? What let you believe believe in bubbles? and the myth of the markets and wealth creation from bubbles? Doesn’t everyone get it that bubbles are mostly hot air pushing against a thin and growing thinner skin as they expand? YIKES that’s not rocket science.

and then there’s this:

“The best way to put it comes from England today:

“… the government is too small to help, [and] in trying to bail out the banks, is in danger of chucking not just good money after bad, but the entire economy after the banks.”

There are other voices which claim that the British banks’ assets are almost at par with their liabilities, but as long as those assets are not valued fairly, either by the government or by the markets, that argument doesn’t fly. Britain in the next few weeks will walk on a very fine, a chillingly steep, and a terribly sharp, edge. There are tons of reasons that say why the UK is different from Iceland. But how safe, then, is the present government, if it fails to calm its economy and banking system? The UK’s biggest banks, like the ones on Wall Street, are insolvent, and would have been liquidated already if trillions of dollars hadn’t been thrown at them. How much more will be thrown? And what will the result be? What further losses are in the offing. They refuse to let us know, our governments and Lords of Finance, while they are spending our money on propping up their own lifestyles. As Neil Young says:

“There’s a bailout coming but it’s not for you
It’s for all those creeps hiding what they do”.

I published a column the other day about those who were right and wrong about the housing bubble:

http://www.forbes.com/2008/12/…..tlett.html

The technical correction was petty. It make me think less of Greenspan because he didn’t have anything better to do with his time than pick at my report.

He was that way with everyone.

Dean is here – starting to answer questions

Hi Folks,

sorry, i was on the wrong page (don’t trust my advice). Anyhow, on the next bubble, I think that it is already there. We have a seriously over-valued dollar. It will fall and it will hurt (it has nothing to do with our budget deficits). The problem was letting it get over-valued (blame Clinton) and leaving it over-valued (blame Bush). The point is that over-valued currencies, like over-valued houses and stocks eventually fall in price. It will not be pretty.

What industries are likely to benefit or suffer from a sharp fall in the dollar?

Everyone with a pea sized brain understand some basic things about gov policy. Tax cuts to the weathly go straight to wall street and high ROI financial investments not job creation.

How can this myth that tax cuts for the wealthy create jobs still be repeated as if it has not been totally discredited?

Jane,

Thanks. It’s hard to tell with Geithner what is political rhetoric and what is substance. He did say that he supports a stronger yuan, which means that he wants a weaker dollar. A lower dollar is a necessary part of our adjustment out of the donwtunr (it is the only way to fix our trade deficit), but i don’t know if Obama will have the political courage to just let the dollar fall.

who decides on the value of a dollar or a yen or a euro or a pound?

I never understood the Greenspan fetishists. How could American Presidents trust our central bank to an Ayn Rand acolyte? It boggles the mind.

Thank you for this wonderful book, Dean Baker. I recommend it to everyone who claims to want to understand how we got in this mess.

You say several times in your book that the true tragedy of this economic catastrophe will be that we don’t re-examine the system of incentives that got us here. Have you any evidence that the Volcker effort will yield anything other than a papered-over revision of the machine lying wrecked at our feet?

Folks, please buy/order and read this book.

One thing I don’t remember seeing in Dean’s book was any mention of the 1997 cut in the capital gains tax on home sales. That legislatuion was initiated by the Clinton Treasury Department according tio David Leohardt’s reporting in the New York Times.

U.S. manufcaturing will be the big winner. It is striking that factory construction has been soaring over the last year. Also capital goods orders have held up remarkably well. Ill bet on a resurgence of domestic manufatcuring, although the firms and industries will be tough to guess.

(Hint — if you click on the “Reply” button below and to the right of a comment, the conversation will be clearer)

It takes a long time for a lower dollar to translate into reduced imports and increased exports. And how does one prevent competitive devaluations by other countries?

Thanks Teddy,

I’m not too optimistic about changing the incentive structures, although if we do end up nationalizing the banks (which we should, if they are insolvent) then we should take the opportunity to put in place a very different structure for the top execs. This could change when they get reprivatized, but hopefully, this will be difficult for the new owners to do.

Got it.

Heh. Wrote that one in 1986. Winners are exporting and import-competing industries; losers are the ones that buy imports (e.g., retailers). (Report is not where I am so can’t name specific industries without referring to it.) However, unlike back in 1986, when most of U.S. trade was with developed countries, today much more of it is with countries with fixed exchange rates, like China. So the dollar falling against the euro and yen will not be as helpful to the economy as it was back in 1986.

I have to demur. Bubbles are dead easy to predict and see. Anything that can cause a major dislocation in the economy has to be huge and can be seen years in advance. Also the math simply doesn’t add up with them in even the most basic ways.

We had the tech bubble, the housing bubble and concomitant with it a bubble in housing and commodities, especially oil. We are currently seeing a liquidity bubble as Paulson and Bernanke (and soon Summers and Geithner and Bernanke again) pump huge amounts of money into an insolvent unproductive financial sector. This bubble is different in that the major player in it is the taxpayer through the government instead of a horde of investors but what is important in a bubble is the cash flows and not the number of players. And believe me this is one humdinger of a bubble and we are looking at it right now.

There could be some competitive devaluations. Ideally we would be in a position to negotiate some currency targets. At the end of the day, a country with an under-valued currency is subsidizing countries with over-valued currencies. Presumably, poor countries like China don’t want to subsidize U.S. consumption forever.

I also wanted to say how much improved your television appearances have been lately. You always have very interesting things to say, but you’ve learned recently how to appear on television in order to get them heard. Please continue to lend your credibility to that medium, wasteland though it is.

My personal view is that much of the trade problem comes from an imbalance between domestic saving and domestic investment. Because we have insufficient domestic saving to finance diomestic investment we have imported the saving from places like China. Therefore, we have to increase domestic saving to really fix the trade deficit.

So please answer:

What actually causes a currency’s value to change?

Don’t be so sure. China is desperate to sustain growth and employment.

Supply and demand.

I don’t think the cut in the capital gains tax on hosuing was wise, but i doubt that it fed too much into the bubble. Most people didn’t pay the tax even under the old rules. It is not supposed to apply to investment properties (i know, people lie), so it should not have affected that too much.

Anyhow, I think it is bad tax policy, I just don’t think it was a mjoar contributor to the bubble.

Bruce, thank you so much for the excellent insight into Greenspan.

Greenspan was a master at giving people the idea that he was interested in their opinions without actually caring about them at all, and appearing to give them insight into monetary policy or the economy without actually saying anything at all. If some bank economist was fortunate enough to get a note from Greenspan congratulating him for some analysis, that economist knew his position was secure; his bosses wouldn’t dare fire him because he had a pipeline to the Great Man. This also guaranteed extreme loyalty to Greenspan from that economist.

Domestic savings has nothing to do with domestic investment.

Investments in capital improvements are mostly from bond issues

Everyone knows with fractional reserve banking banks are leveraged 10: 1 and hardly need depositors to create loans.

U.S. was world consumer of last resort.

Think China’s imbalance in the opposite direction is a core part of the problem, since it stems from deliberate govt policy, whereas the U.S. situation arises from “market” forces and unintended consequences of govt policy.

It responds to supply and demand conditions in the market, which are also affected by government policy. China has an explicit policy of keeping its currency low against the dollar. We could have an explicit policy of keeping our currency low against the yuan. This could mean , for example, that we offer at Treasury to buy yuan at the rate of 5 to the dollar, which is far higher than the yuan’s current value.

Greenspan was the best, but Arthur Burns and Paul Volcker did the same thing. Ben Bernancke seems less interested in using his power to create a cult.

I’m in complete agreement on Greenpsan.

But whenever the worst possible American citizen behavior is described nowadays, it seems to involve us putting some part of the stimulus to work in a savings vehicle, or paying off debt.

At what point do we stop encouraging consumer spending and start encouraging citizen saving?

supply and demand of what?

You are going to say the currency, of course. But that is circular reasoning somewhat. Since the major currencies are all “pegged” to one another why does it matter which one is used?

It’s all just numbers on screens.

It will come when the dollar falls. Imports will become much more expensive.

The dollar is the reserve currency.

That’s a very interesting article, Bruce.

Dean I know you are a big champion of Sheila Bair, who appears to be on the outs with the Obama Treasury folks because she spoke out of school about direct aid to homeowners (so much for “team of rivals”). It’s my understanding that they believe that direct aid to homeowners will only make the problem worse by encouraging people to default, and thus they believe that the only way to address the problem is through the banks.

Bruce’s article, and your book, are serious indictments of Greenspan and those who led homeowners to believe that the prices of their homes would go up indefinitely. What do you both of you think are the practical implications of aid to homeowners vs. banks, and do you think we have any responsibility in the situation due to the fact that Greenspan led everyone on?

Trade responds to currency values, not saving and investment. We could have a high currency because we have low saving (this is the conventional international crowding out story), but the proximate cause of a trade deficit is always the currency value — not the saving/investment balance.

No one ever bought an imported good at Wal-Mart because we weren’t saving enough. The bought the imported good because the high dollar made it cheaper than the domestically produced good.

We should debate this question another time.

My personal view is that much of the trade problem comes from an imbalance between domestic saving and domestic investment. Because we have insufficient domestic saving to finance diomestic investment we have imported the saving from places like China. Therefore, we have to increase domestic saving to really fix the trade deficit.

but what is the cause of this imbalance? why do you think we haven’t been saving? could it have anything to do with the availability of insanely easy credit?

Domestic savings has nothing to do with domestic investment.

Exactly. Domestic saving if there were any would just have been used to accelerate the outsourcing of the real economy to China.

And while China may not want to subsidize American consumption forever, it was until the current smashup willing to do so because it helped develop China’s economy.

Finally, I would just point out that picking economic winners and losers in our economy is a little futile if we get caught up in a deflationary spiral. Obama’s stimulus as well as his banking policies don’t look like they are going to do the job so any “winners” are likely to hit the wall when the stimulus ends in two years.

Jane,

I fear that much of the direct aid to homeowners is in fact aid to banks. Many of these plans call for buying up mortgages from banks at far above their market price. The homeowner then gets a new mortgage that is more affordable, but still leaves them with little or no equity. That looks to me like help to banks, not homeowners.

My proposal is that we give people facing foreclosure the right to stay in their home as renters for a substantial period (e.g. 10 years), paying the market rent. It gives them security in their home and it gives hte banks real incentive to negotiate new terms on a mortgage, since they don’t want to be landlords. And it requires no bureaucracy and costs the taxpayers zero.

For some reason, none of the Dems in the leadership have any interest in even discussing this one. I’m open to explanations.

Delurking to Digg it.

A big part of the problem is that people substituted home equity for real saving. But home equity doesn’t create resources thart businesses can use to expand production and employment; it’s sterile.

Hugh,

I see the stimulus as the opening shot. It is a step in the right direction, but we will need more. The key think is that people can see progress — that we can see a stop to the downward spiral and see concrete gains from this spending. I think we will and if we do, people will support more.

Do you agree with Paul Krugman that we are in a liquidity trap and that the main purpose of stimulus spending is to mobilize monetary policy?

But isn’t there a problem with saving when real wages have not kept pace; it really seems that people were using home equity as the foundation for their use of credit to maintain the living standard that they wanted. Now they have no jobs, the value of their homes has falled through the floor and there is no money to spend OR to save…

“The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system[1] that comprises (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. As of February 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System. Donald Kohn is the current Vice Chairman of the Board of Governors of the Federal Reserve System.”

Quasi needs addressing…the name Fed implies falsely a government bank?

Exactly, this was again one of the outrages of Greenspan’s decision to ignore bubbles. When people saw their house price soaring (or their stocks in the 90s), they decided that they did not have to save. This is a rational decision, if the increases are not driven by a bubble.

But they were, and now tens of millions of peopel find themseleves far power than they thought they were. People can’t get those years back or the decision to take a vacation or buy a new cra back. Greenspan thaught that bubbles were cute, but they ruined millions of peoples’ lives.

The economy’s deteriorating too rapidly to do the stimulus in stages. For example, consumer sentiment and the new orders index in the Institute of Supply Management data, the best leading indicators, already have fallen below their prior post-WWII lows, and that’s before consumers have seen the January jobless data.

Yes, it is hard to save when wages are stagnating, but some people did chose to spend on non-essential items based on their housing wealth. They would have acted differently if they knew that the bubble would not last.

Dugg.

When I talk about saving I am referring to gross national saving, which consists of saving by businesses and governments as well as households. The budget deficit represents negative saving. Eventually the deficit will have to be cut significantly in order to raise national saving.

Of course it’s a government bank.

One fear of mine, that is already happening, is that the GOP and the media will pick examples of “frivolous” spending in the stimulus package (e.g. Boehner and the hundreds of millions of dollar in contraceptives) and use this to delegitimize the stimulus. Americans need to understand that not all the money spent might be worth spending in other circumstances.

Paying some people to dig holes and others to fill them in, in other words, might be a worthwhile use of the stimulus money if a revolution is avoided.

Actually, I have been surprised how well that new orders for capital goods (long-term investment) have held up. The November data did not show much of a falloff from the summer. I certainly would rather see more stimulus sooner (and a bit more creative — how about tax credits for shorter workweeks), but we will still have time.

The biggest thing in this package is money to S&L governments so that they don’t have to keep making cutbacks.

Dean (reply not working for me right now), the orders you cite are a lagging indicator.

I wrote a number of columns warning about collapse of the housing bubble. But then nothing happened throughout 2006 and most of 2007.

After a while, I began to doubt my analysis and moved on to other things

I wanted to comment on this. Because the loopy housing loans of the bubble were not set to begin resetting until 2006 and 2007 and a critical mass of them getting in trouble would be needed to cause a burst, this is precisely when you would expect the bubble to burst. In fact the bubble was fully mature by 2006 and mortgage underwriting companies were having problems throughout that year and they began going belly up in early 2007. This was exactly what was to be expected. The first Bear Stearns funds froze in June and the BNP Paribas ones did on August 9, 2007 marking the pop of the bubble. You can’t always tell exactly when a bubble will burst because it is essentially an irrational creation but this one was about the most predictable within in a month or two of when you might expect it to go kerblooey in the technical parlance.

Bruce when we were at CSPAN I made mention of the upflow of money into the hands of the wealthy at levels unseen since the Depression and you made mention of the fact that this was happening all over the world, not just in the US, and that it was happening in other places without benefit of George Bush’s regressive tax policy. You said Jamie Galbraith had no good answer for why this was happening, but were dashing onto the set and we didn’t get to talk about it further.

I was wondering if you (or Dean) had any thoughts about why this is happening?

Yes, the Obama crew will have to be prepared for this. Some of the money will be wasted. The key will be to have success stories that they can point to.

The problem is that the media refuses to ever put anyhting into perspective. Look at all the mileage that McCain got out of the Woodstock museum. It was $1 million. In the federal budget this is invisible (about 0.00003 percent of spending). we don’t have time to worry about whether this was wasted money or not.

Much of the money will be wasted. That’s an unfortunate fact. That’s why it would have been better to have done something more meaningful than send out rebate checks a year ago. I said at the time in a New York Times article that the $150 billion would have been better spent cleaning up the housing mess. Often a small amount of money spent strategically at the beginning of a crisis can forstall the need for much greater spending later when downward momentum has set in.

we’ll see. It’s possible that they turned in December, but November was already after the ecnonomy was in free fall.

Also, bubbles always get bigger and pop later than a rational person would think. For example, knowing we were in a tech bubble, I sold my tech stocks in 10/99. The NASDAQ (heavily tech weighted) went up for another 6 months, and rose another 50%.

FWIW, I’d like to see Obama/Democrats make the safety of the food supply a priority. It is too vital to treat as a subset of the economic problems. As I have learned from Ian Welsh, here at FDL, if we can feed our population, we avert the worst ravages of a depression/hyperinflation. If we decentralize U.S. food production, along with a very dramatic improvement in inspections, we make the food supply more redundant and hopefully a lot safer.

BTW, the book is excellent.

You can buy it here.

Are these problems or not with the current stimulus/recovery package? And why.

1. focused too much on tax cuts, not enough on spending?

2. too small?

3. limited by “shovel ready,” when in all likelihood, we’ll still need more 18-24 months from now?

4. lack of imagination — assuming we know the list of things we need now, when we’ve hardly begun to think about them?

5. To prone to current Congresssional pet project (or earmark) thinking, rather than establishing a process for inviting, evvaluating, selecting, funding more projects?

6. No clear vision of what the economy is supposed to look like — what are we investing to create?

Much of the increase in wealth of the ultr-wealthy has come from finance, which is a bigger part of the economy than it used to be. I there is a problem in this area that I don’t know how to fix.

The key think is that people can see progress — that we can see a stop to the downward spiral and see concrete gains from this spending. I think we will and if we do, people will support more.

if by “the people” you mean the voters, i agree. but i think the answer will be the opposite for the people who seem to have influence. there will be calls to balance the budget and the kinds of restructuring we need for the long term will be kicked down the road because the need is not seen and the interests in the status quo are too great.

hope i have that wrong.

I think that much of the upward flow of income is due to the finance sector, where you do have many of the highest paid people in the country — everywhere. My guess is that there will be a substantial downward redistribution of income resulting from this crash. In fact, real wages did soar (24 percent annual growth rate) in the last 3 months of 2008. Much of that was lower oil prices, but even taking out oil, the rate of increase was still 4 percent. There si real potential for change here.

I believe Krugman sez something about income distribution in other countries in Depression Economics. Not sure if I remember it correctly, but I think he sez that it’s not anywhere near the magnitude of the shift in the U.S. (Developing countries may be a different story from western Europe and Japan.)

To the extent that U.S. policies cause bubbles, the rich are the ones who initially benefit from them. Globally, since all financial markets are now linked, so what the U.S. does contaminates all financial markets.

How about providing funds for state and local programs that have had to be scaled back or ended due to their budgetary problems? This isn’t my idea, I seem to remember Paul Krugman mentioning it. Seems like a great way to get some immediate economic benefit.

That is very interesting. How does that work?

Do you see any danger of a Japan-type situation where things just drag on for years? I am, which is why I support stimulus spending. But we also have to be willing and able to turn off the monetary faucet before we have the opposit problem and go back to inflation.

I see the stimulus as the opening shot.

The problem is that as I pointed out in my #70. The housing bubble burst 18 months ago. Since then there has been a huge amount of dithering and some 2 trillion committed by the Fed and $350 by the Treasury to no purpose that I can see except the amorphous claim that the financial system was stabilized. I ask anyone to look at the financial system and tell me if they think it is stable.

I agree with eCahn on this. Doing this in steps only puts us further and further behind the curve and will necessitate even larger and more expensive interventions. I don’t think we have the time or the money to keep subsidizing half-assed solutions that don’t work and that we know won’t work in advance.

Yes, we will have to nail the balance the budget crowd. this almost brought the economy to ruin when they got their way in 1937 and got Roosevelt to cut spending and raise taxes. No reruns.

The long-term deficit problem is health care, health care, health care. Obama’s OMB director, Peter Orszag knows this, which is one reason I was so happy to see him get the job. He is smart and honest. by far the best pick among Obama’s economic team.

My point was that wealth and income have become more unequal everywhere, not just here.

Don’t get your hopes up. There is already evidence that nominal wages are NOT downward sticky as we economists used to believe. Employees now being asked to take wage cuts.

Regarding this quote from the article:

Greenspan was a master at giving people the idea that he was interested in their opinions without actually caring about them at all,

What gave you the impression that this was what Greenspan felt? I’m always wary of mind-reading arguments. Often as not, they reflect the arguer’s thinking as much as the subject’s.

yes, this is a no-brainer. There is much in the stimulus for exactly this end. We could probably use more. (btw, it largely takes the form of Medicaid funding — this is just the easiest way to get money to the states.)

re use of the bailout funds: $3.5 * 10^11 has been given out. We don’t know where it went, if I understand things.

Say there are 3 * 10^8 people in the U.S.; say there are 3 people per household; say that 1 in 10 of these households has a ”toxic” mortgage: that’s 10^7 toxic mortgages in the U.S.

If the bailout money were used to wipe out one immediate cause of the economic problem, namely, the existence of ”toxic mortgages”, then each toxic mortgage could be paid $3.5 * 10^4, or $35,000. Since my figures certainly overestimate the number of risky mortgages, perhaps by an order of magnitude, you might actually be able to throw $350,000 (!!) at each mortgage. THAT would make the problem with unpaid mortgages go away!

Why not do this?

Bullseye, as per usual Child-care scams rake in thousands

Milwaukee County’s neo-con county executive, has his picture in the dictionary next to “penny-wise and dollar foolish.” AFAIK, as the GOP slashed investment in government, one of the first things to go were quality control and anti-fraud procedures.

Medicare funds a large percentage of U.S. Medical schools. This link leads to others, all with the same them. UW course for doctors pushed risky therapy Unscrupulous physicians at U.S. Medical schools sell their medical credentials to the highest bidder.

We’ve underinvested in government oversight and quality control, so we can’t be surprised when it’s broken.

Magnitude matters.

We’ll get another data point a week from Friday, but through December they were still rising at a 3.5 percent nominal rtae. I expect this rate of increae to slow, but I don’t think it will fall to zero overnight.

Greenspan used to brag about his matery of “Fedspeak.” I once heard him in a congressional hearings say that if someone understood what he had said then he didn’t understand what he had said. In other words, Greenspan was being intentionally ambiguous.

FL has a number of projects that await only funding. With a probable $3B deficit by the time the legislature meets in March the state could use the dust.

Yes

Thank you so much, didn’t know this.

thanks. good to know re orszag.

do you have any insight into his thinking on going to some kind of single payer system for health care?

Along with added unemployment benefits, yes. In my state, there are quite a few things that have suffered that don’t fall into those categories, including social services and public safety.

The problem is not toxic mortgages, it people who are underwater in their homes because a loss of equity (blame the media here for atrocious reporting –maybe if they didn’t rely exclusively on people who missed the bubble as their experts). Anyhow, we have around 10 million homewoners who are underwater. many will default on their mortgages. They will also default on other debt (credit card, car loans etc.,) because they don’t have home equity as a backdrop if they get in trouble.

Yes, I heard the same story. Greenspan thought this was cute — it wasn’t.

Some time I’ll tell you about the one and only conversation I ever had with Greenspan.

One of the reasons I avoided investing back then. You couldn’t get a straight answer out of anyone.

Isn’t it important that spending be incremental- that is spending that wouldn’t happen but for the stimulus package? How can we be sure that we aren’t just financing the same projects at a federal level that would have been financed at the state level anyway- taking the money out of one pocket and putting it in the other with no effect?

Aren’t the “balance the budget” crowd like Pete Peterson okay with stimulus spending? They sure were fine with the bank bailout.

They seem to be most committed to a “balanced budget” when fetishizing the destruction of the social safety net.

The reason Dems or anyone in power doesn’t want to discuss helping individual people is because individual citizens are no longer their constituencies.

Do you see any danger of a Japan-type situation where things just drag on for years? I am, which is why I support stimulus spending. But we also have to be willing and able to turn off the monetary faucet before we have the opposit problem and go back to inflation.

Just wanted to say that I agree that the global paper economy is what built up so much paper wealth in so many places.

On the comment above, we are headed for Japanification on steroids. Japan also tried various stimulus packages but it just couldn’t face up to cleaning up its banking sector and without that they all fell flat. I think we can see that happening here. As for inflation, we are on the edge of depression. Inflation is so far down the road that it is hard to even see it.

(blame the media here for atrocious reporting –maybe if they didn’t rely exclusively on people who missed the bubble as their experts).

I believe this is the same media that relies on the Brainiacs who thought the invasion/occupation of Iraq would be an easy action and not cause any troubles and still refuses to deal with those who got it correct from the beginning.

Well put.

The only political way to single-payer is through something like the Hacker plan. You create a good public plan that employers and individuals can buy into. If the plan is good, it will eventually dominate the market and get you to something like single-payer.

As a political, economic, and legal matter, I don’t know that a literal single-payer program would be desirable. I don’t think that we can arrest people for providing health care, whicb may mean that we always have some people going out of system. However, the point is to make sure that we have a realy good plan that everyone has access to. If we have some really rich people who want to spent more, I don’t like it, but I don’t see how we can stop it.

The long-term deficit problem is health care, health care, health care. Obama’s OMB director, Peter Orszag knows this

Is he onboard that for single payer because short of that healthcare is not going to get fixed?

Well said.

Yes, thankfully the Peterson crew has not tried to oppose the stimulus. Some of them seem to want to play a quid pro quo — spending now, but we’ll have cuts in Medicare and SS in 5-10 years. Note that Obama agreed to some sort of “entitlements” summit for Feb.

This is so much lunancy. The baby boom cohort has just seen the equity in their home and savings in their 401(k)s disappear and these folks want to cut their SS and Medicare — they should be chased out of town.

Health care, specifically Medicare, clearly represents the bulk of our long-term budget problem.

Isn’t there another bunch of re-sets coming, too? Won’t people on the edge also be underwater very soon?

It’s disturbing to me that Democrats are having to fight so hard against a Democratic Administration to include cost-effective stimulus components like food stamps expansion and unemployment insurance extensions. These seem like ingredients for success, since they both return more than $1.50 for each stimulus dollar spent; they are also well within the Democratic party’s value set.

Why are these such a hard sell now?

For some reason, none of the Dems in the leadership have any interest in even discussing this one. I’m open to explanations.

I think Linda R’s response at 108 is excellent. I’d like to see a system where donations are limited to registered voters. Maybe corporations could contribute a fraction of what constituents had already donated.

I’m uncomfortable nationalizing banks until we do something with campaign finance reform, but I don’t think we can wait.

On torture, 4th Amendment, Democrats were complicit, so now they want to run the cover-up. Perhaps it’s similar on the economy?

Your response @ 102: (My response button is slo-o-ow.)

The problem is not toxic mortgages, it people who are underwater in their homes because a loss of equity (blame the media here for atrocious reporting –maybe if they didn’t rely exclusively on people who missed the bubble as their experts). Anyhow, we have around 10 million homewoners who are underwater. many will default on their mortgages. They will also default on other debt (credit card, car loans etc.,) because they don’t have home equity as a backdrop if they get in trouble.

I guess I don’t get the distinction; I thought that people defaulting on the mortgage was what made the mortgage “toxic”. Anyway, what I’m saying is, “Why not give the families in trouble enough to get them out of trouble?” To me, that solution seems directed, east to track, humane, etc.

(”Lick the stamp, not the whole envelope.”)

I worry that we could go Japan. But, I think one perverse advantage we have is that if the U.S. economy does stagnate (and others grow — big “if), then the dollar will likely fall. This will cause some inflation, but it will also give a big boost to our exports. Japan started its downturn with a huge trade surplus. We start with a huge trade deficit — that leaves lots of room for improvement just by buying fewer imports.

This is a distorted view of single payer. If you look at other countries like France, UK, and Germany, single payer covers everyone but if you want something gilt edged and have the money for it you can still get it.

Homelessnes for the 30 million that live in those hoes will exacerbate the rental market demand forcing upward pressure on rents. Any solution for this?

If the February entitlements summit has anything more on its agenda than lifting the salary cap on FICA taxes, it’s not worth attending. That single innovation will solve everything forever.

The amount that they are underwater would be in trillions. The beneficiaries of this would be the banks — they have enough of our money already.

Employees have been taking wage cuts — in the form of no raises and less benefits — ever since “globalization” began.

Lifting the cap doesn’t solve anything. The amount of revenue it would generate is trivial relative to our long-term budget problem.

that’s fine, but then it’s not strict single-payer. England and denmark and I suspect the others all have private health care systems that are outside of the single-payer network. If you want to call that single-payer that’s fine, the semantics don’t mean anything to me.

The whole thing’s a mess. There’s no reason to bring anyone around. What must be done is completely obvious. There’s only a couple of possibilities left. Everything else has failed. So just pass the bill.

Do countries with lower Gini coefficients suffer milder swings in recessions?

The mortgages are not toxic, as there’s some value there, though not enough to cover the value of the mortgage. What’s toxic are all the financial instruments Wall St. leveraged on top of the housing bubble. Many of them probably have no value at all.

Which is why moving to a single payer system makes sense. Instead as with the meltdown we continue to dink around with all this. We should have had single payer decades ago.

selise once found a great post where a blogger noting how quickly trillions were made available to the banking system opined that the need to go slow, that it was too costly, etc. was all BS. That when the government wanted to do something like bail out the financial sector it acted and found the money in days not decades. It could have done with healthcare and many other issues but it did not because healthcare helps ordinary Americans not corporations, not the powerful, not the rich.

Japan had the worst recession of any country in recent years and its income distribution is much more equal than ours.

Social security is fixed forever if the cap is lifted. Lots of money for Medicare too.

Some of the homes bought as second homes are now on the rental market. My company Friday had a 20% vacancy rate. The same time last year it was 5%. We’re having to lower rents to attract renters. It is definitely a renter’s market.

Actually, if you eliminated the cap, it would get rid of the shortfall projected by CBO. That is extrenme, but raising the cap to $150 k would eliminate about 1/3rd of the SS shortfall and make us solvent to past 2050.

of course, if the crash reistributes wage icnome downward, as I think is happening, this will have a very beneficial effect on SS as well.

Krugman argues universal medical care fell on southern racism, as they did not want to integrate their hospitals. Other than that, we might have had it during Nixon.

the dollar will likely fall. This will cause some inflation

Deflation offsets any inflationary pressure and is likely to do so for the foreseeable future.

I accept the inevitability of some form of national health insurance. My concern is how to pay for it. I think we will need a value-added tax.

we’ll find out — I suspect that the English speaking countries will fare worst — they had the biggest bubbles.

That’s just not true.

Had the govt. bought the underlying mortgages at market value, the banks would have taken their haircut instantly and would be on the road to recovery. The govt. could then have reduced the principle amount of loans where appropriate in order to give people some equity back and keep them in their homes.

It seems to me that the media discussion has been overfocused on rising mortgage interest rates on sub primes and not enough on the problems of equity loss. As long as there is equity, people will try to hold on- when they go upside down, they walk….Half the sales in this market during dec. were bank owned properties- and that is depressing prices, driving the market further down.

yes, we lost many opportunities.

In the back of my mind is forming the impression that the way the bank bailout has been handled seems to be making the banks more obstreperous about mortgages, rather than wanting to preserve the mortgages in some form. Now, thanks to all that money they’re apparently just salting away, they can afford to wait for the value of real estate to climb again before they try unloading the homes they’ve repossessed. They’re certainly willing to fight the proposed legislation to allow judges to restructure mortgages.

I suppose a good question for our authers would be if there’s any evidence to support this idea (or if I should go commune with 9/11 conspiracy theorists?)

Maybe, but Social Security’s budgetary problems are trivial compared to Medicare.

that’s fine, but then it’s not strict single-payer.

Of course, it is single payer. Single payer is not some theoretical concept. It is something that we can see in numerous countries and almost all of them have some capacity for add-ons. And to my knowledge no one has ever accused them of not being single payer until now.

Keeping the nationalized banks in US hands once they started to turn a profit would help pay for health care. So would nationalizing the oil companies.

I dunno why those Peterson fuckers get up my nose so much, maybe it’s because they’re always trying to paint their position as pragmatic but they’re so quick to switch the philosophical deck chairs around when Peterson’s Wall Street fortune is at stake it’s obvious that their objection so Social Security and Medicare is a moral one.

I wonder if the crash has affected their funding. Would almost be worth it.

Japan has a better safety net don’t they?

Don’t forget to add: The Baby Boom generation has just seen their blah blah blah disappear and after paying double social security taxes since the 1980s!

yeah, we could have bought the mortgages at market value — that might have been a good idea, but we couldn’t force the banks to sell (in fairness, we don’t know the market value). This would also instantly wipe out nearly every bank in the country — possibly a good idea, but a side effect that we should note.

Dean Baker @ 124:

The amount that they are underwater would be in trillions. The beneficiaries of this would be the banks — they have enough of our money already.

10^7 mortgages * 10^5 (say) $/mortgage = 10^12 $, which is a trillion.

But, (1) doesn’t this fix the problem? And wouldn’t, say, a third of this amount fix almost all the nonpayments numerically?

And, (2) didn’t the banks just get $350 billion, with more to come? I thought that wanting to cure sick banks was the point of the whole thing.

Thank you. Very well stated.

If they are waiting for real estate to climb again, then the million dollar bank boys are even dumber than they look. They will do their best to avoid owning up to their losses and TARP I may have delayed the day of reckoning.

That’s not going to happen. If nationalized industries turned a profit they never would have been privatized in places like Britain. Privatization was primarily motivated by a desire to save money because all the nationalzed industries ran huge losses that the taxpayer had to cover.

On the Hindenburg shows this morning several of the gaseous-heads indicated there was a “done deal” to establish a “Bad Bank” to vacuum up and hold the toxic bank assets at a cost of approximately $1.5 trillion.
Is this true? Is it a good idea?

I don’t think so. Might even be worse than ours.

We could have tied the sale to an equity infusion in exchange for convertible prefferred stock-

you are a dry one Dean Baker

That’s Medicare not Social Security. And if we go with a single payer universal healthcare the Medicare side of that is taken out of the equation. The government has undertaken the commitment to fund SS fully through about 2040 or so in exchange for the surpluses it has already received and spent. Even after 2040 and with no changes to FICA, SS would still cover something like 74% of benefits for decades and decades beyond that.

That depends on how we think about defining worst recession. They did have a long period of near zero growth, but their unemployment rate never got above 6 percent. Also, since their population is declining, near zero growth still translates into positive per capita GDP growth in Japan.

FWIW and btw I apologize to all the fine physician here at FDL, but physicians are a highly paid labor union. They use their influence to control the number of graduates of U.S. medical schools, thus insuring a constant and chronic physician shortage.

OT, I need we have to regulate each specialty on its won.

This hits slightly on why I think the EITC is corporate welfare. It artificially keeps wages lower than they should be — and robs tons o’ bucks from the medicare and social security programs.

Not to mention depressing the wages of people who don’t have dependent children.

I fear you’re right, and that it will mean that we’ll have to stop using Roman numerals to number the TARPs.

I’m just not aware of any evidence that business cycles are related to the distyribution of wealth or income one way or another. I think business cycles are mainly caused by bad monetary policy.

Valued added tax. That sounds wonderfully regressive. It makes more sense in European economies where wealth differentials are not so out of whack but here? Why not increase marginal tax rates instead?

establish a “Bad Bank” to vacuum up and hold the toxic bank assets at a cost of approximately $1.5 trillion.
Is this true? Is it a good idea?

No, we get the crap and the banks take a walk and can do this all over again in the future.

IIRC, Dean argued it is a ruse to get the taxpayers to overpay for the assets. Nationalizing the money-center banks means the taxpayers get a much better deal.

Sorry behindthefall,

many folks are underwater in their mortgage by more than 100k. the average loss in equity per homeowner is about 80k. Not everyone is underwater to this tune, but many are.

You should ask youself what you want to accomplish. I don’t particularlky want to see my taxes go up because banks made stupid mortgages. I’m fine with paying taxes so that kids can get health care child crae, edcuation etc., but helping out millionarire bankers is not on my list of prioritites.

eCAHNomics @ 130:

The mortgages are not toxic, as there’s some value there, though not enough to cover the value of the mortgage. What’s toxic are all the financial instruments Wall St. leveraged on top of the housing bubble. Many of them probably have no value at all.

And why should $350 billion and counting go to those leveraged instruments (whatever the heck those are!) instead of to 10,000,000 households? Which use would be better for the country? Which use would keep more people out of the poorhouse, out from under bridges, from being destitute?

agreed — but the particularities of this cycle may mean that it is worse in the countries that had more inequality.

Our long term budget hole is so large that we cannot get enough money out of the income tax to cover it. We need a new revenue source. If the VAT were tied to a new health care benefit that would offset the regressivity.

Ah, my pet-most of pet peeves. No one should be allowed to talk about growth rates across countries unless they state them in per capita terms. There oughta be a law.

If you have research on this subject I’d be happy to see it. Iceland is pretty egalitarian but it has suffered the worst so far in this cycle.

what is wrong with just re-writing the rules on foreclosures so that people have the right to stay in their homes as renters? I know that this too complicated for the politicians, but it should be easy to understand for normal people.

but helping out millionarire bankers is not on my list of prioritites.

Wiping liquids off the monitor.

well, we’ll have the data in a few years. It will be interesting to see.

Well, that may be what privatization was all about in the past, but future privatization of the Carbon Lords will happen to stop them from ruining the planet, and to nationalize their short-term profits. They simply will never stop acting in a rationally-corporate way, and they are too large to permit their rapacious ways.

Old-time privatization won’t look anything like second-decade 21st century privatization.

Don’t ask me. I never understood the TARP, except that it was a Goldman Sachs raid on the U.S. taxpayer. That’s certainly what Paulson’s demands made it sound like.

10,000,ooo households have no lobbyists

We have data from past recessions.

I think business cycles are mainly caused by bad monetary policy.

It wasn’t Japan’s monetary policy but its failure to clean up its banks that led to economic stagnation. What we have already seen with Bernanke is he has used up most of his monetary tools (except for just printing lots of money) and it has had no effect on the situation. We are going the way of Japan only for us it will likely be much worse.

I’d go further – I think that any talk about economic gains should include the median income and how much they have changed, as well as the modal income change.

The banking system is the transmission mechanism for monetary policy. When banks stop working so does monetary policy.

yes, but we are looking at qualitatively different type of downturn. Almost all the prior recessions (at least in the U.S.) were caused by the Fed raising rates to slow inflation (2001 was the only exception). This one was caused by the collapse of an asset bubble. I expect the dynamics to be very different in the U.S. and elsewhere.

sounds good to me.

Hank Paulson should be in prison.

There’s only one precedent for what we are experiencing today and that is 1929.

That’s a good reason to just nationalize the bastards. we can save on roman numerals.

Too complicated. Per capita figures would clarify the situation mightily with very little effort. Your suggestion would require a master’s thesis to explain it every time you used it. Because if you do what you suggest, then you must make many other adjustments, like per hour worked, like subtracting for environmental degradation, etc.

Dean Baker @ 168:

Sorry behindthefall,

many folks are underwater in their mortgage by more than 100k. the average loss in equity per homeowner is about 80k. Not everyone is underwater to this tune, but many are.

You should ask youself what you want to accomplish. I don’t particularlky want to see my taxes go up because banks made stupid mortgages. I’m fine with paying taxes so that kids can get health care child crae, edcuation etc., but helping out millionarire bankers is not on my list of prioritites.

Now I *REALLY* don’t understand where the $350 billion went!

Banks hold money for people, most of whom I imagine are not millionaires, don’t they? They (being unregulated, in effect) make bonehead moves with “Other People’s Money” and get into trouble. Making good on “stupid mortgages” puts back the “Other Peop[le’s Money” that they had managed to squander. I can’t see that paying off a mortgage for someone who is about to lost their house either puts money directly into a (m/b)illionaire banker’s pocket or is a worse use for the money than pumping the same funds into some Wall St. firms’ black holes. (Am I supposed to believe that that money absolutely never goes to paying million-$ bonuses and the like?)

Ding. Along with Summers, Bernanke, and Geithner.

Seconded.

Cashed his paychecks as Sec. of the Treasury and steered us right into the damn iceburg.

I agree strongly with the renting idea. As for who was most exposed, it a combination of which economies were growing the fastest, had the fewest reserves, and had the most sunk in bad investments.

When you pay off the mortgage, the check goes to a bank, not the homeowner. As Deep Throat of Watergate fame kept saying “follow the money.”

We’ve spent enough money already that we ought to own the things, that’s for sure.

Hank Paulson should be in prison.

i’m a liberal, so i think he should get a fair trial first.

Oh, but Hugh, think of the moral hazard. If you don’t throw people out of their houses now, the next time the banks throw money at them, they won’t say no. /s

In this case, I’m the Red Queen. (Do I have that right?)

yes, it depends on the level of the discussion. as a first approximation, per capita GDP growth is a useful number. If we want a full assessment of well-being, we will have to look at distribution, work hours, environmental issues etc.

So do either of you think that there will be more concessions for Republican votes that aren’t needed, or will necessity encourage them to tell Boehner to go Cheney himself on the stimulus?

IANAE but what is McCain talking about:

“We need to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes,” Mr. McCain said. “We need to cut payroll taxes. We need to cut business taxes.”

“We need to have a commitment that after a couple of quarters of G.D.P. growth that we will embark on a path,” he said about the gross domestic product, “to reduce spending to get our budget in balance.”

Do permanent tax cuts count as “stimulus,” and how does he think that G.D.P. growth is going to magically materialize?

Maybe we can lock him in a room with those Peterson assholes and they can duke it out.

The banking system is the transmission mechanism for monetary policy. When banks stop working so does monetary policy.

Sounds great but what does it mean? Yes, the problem is with the banks. It is not with the supply of money to them. That is the essence of Japanification.

on cell phone and can’t read entire thead…forgive

what bothers me is the failure of most progredssives to blame our economy on the actual culprit…

it was reagan and his depraved redistribution of middle class assets, transferring tax burden from those who use the most resources onto those who contribute their labor for little return, all the while claiming he lowered taxdes when in fact he raised them more then any peacetime president…then failing to used that revenue for anything but wealth to the wealthy

Bruce, Dean, or anyone, I’m interested in any comments you have about credit default swaps. NYT’s Gretchen Morgenson had imho a good write up about them today Fair Game
Time to Unravel the Knot of Credit-Default Swaps

I just remember what the doormouse said.

LOL! yes: “Sentence first–verdict afterwards.”

More payoff from Obama’s charm offensive. Not.

Well played.

Your commitment to the rule of law is commendable.

My point is that the fundamental problem is monetary policy. That is true now as well. When interest rates get as low as they are now the Fed can’t stimulate borrowing by cutting them further. This creates what economists call a liquidity trap.

What I had in mind was actually pretty simple. Median income is about as easy to determine as a mean. Modal is a bit complicated, because it requires some definitions, I think. Mine’s pretty simple – how have most people’s incomes been doing, going up or down? In this chart, which most of us are probably familiar with in some form, indicates that the modal change is downward, I think. Making that a more precise measure would be one of those things economists could have lots of fun arguing over.

McCain is simply hoping for a quick return to “the fundamentals of our economy are strong.” For him, the good times never really went away.

Dean Baker @ 194:

When you pay off the mortgage, the check goes to a bank, not the homeowner. As Deep Throat of Watergate fame kept saying “follow the money.”

Yeah, I got that part about paying the bank. But then you own your home. And the money that you paid the bank does not go into the pockets of bank officials directly, but is used to cover the deposits of account-holders, who otherwise would have been at risk. At least, that’s the way it was supposed to work in “It’s A Wonderful Life” …

People aren’t on the street, people have their savings safe — that doesn’t sound like the worst possible way to use tax dollars.

Contrast that with what the $350,000,000,000 is being used for.

My guess is that McCain is just trying to obstruct the stimulus and is carrying water for the party. Obviously he will never run for president again and I doubt that he can restore his reputation for independence. So, he will just use his stature to throw out whatever nonsense he can to make life more difficult for Obama.

I originally questioned Obama’s 80 vote strategy, but I now think it was brilliant. He is giving the Republicans the option to be part of the recovery team or to be obstructionist. He will get the bill passed. If the Rs are all in the opposition, this will be a hard position to sell in the next election.

McCain and the Republicans are fucking fools. They would have fit right in back in the Hoover Administration. If we follow those dopes, we are doomed. That the media continues to propagate their views instead of pointing out how they bear heavy responsibility for the implosion of the economy just goes to show how in the bag the media remains to them.

You mean “more concessions for to attempt to get Republican votes that aren’t needed” I think.

Politically speaking, I don’t see many if any of the hardcore GOP Reps and Senators going along with anything that is contemplated with respect to this stimulus package, even if you gave them their wishlist, they’d still vote against it.

So what monetary policy tools are left in the toolkit — any?

I’d settle for having him spend the next few years the way many of his victims have – broke and wondering where he’ll be able to live.

Was it worth the pricetag of $275 billion in tax cuts?

As McCain proved over the past year, he is an idiot who has no idea what he is talking about most of the time.

Heh. Did you notice that the stock market rallied the day that rates were cut to zero? On the theory (according to talking heads on cnbc) that the Fed was throwing everything at the problem. Whereas, they had the verb tense wrong: the Fed had just thrown everything they had at the problem.

I’m a huge fan of Morgensen. It was absolutely crazy to let CDSs go unregulated. Can we get by without an implosion? possibly. This is one where time is on our side. They are relatively short-lived instruments, generally less than 5 years. Most were issued before 2007. The outstanding nominal value has already shrunk from around $72 trillion at its peak to around $30 trillion today. If we don’t see another really big company collapse, these may just unwind as a result of time.

“Sentence first; verdict afterwards.” -Queen of Hearts”
— Lewis Carroll

The Fed has to stop doing open market operations only through Treasury bills. It needs to be buying other types of securities with higher interest rates. It’s doing some of that, but not nearly enough.

I’d prefer, after a fair trial of course, years of house arrest combined with community service doing something like working at the SPCA 40 hours a week. At least we’d get something for our money.

That’s a real problem.

This creates what economists call a liquidity trap.

LOL no really, are there any other official economic terms you want to tell me about? The point is what created the trap and addressing it, i.e. bank insolvency and what caused that insolvency: their crap assets.

Thanks for the chart. I was being peevish, by indicating that to really account for changes in standards of living is a complicated task, with many unknowns (both known unknowns and unknown unknowns).

I originally questioned Obama’s 80 vote strategy, but I now think it was brilliant. He is giving the Republicans the option to be part of the recovery team or to be obstructionist. He will get the bill passed. If the Rs are all in the opposition, this will be a hard position to sell in the next election.

i’m not keen on what obama is doing to get the Rs on board (see tax cuts).

Wow..that is profoud… I have an old conservative friend (95) said that a year ago. She lived it.

I’m not sure that if you had the Obama crew draw up their ideal stimulus that it would have much less than $275 billion in tax cuts. Personally, I’m not upset about the $500 per worker tax cut. The business tax breaks are more dubious, especially the 5-year tax look back.

If you are going to do tax breaks, I would love to see them go to reducing hours (you cut hours by 10 percent and we pick up the tab). that would get money in the economy and make for a more family friendly work place. But, it will be tough to get this one on the map in DC.

BTW, and I’ll totally understand if nobody wants to answer this, but do we think Krugman’s relationship with Bernanke has affected his assessment of Bernanke’s actions?

Can’t Harry and Nancy conference-out a proportionate amount of taxcuts, based on how many GOPs oppose the bill?

If 275 billion = 41 votes, then if only 20 GOPs support the bill, send a stimulus to the Oval Office with only 135 billion in taxcuts.

Much appreciated.

On that point, we agree.

Lease with repurchase option is better for all and makes a good tenant to keep up property.

The basic problem is a collapse of velocity, which means that nominal GDP must shrink. This will partly result in lower prices and lower output. We are seeing both. Under these circumstances the Fed is pushing on a string when it tries to inject liquidity into the economy. That is why we need fiscal stimulus. Public spending has to substitute for the decline in private spending.

Brilliant! But the Ds are much too dumb to think of it, and much to spineless to do it.

Everyone who I know who knows Bernanke personally has nothing but good things to say about the guy. I suspect (based on nothing) that Krugman likes Bernanke and really does not want to trash him. He has called out Paulson for many actions in which Bernanke was a partner in the crime.

I love it.

I haven’t heard anyone say so. No doubt, Krugman cuts him some slack. After all, Bernanke will probably go back to Princeton when his Fed term is up. Most economists assume that he will not be reappointed as Fed chairman and that Larry Summers will probably replace him.

Why did velocity collapse? (Disclosure: I worked for a few years with a bunch of monetarist economists who were always talking about velocity, which seemed to me nothing more than the residual in an algebra formula.)

Yes, that sounds good. It makes it more complicated, but if you can get it in, that’s fine by me. the basic point is to allow people to stay in their homes.

There’s gotta be something wrong with that idea, but I’m not seeing it…

As we come to the end of this great Book Salon,

Dean, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book and economics.

Bruce, Thank you for Hosting this great Book Salon.

Everyone, this is a highly recommended book, if you haven’t bought one yet, there is a link above.

Thanks all.

Bernanke has been using scads of different facilities (programs) to inject money into the financial system and unload crap from them. It goes to the depth of the problem that even with the trillions he has used and more trillions he has committed to use there has been so little effect. It is why nationalization is really the only way to go. No matter how much money is put in the system it can no longer function coherently. It needs a reset and that can only be done by the government through nationalization. And via nationalization you can do a lot of other things as well like help homeowners, free up credit.,and do away with entities that are too big to fail.

Thanks for hosting. It was a great group.

Dean

general comment…. just want to say for the record: i did not know dean baker was such a very funny guy. don’t think i’ve ever laughed out loud so many times during one thread – and one on such a depressing topic.

also a personal beg to dean – i really enjoy your diaries on oxdown. now that you are an expert with the commenting system here, would you consider stopping by again?

many thanks.

Collapse of the housing bubble. Also, don’t forget that we had an oil shock at the same time. People we forced to cut back their spending.

Seconded. Great discussion.
Glad I purchased the book.

What is meant by “velocity” here. I’d never use it in that sentence if it meant what it does in physics, so I’m confused.

But stimulus won’t work or not for long if banks are not nationalized and recapitalized transparently.

Thanks

Yes, thank you Dean and Bruce for an interesting discussion.

Velocity is the ratio of the money supply to GDP–it’s the number of times money turns over. A fall in velocity has the same deflationary effect as a decline in the money supply.

So why say velocity if you mean collapse of housing bubble and oil shock? The latter are far more enlightening. And the use of the word velocity adds nothing to the understanding of the problem.

See my 241 and Bruce’s 254.

Thanks, Bruce, thanks Dean.

This was a great chat.

Anyone who hasn’t read this book should do, hopefully by purchasing it, but read it nonetheless.

Agreed, comedy and economics. What more can you ask for.

Dean, Bruce, thank you both so much for being here today. One of the very best book salon’s we’ve ever had. (And to answer your question, no, we don’t say that to everyone.)

Just to echo Bev — the book is wonderful, easy to read and very interesting, full of economic wisdom and the comedy stylings of Dean Baker.

You can buy it here.

FYI, when I tried to buy Depression Economics thru the FDL link, amazon eventually sent me a notice that they could not provide the book and were reversing the order. Is that because you get a cut and they didn’t want to pay you?

I think Krugman’s writing sharpened up a lot after he visited us. But I have not seen him call Bernanke out. Bernanke is one of the great villains in this for me. He came to the Fed in 2006 and like Geithner had a ringside seat to what was developing. He did nothing to stop or mitigate it before the fact. He with Paulson did nothing for more than a year after the housing bubble blew up from August 9, 2007 to when Lehman and the financial system went splat on September 15, 2008. He has fed trillions into a liquidity trap as we have chronicled here over the last 6 months and like Einstein’s definition of insanity keeps expecting a different result.

That Summers is likely to replace Bernanke is not a sure thing given that Summers’ policies don’t look like they are going to be successful but if he does replace Bernanke this will not be a postive for the economy.

It looks like your comment implies it’s not important. I suppose that’s true sometimes, but ISTM that if it gets too low you have a really dysfunctional financial system (certainly if it’s much below 1.0).

The US Gov taxed us into debt and bankruptcy. We did save but because of our gov taxing every thing we earned, spent, or did (fees and licenses), etc and we were brainwashed into putting our savings into retirement funds and then they stole it from us in 2 bubbles. Our savings went into retirement accs because our gov taxed the American citizen while giving large corp, rich folks and financial institutions tax breaks. They say the market needs “confidence” ie they say we need to “trust” the market again, NEVER! It will take decades before teachers, nurses, auto workers, steal workers, firefighters, police officers, etc trust retirement acc or stocks markets again.

Thanks Selise,

I will post here more frequently.

regards,

dean

As an aside, I’ve had tracks from the band X on a continuous play loop while this discussion has been going on. Every time “The Have Nots” comes up, I feel like this article has a soundtrack.

… full of economic wisdom and the comedy stylings of Dean Baker.

that clinches the sale.

thank you!!!

McLame…dont know much about economics

http://www.youtube.com/watch?v=_OunCv-7qvA

We would like that very much.

Ah, home equity. How many people have that now? Remember all those commercials that inticed homeowners to remortgage so they could take that vacation they always dreamed of, buy that boat they always wanted, pay for your kids college or better yet, how about that commercial that said buy the things your grandkids always wanted and showed an elderly African American woman pushing a child in a swingset. And lets not forget to mentioned those reverse mortgage commercials and how many elderly will not be willing their homes to their children when they die? Just more ponzi scemes if you ask me.

But his son is in the financial biz and was hired to help a bank through bankruptsy last spring or summer. He has a front seat to this financial crises through his son.

That is the way it works in Canada. Single payer covers all of the basic health care provided. Premiums paid by each individual/family is based on the previous years net income. The rich go to the US when they want to avoid waiting in line. Or, they go to one of the few private clinics that exist in Canada. The Federal gov’t pays 50% of each province’s medical costs. The Provinces and Territories pay the other 50% through the premiums. The governments negotiate fees to doctors, etc. There are no user fees and no denials for preexisting conditions and no yearly limits on care.

The system works because insurance companies are kept out; no middleman driving up the cost.

Andrew K. McCain, a son of Republican presidential nominee John McCain, sat on the boards of Silver State Bank and of its parent, Silver State Bancorp, starting in February but resigned in July citing “personal reasons,” corporate filings with the Securities and Exchange Commission show. Andrew McCain also was a member of the bank’s audit committee, responsible for oversight of the company’s accounting.

Silver State Bank ran into difficulty because of a substantial amount of “poor-quality loans primarily related to real estate development” in southern Nevada and other distressed markets, FDIC spokesman David Barr said.

http://www.cbsnews.com/stories…..2652.shtml

“Twenty-five people at the heart of the meltdown …
The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part. In the second part of a week-long series looking behind the slump, Guardian City editor Julia Finch picks out the individuals who have led us into the current crisis”

http://www.guardian.co.uk/busi…..ls-economy

Thanks Bluebutterfly…very helpful to have the specifics on a topic usually subject to generalities.

Ah, home equity. How many people have that now? Remember all those commercials that enticed homeowners to remortgage so they could take that vacation they always dreamed of, buy that boat they always wanted, pay for your kids college or better yet, how about that commercial that said buy the things your grand-kids always wanted and showed an elderly African American woman pushing a child in a swing-set. And lets not forget to mentioned those reversal mortgage commercials and now many elderly will not be willing their homes to their children when they die. Just more ponzi schemes if you ask me.

You’re welcome..

“A January 19 episode of BBC One’s Panorama, the world’s longest running television documentary show, tackles the dismal state of health care in the United States, the lengths to which its estimated 45 million uninsured citizens will go to in pursuit of care, the pharmaceutical industry’s rigged pricing against the American patient, and the insurance industry’s efforts to deny care whenever possible.”

http://rawstory.com/news/2008/….._0125.html