To send money is not to spend money
Robert Waldmann
Atrios vs Bernanke.
OK so I agreed with Atrios about Greenspan (just below). Now I disagree with him about Bernanke. He equates loans with gifts. He equates worse than optimal with worse than nothing (dealing with free market fanatics can cause one to overlook the difference).
Bernanke could have sent money from the Fed’s magic money machine in all kinds of ways. They could have paid down mortgages. They could have put money in my bank account. They could have given it to state governments. What they did was prop up a failed banking system, and the worst failures of the failed banking system, under the premise that capital misallocating financial intermediaries were necessary for a stable economy.
Note the unusual usage “sent money.” This is not a typo. Atrios did not hit the p too gently meaning to type “spent,” because the Fed did not spend money bailing out the banks. It loaned money, guaranteed loans and guaranteed assets. If they put money in Atrios’s bank account, full stop, then they wouldn’t be able to get it back. A loan is not a gift.
The latest estimate I saw of the cost of the bailout to the Fed was Negative $ 125,000,000,000.
I also think our experience with Lehman shows that, in the short run (which means until congress acts) bad banks run by incompetent greed heads are better than no banks. But in any case, even if you think we would be slightly better off if they had all gone bankrupt, $125,000,000,000 is a nice chunk of change.
update. However, I remembered incorrectly. The estimate was a profit of $ 115,000,000,000 via Barry Ritholtz who was not convinced. Close but no cigar. I mean ten billion here ten billion there and soon you’re talking real money.
Total delirium after the jump.
Here I think part of the problem is that, like most Americans, Atrios rejects socialism. If The Fed could make a killing intervening and saving banks, it could make a killing most years. Does that mean that a mostly private financial system is inefficient compared to one where the Federal government bears more risk and pockets the risk premia ? Sure it does. Wouldn’t that be public ownership of the means of production, that is socialism ? Yes. Am I saying that Bernanke and Paulson proved the superiority of a shift towards socialism (not all the way to nationalized popsicle stands). Yes I am.
I think that TARP is one of the best programs ever, and, if we were half rational, would be our first step on a path that leads part way to socialism.
Robert, where’d you get that $125 billion number?
And of course socialism often works quite well.
The Greeks agree!
Ambrose Evans-Pritchard sums up the problems with the way the Federal Reserve propped up banks:
“The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.
“The error was for the Fed to buy the bonds from the banking system … rather than going straight to the non-bank private sector. … The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell”.
Back to the post:
“Does that mean that a mostly private financial system is inefficient compared to one where the Federal government bears more risk and pockets the risk premia ? Sure it does”.
Well, that takes me back to my old post of Feb. 2009 on why the US needs a Govt. bank.
Would Andrew Jackson agree?
We don’t have a legitimate socialist movement in the United States. The closest thing to it are liberal keynesian inclined democrats. But their policy like in the great depression is screwing up. State controlled keynesian polies don’t work well. We need a new dose of reaganomics with its tax and regulation cuts.
In the face of their failure the keynesians (such as Paul Krugman) are telling us we need to double down on their failing policy. The logic is that since its not working do more of it and do it more intensely. Hopefully a large chunk of congress that think this way will be gone after the next election.
Here is an immediate way to increase GDP and jobs. Open up the east and west coast to offshore drilling and do the same with ANWR. Go through every corner of this country and look for inefficient government regulation and either terminate it or replace it with regulation that is less in the way. This way works. The keynesian way does not.
Non-sequitor therater presents: Owl!
Well first I remembered it wrong. The number I missremembered is 115 billion. It is an official estimate of Fed profits from its rescue efforts. It is discussed here by Barry Ritholtz who is not convinced
http://www.ritholtz.com/blog/2010/04/declining-bailout-costs-or-bad-math/
I am quite serious in arguing that the Federal Government should bear more risk. Risk bearing is called ownership, so I am advocating partial public ownership of the means of production — that is (partial) socialism. I the the Federal government should issue more bonds and buy, say, 5% of all common stock and corporate bonds issued in the USA. What is undiversifiable risk for you and me is an automatic stabilizer if born by the Treasury so this would be good policy even of those assets paid the same returns as Treasury securities. Since they pay much higher yields, this would be, in my view, a more than trillion dollar better than sure thing. Also it would be (partial) socialism. I advocate partial socialism. I am absolutely serious.
The stimulus bill was followed by the most rapid increase in GDP growth from one quarter to 2 quarters later since 1980. The by the most rapid increase in GDP growth from one quarter to three quarters later. Such a turnaround was not seen since Carter was president. To be clear, the turnaround from the recession which started in Reagan’s first year to the expansion was not as dramatic. These are simple official numbers. More sophisticated analysis supports the simple calculation. If you aren’t convinced by 2009 that Keynesian stimulus can work, then you just can’t be convinced by evidence.
We tried tax cuts and deregulation. Those were Bush’s policies (the deregulation also via bills signed by Clinton). Any sane person can see that this approach lead to total disaster.
On the other hand, exactly what did Reagan deregulate ? I claim he deregulated nothing. I think that, in your utter ignorance, you are claiming that regulations removed by bills signed into law by Jimmy Carter were removed by Reagan. Come on, try to name an aspect of Reaganite deregulation. He cut taxes and didn’t cut spending and ran up a huge debt (like Bush). He did not massively deregulate finance like Bush (and Clinton). The result was mediocre growth (worse than that under any Democratic president in my lifetime except marginally better than under Carter) but at least it wasn’t a huge catastrophy.
I might be making a fool of myself. I am responding to your comment on the assumption that it was not a joke. I began thinking of my response before reading to the end. Now that I read that you claim that your view, post Deepwater Horizon disaster, is that there were too many restrictions on offshore drilling when the Macondo well was drilled, I feel almost certain that you must be joking. I find it hard to believe that anyone could be so out of touch with reality to argue that there was too much regulation of offshore drilling back when BP was allowed to inflict so much damage in an effort to save a million here and a million there.
So lets take the SS trust fund and invest it in stocks then.
Actually, Reagan raised taxes, deficit spent like crazy, and we recovered from one of the worst recessions since the great depression. A double dip recession.
So tell us about that little dam that burst, which was controlled by that government agency called the TVA. Ah yes selective memory.
Meanwhile here in Baltimore the violence escalates every day, the poverty continues, the schools are horrid. Your team and policies are in charge.
Democrats and Republicans are so inept, and the whole country is blind to it.
The Great TaxerBy PAUL KRUGMANPublished: June 8, 2004
http://www.nytimes.com/2004/06/08/opinion/the-great-taxer.html
my favorite part from theKrugman piece:
I did not and do not approve of President Reagan’s economic policies, which saddled the nation with trillions of dollars in debt.
But now, Krugman LOVES deficit spending. IN fact he feels we need to increase it even more. SOmehow this recession is different.
I have long advocating doing exactly that mcwop.
This recession is different because the feds target rate for the federal funds rate is 0-0.25%. Krugman argues that deficit spending is completey different depending on whether the economy is in a liquidity trap or not. He argued this in the 90s advocating deficit spending in Japan. I absolutely assure you that Krugman is being perfectly consistent. There is no need to consider which party is in power to predict that he would advocate deficit spending in this recession and oppose it in 81-82.
“this recession is different” because the interest rate is 0.25% not 15%. Krugman has explained his views dozens of times. For you to suggest that he is inconsistent is for you to demonstrate that you are willing to argue from complete ignorance and criticize someone because, you claim, he can’t explain something he has explained very clearly dozens of times.
I might add that I understood this on my own (with reference to the 30s) before I took my first economics course. To be frank, the fact that you write “this recession is different” with obvious sarcasm makes me think that you are not very bright. It’s obviously different. In 2006 I would have said that any idiot can understand the difference, but it is clear that I underestimated the depths of human idiocy.
I take the issue to be rewarding bad actors while ignoring other useful socialist investments, like bridges and teachers and super trains…
I think TARP purcheses of preferred shares from banks were wonderful, because we kept the financial system functioning and rewarded bad acters and made a profit. There is no need to choose between that program and spending on bridges teachers and super trains. That program means more money is available for bridges and teachers and super trains.
Now there was also the bailout of Fannie Freddie and AIG so the over all rescue might come out as costing more than zero (I very much doubt it but it is possible). But helping nasty people while helping oneself is gaining from trade. In no way did TARP reduce the ability of the US Federal Government to spend on teachers and trains. We know that because interest rates n 10 year treasury bonds are tiny. The problem is idiots in congress and not TARP.
Now I think the program could have been much better. Here in comments I am not restrained and I note we had the bankers by the balls. I think we should have squeezed until they coughed up most of their ill gotten gains (and I mean their personal money from old bonuses not just new bonuses). This would have been just as good on average, better for almost all Americans and worse for super rich people who made money in banking — like Hank Paulson. I wonder why he didn’t do it (actually seriously I don’t think it was self interest I think it was ideology).
Japan has deficit spent like crazy, by your logic they should have the boomingist economy ever. They have gone from a debt to GDP ratio of 50% in 1989 to about 200% now.
And since you have instituted a new spending, rule for recessions, what is the interest rate at which the government should not deficit spend?
Again, democrats and republicans are ruining this country with failed policies.
So this recession is different than Reagans, but the same as FDRs. And the same as Japan’s.
Kyle Bass: I think the big canary in the coalmine is Japan. When you see how Japan has lost 20 years of their prosperity from 1990 to today, you see what happens when a government steps in and runs giant deficits to make up for the private market place pulling back and attempting to deleverage.
So what we’ve seen around the globe in the developed world, bad private assets are moving onto public balance sheets. Sovereign balance sheets have expanded 86% from pre-crisis levels of debt. If you extrapolate that from the beginning levels of debt, many of these countries around the world won’t be able to service their debt. So I think in the next 2-3-4 years you start to see
significant defaults.
http://globaleconomicanalysis.blogspot.com/2010/01/no-way-out-for-japan.html
If you invest the SS trust fund in private sector stocks, don’t you then have a Sovereign Wealth Fund (SWF)?
SWF’s were punished along with everybody else in the GFC – see here, which estimates a loss of 20% by SWFs from 2007 to early 2009. The linked article also points to reduced deposits by Sovereigns in SWFs recently. All of this might well be a problem for a fund which has to pay a “dividend” to retired people regardless of the state of the markets. Existing SWFs don’t have to do this.
By the way, several US States already have SWFs (Alaska, Wyoming, New Mexico) – see the Wikipedia article (which was also where I found the article on the GFC impact linked above).
Anyone else remember the early commentary re: the stimulus? The Govt might just as well give the total stimulus away as direct payment to citizens. In Robert’s analsysis the GDP would have sky rocketed. In reality, it would have gone up even more than what we have seen today.
Anyone remember the commentary re: the Bush simulus package? The left/Dems said we, the US, would be better off by investing in capital improvments, infrastructure. Well, we’ve tried both party’s approaches. Which was the better?
Which environment do you think is better for the US economy? One in which the foundations of our economic system, capitalism and businesses are under unending attack and discredited, or one in which those same economic foundations are supported and credited? Which approach is better for creating jobs by expanding those job creating businesses?
I’ll sit over here by the sidelines waiting for an explanation. Oh, to save time I’ll state your number one argument for you: “It was Bush’s fault.”
I need to apologize for being so surly last night. I was in a very grumpy mood, and that never lends to good discussion.
I have wondered whether it may be at some point that the Fed will make direct purchases in the equities markets to prop up prices in the event of a calamitous fall. I think that violates the Fed’s charter, but it has been argued that some of the assets on the Fed’s current balance sheet do that also. Fed-held equities could be swapped for new Treasury bonds. Perhaps your proposal will come to pass.
Glad you agree Corev.
Oh…and don’t forget Darth Cheney too!
Robert,
If you put an end to offshore drilling we lose jobs. If you don’t and expand it we gain jobs. Its not a joke. On the other hand the current administration and their policy is a joke. The recovery summer? Unemployment below 8 percent? (should be below 7 now according to leftwing forecasts).
Smart policy does not try to manage the economy. Rather it creates a positive business environment and lets private personal incentive lead us to economic growth. Socialist don’t get this. They picked the wrong horse to back. It time again for the conservatives and independents to sweep them into the dust bin.
I notice that New Economic Perspectives From Kansas City has a post on this.