Relevant and even prescient commentary on news, politics and the economy.

The result of taxpayers’ financial bailout of GMAC

Linda Beale announced her return to blogging after the death of her husband here.   (Dan here…Welcome back to blogging Linda.)

by Linda Beale

The result of taxpayers’ financial bailout of GMAC

GMAC, as most of you likely know, was General Motors’ financial group.  GMAC had originated as a means for the auto company to support the market for autos through its wholly owned lending group.  But as with most corporate enterprises, it outgrew its origin, reaching near-collapse after becoming heavily involved in the residential mortgage securitization business and subprime loans.  It was transferred to a hedge fund in 2006, and ultimately required rescue by the government’s bailout program in the 2008 financial crisis.  Why was GMAC bailed out when other mortgage lenders were not?  The government wanted to save the auto lending business, so “auto czar” Steven Rattner says, the rescue of GMAC was necessary in that “the governmant had to act quickly and there wasn’t enough time to untangle GMAC’s mortgage unit from the auto lending business.” U.S. Taxpayers Earn Profit on Ally, as Treasury Cuts Stake, Wall St. J., Oct. 21, 2014 at C4.

GM, of course, ultimately established a new financial arm related to its auto business, and that company has acquired some of the GMAC’s successor’s businesses around the globe.  See, e.g., GM Financial to Benefit from Wall Street Upgrade, Sept 24, 2014.

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About that “State and local governments are closer to the people” thing …

Indeed, they are; state and local governments are closer to the people.  It’s just that the people they’re closer to probably aren’t, well … you. So, here’s a question: Why isn’t, say, Kay Hagan, who’s running against the Speaker of the State House*, or Charlie Crist, who’s running against Florida governor Rick Scott, um, mentioning this in their campaigns?

Beats me, although it may actually be that they don’t know about this, since apparently the news media in these states and the other six that have enacted similar laws hasn’t bothered to report it. It’s part of what I now think of as vacuum-packed politics, in which only the Republicans ever say anything, and in which for nearly six years now we’ve had a Democratic president who doesn’t trouble himself to respond to falsehoods about policy, or ever actually educate the public about, like, anything. Normally, I would expect the president to, for example, inform the public that, as the New York Times puts it in an editorial today, complaining about the self-defeating cowardice of most of the Democratic Senate candidates in “red” or “purple” states, that the reason he has not imposed a ban on travel to this country from “African countries with Ebola cases [is that] most public­health experts say such a ban would be ineffective and could make the situation worse.  But I don’t expect that, because this president just plain doesn’t do explanation to the public.  It’s pretty difficult for a senator or Senate candidate to educate the public about something of this sort, but it would be very easy for the president to do that.

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Jim Bruce on Future Fed policy… Fed rate not rising next year

By way of the show Boom-Bust, we have an interview with Jim Bruce on the future of Fed Policy. (interview starts at 14:40) He does not see the Fed rate lifting off next year. He does not see easy Fed policy avoiding an economic downturn. He says Fed has been unable to generate inflation at the CPI level.

I agree with everything he had to say.

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Fisher Effect in Econoblogosphere again

Interest in money growth

John Cochrane is developing a model for the Fisher Effect to explain that raising the nominal central bank rate could lead to higher inflation, not lower inflation as many say. Nick Rowe complements the model with a simpler “model”. And Steve Williamson has been an ever-present force for the Fisher Effect. I too have written about this before (link).

I also wrote in June (link) that the extra loosening of monetary policy by the ECB in Europe would be a test of the Fisher effect. Since June, we have seen inflation expectations continue to fall, which supports the Fisher Effect.

Once you realize that firms hedge against extra funding costs by raising prices as I see, and that a rise in the nominal rate is a rise in the money growth rate as Nick Rowe explains, and that coordinated fiscal-monetary policy produces the Fisher Effect as John Cochrane sees… then you see why nominal rates should not fall but rise in order to raise inflation.

Raising the nominal rates by central banks would also increase consumption. John Cochrane and Nick Rowe talk about this.

  • John Cochrane…”In the meantime the higher real interest rates (green) induce a little boom in consumption. So, raising rates not only raises inflation, it gives you a little output boost along the way! “
  • Nick Rowe… “Now remember the relationship between consumption and real interest rates from the standard New Keynesian Euler equation. There is a positive relationship between the level of the real interest rate and the growth rate of consumption.

I presented a video one year ago here on Angry Bear in response to a post from Nick Rowe that talked about how consumption would increase from a rise in nominal rates. The video gave a model of a bifurcated money market between labor and capital where lower interest rates were causing bond prices to rise, inflation to fall and GDP to fall. The bifurcated money market is due to the divergence in money supply between labor and capital income after the crisis. The model supports what Cochrane and Rowe say about a boost in consumption from raising interest rates.

We have had an environment that greatly favors the Fisher Effect to raise inflation and consumption by raising nominal rates… but I think time is running out has run out on this option.

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Increasing productivity by cleaning out low-productivity firms

In the Solow Growth Model, productivity is a powerful factor for raising income per person in a country. So it is important to maintain productivity growth if a country would like to have economic growth.

I have written recently that there are ways to discipline the market in order to achieve greater productivity and thus greater net social benefits. We could raise the minimum wage or raise the Fed rate. What would the result be? Low productivity firms get cleaned out leaving high productivity firms still in business.

There is a post at the Growth Economics Blog on this very issue. The post refers to a paper titled, Reallocation in the Great Recession: cleansing or not? The paper says that low productivity firms normally get cleaned out during a recession, which allows productivity to increase after a recession. But that didn’t happen after our recent crisis. So there is evidence that low-productivity firms are still in business.

So why didn’t low-productivity firms get cleaned out this time? As the Growth Economics Blog’s post says…

“The authors don’t offer an explanation, as their paper is just about documenting these changes.”

Well, some of the answers to this question are simple. If you keep real wages low, low-productivity firms have a better chance to survive.

prod real comp

This graph uses show real compensation (blue) and productivity (red). From the graph, we see that this is the only business cycle so far where real compensation has not risen. You can also see a correlation between productivity and real compensation. By the way, productivity rose greatly back in the 50’s and 60’s, and look how steadily real compensation grew through the recessions back then.

Then we can look at the Fed rate.

fed rate fred

This is the only business cycle where the Fed rate has not risen to challenge low-productivity firms. Productivity has a delayed response to an increase in the Fed rate due to a subsequent process of cleaning out low-productivity firms, usually in a recession.

One would think that if the Fed rate was truly tight for market conditions, we would have seen more low-productivity firms get cleaned out. But the continued existence of relatively more low-productivity firms supports the view that the Fed rate has not been tight and therefore not disciplining low-productivity firms.

Also the banks want low-productivity firms to stay alive because the banks are protecting their own capital ratios.

So these two processes of challenging low-productivity firms, higher real wages and a rising Fed rate, have been excessively weak so far in this business cycle. The result is a weaker economy.

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Anyone got a number? For ‘Real Debt Service of Public Debt as % of GDP’

And this is an honest question, one that I have been poking around in but maybe don’t have the chops to answer.

Lets take three measures of Public Debt:
One nominal. Public Debt as of the 16th was $17.899 trillion. And rising.
Two as percentage of GDP. And BTW the preferred measure of deficit fetishists prior to the blowup in R-R, but still active enough. Well depending on whether you take Total Public Debt or its major component Debt Held by the Public this ratio is either close to 100 or 70 depending (top of head, please insert real number.
Three when measured as debt service as share of GDP.

Now I would argue that this last measure is the right one for measuring ‘sustainability’ of debt. For one thing it is generally the measure used my most households and corporations because it directly effects cash flow, and for most people Cash is King. Take the following thought experiment:

I have borrowed a billion dollars at zero percent interest on an interest only loan with no term. Is that borrowed money actually to be considered ‘debt’ if it costs nothing to hold it and never has to be paid back? Well lets just say that it is an odd kind of debt. Now obviously no one is going to loan me a billion on those terms but increasingly people are effectively offering something close to that to Uncle Sam. That is the real rate on the 10 year is at or even below the zero bound, in effect people are paying the U.S. to hold their money for them. On the other hand there are still older issues of the 10 year and longer notes and bonds that are carrying higher yields and so there is actual debt service. But how much of that is real? And what is the percentage of federal revenues and/or GDP going to that? Because this is a harder number to come up with than you might think for a couple reasons.

One, most debt service on the Intragovernmental Holdings component of Total Public Debt is not financed in real terms, instead it is just credited to various Trust Funds and shows up as an increase in Debt. But mostly not as an expenditure.
Two, a good deal of debt service on the Debt Held by the Public component of Total Public Debt is being paid/credited to the Federal Reserve. Which in turn returns any ‘profits’ to the Treasury. To me it is an open question as to whether debt service actually paid to the Fed should count as ‘Real Debt Service’ at all. Which is why I posed all this as a question.

Has anyone actually taken the ‘Interest on the Public Debt’ figure and related it to the actual budget line items for ‘Debt Service’ and then adjusted THAT for such debt service actually paid to governmental and quasi-governmental institutions? I have been meaning to make an attempt at doing this myself but have run into problems of time and expertise. But the question still remains: in real terms how close is the U.S. Treasury to being in the same position as my theoretical borrower with a no term billion dollar zero interest rate interest only loan? Not all that close maybe but the answer is far far away from most people’s assumption of what it means to carry $17.9 trillion in debt.

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U.S. median wealth up from 27th to 25th

Yesterday Credit Suisse released its Global Wealth Databook 2014 to go along with the Global Wealth Report issued Monday. Global wealth hit another new record of $263 trillion as of mid-2014, up 8.3% from mid-2013 (Report, p. 3). Rich people are doing well, but how about the middle class? One measure of this is median wealth per adult, the exact midpoint of the wealth distribution.

In the United States, mean wealth per adult reached $347,845, and median wealth per adult hit $53,352 (Databook, Table 2-4). This represents an increase in median wealth of 18.8% over 2013, enough to move the U.S. up two places to 25th in the world.

Before we congratulate ourselves too much, we need to remember that $53,352 is not all that much money, especially for retirement (don’t forget that figure includes home equity). With 49% of Americans in the private sector having no retirement plan at all, and only 20% having a defined-benefit pension, a retirement crisis is looming for younger baby boomers and all later middle-class retirees. Meanwhile, if Republicans take control of the Senate in this year’s elections, we are likely to hear increasing demands for cuts to Social Security, when what we actually need is to raise Social Security benefits.

The relatively low median wealth also points to persistent inequality in the United States. While only 25th in median wealth per adult, the U.S. ranks 5th in mean wealth per adult. With a ratio between mean and median wealth per adult of 6.5:1, this is higher than any of the other top 25 countries. Number one Australia has a ratio of less than 2:1. Without further ado, here is the list of all countries with median wealth per adult above $50,000.


Median wealth per adult, mid-2014


1. Australia                  225,337

2. Belgium                   172,947

3. Iceland                    164,193

4. Luxembourg            156,267

5. Italy                         142,296

6. France                     140,638

7. United Kingdom     130,590

8. Japan                       112,998

9. Singapore                109.250

10. Switzerland           106,887

11. Canada                    98,756

12. Netherlands             93,116

13. Finland                    88,130

14. Norway                   86,953

15. New Zealand          82,610

16. Ireland                     79,346

17. Spain                       66,752

18. Taiwan                    65,375

19. Austria                    63,741

20. Sweden                   63,376

21. Malta                       63,271

22. Qatar                       56,969

23. Germany                 54,090

24. Greece                     53,375

25. United States          53,352

26. Israel                       51,346

27. Slovenia                  50,329

Source: Credit Suisse Global Wealth Databook 2014, Table 2-4


Cross-posted from Middle Class Political Economist.

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NOTE TO COLORADANS: You can get virtually identical insurance on your state’s Exchange—and continue to receive the same subsidies to pay the premiums that you received THIS year. Really.

More than 22,000 Coloradans were informed in the past month that their health coverage will be canceled at the end of the year, state insurance authorities disclosed this week, a spike in cancellations already roiling the state’s fierce campaigns for the Senate and governor’s seat.

Republican Rep. Cory Gardner, who’s running to unseat Democratic Sen. Mark Udall, pounced on the news as evidence that Obamacare is disrupting coverage for Coloradans and that Udall, who voted for the law, shares in the blame.

It’s unclear, though, if Obamacare is the reason for the latest wave of canceled plans. The cancellations are nearly all the result of a decision by Humana, a major national insurance company, to cancel offerings for people who buy health insurance on their own. About 3,800 were the result of financial instability at a smaller insurer, SeeChange, which offered plans to small businesses.

The sudden surge, however, comes at an inopportune time for Democratic Gov. John Hickenlooper and Democratic Sen. Mark Udall, both of whom are fighting for their political lives and have been staunch defenders of the health law. Hickenlooper was one of just more than a dozen governors to build a state-run Obamacare exchange last year.

It’s unclear why Humana canceled policies that covered nearly 18,000 people, but the company is participating in Colorado’s exchange this year, offering plans to consumers who live in Colorado Springs and Denver. Although many insurers have canceled plans that fail to meet the minimum standards of Obamacare, Colorado insurance officials noted that Humana had the opportunity to continue its offerings through 2015. Plans may be canceled for many reasons besides failure to comply with Obamacare, too, they noted.

Health cancellations ripple in Colorado, Kyle Cheney, Politico, today

Hmm.  I no longer expect any Democratic candidate for anything–okay, I can think of three, but only three, exceptions: Gary Peters and Mark Schauer in Michigan, and Kay Hagan in North Carolina–to actually respond clearly and directly on-point to this kind of stuff.  But Udall and Hickenlooper could, theoretically, surprise me by pointing out, first, that almost certainly a high percentage of beneficiaries have been able to afford that policy because of the federal subsidies courtesy of the ACA, and, second, that every single one of these folks will be able to get a similar policy, through the Exchange–and receive the same financial assistance via the ACA that they received this year.

Udall and Hickenlooper won’t, of course, point out these things.  Nor, I guess, will the political-news media, which also could, theoretically.  But I thought I’d mention these theoretical possibilities, anyway.


UPDATE: I just thought of a fourth one: Bruce Braley of Iowa.

SECOND UPDATE: And Rick Weiland of South Dakota!  He’s running aggressively as a liberal.

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I predict that the Supreme Court will grant the emergency petition in the Texas voter-ID case, and reinstate the district court’s stay of enforcement until after the November election.

I predict that the Supreme Court will grant the emergency request in the Texas voter-ID case, and reinstate the district court’s stay of enforcement until after the November election. Which, best as I can tell, makes me a minority of exactly one.

I don’t have time to elaborate much, but I did address pretty thoroughly last week, in this post, what’s become known in the last 10 days or so as “the Purcell principle”–the key legal issue regarding these emergency stay requests to the Supreme Court in all of the voter-access litigation,  as, in my opinion, it should apply to the Texas case.

Summarizing quickly why I think that the Court will stay the Fifth Circuit Court of Appeals’ stay of the district court’s stay of enforcement of the Texas voter-ID law:

  1. The Purcell principle cannot possibly justify the disenfranchisement of otherwise-eligible voters—and the voter-ID litigation has now, finally, broken out into mainstream media, and consequently the public’s, consciousness.  I think there is a limit to the extent to which the Court is willing to advertise its overt partisanship, and in this instance it would serve no real Republican purpose.  There aren’t any major races in Texas that are close enough for this to swing the election to the Democrats.
  1. Last week, in the Wisconsin voter-ID case, six justices voted to stay the Seventh Circuit Court of Appeals’ stay of the district court’s stay of enforcement of that state’s voter-ID law, thus halting enforcement of the statute in the upcoming election.  But three justices—Alito, Scalia and Thomas—dissented, citing a technical Court-created procedural nicety that they thought was violated by the majority’s issuance of the stay of the stay.  In the Texas case, however, that very procedural nicety would require that the Court stay the appellate court’s stay of the district court’s stay.  (Got that?  Of course you do!)

Okay, by tomorrow at this time, I probably will be in need of orthopedic surgery to repair those bones I broke when that tree limb I just climbed back out on snapped.  We’ll see.

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