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Three Charts in a Tangle: What Lending?

UPDATE: Credit where due category: H/T to Felix Salmon for pointing to this chart at, which gives you borrowings relative to GDP.

I often hate line graphs, especially when they include outliers that skew the axis, making it virtually unreadable. (This may be a result of seeing several papers this semester with Chilean/US$ exchange rates on a graphic from ca. 1970 forward.)

But this objection is because the historic outlier smoothes the view of current data. It doesn’t apply when you’re living through the outliers. And now that NBER has called the start of the recession, let’s look at some of the evidence. The following three graphics are of two serieses from the Fed’s H.3 Aggregate Reserves data, available from FRED.

First, let’s look at the longest period possible, January 1929*-November 2007:

The Very Noticeable post-WW II increase of the Blue Line (Excess Reserves) is September, 2001. I think we can generally agree that the two-week period in the middle of the month during which very little shopping was done may have had something to do with it.

The rather high (per this graphic, defined loosely as > US$2B) Depository Borrowings are generally May to November of 1984 and April to November of 1988. Whether these have anything to do with the election is left as an exercise. (The pattern is not repeated in 1992 or later.) There are other noticeable high periods—basically, the last months of Richard Nixon’s Presidency (May-Sep 1974) and a few months scattered from October 1979 to June of 1981, and a couple of subsequent outliers, but the Borrowings are generally below US$2B for the month until December of 2007.

Now let’s look at the current century, January 2001-October 2008:

What was a noticeable Crisis Point on the previous graph is now a small bump in the road to Reserve Hell. The scale for Borrowings has gone from peaking at US$9B to US$700B. The scale of Excess Reserves has gone from peaking around US$20B to US$300B—all during the period since the Recession started.

And, just because I’m a cruel person, let’s zoom in on the Recession itself: the past thirteen months of data, October 2007 – October 2008:

The scariest thing about this graphic is the reason it’s on two axes. Note that it is even clearer from this graphic the borrowings from the Fed are far in excess of the Excess Reserves. (Don’t let the narrowing fool you; the slope of the scale of the Borrowings is condensed much more than the scale of the Reserves.

In fact, if we look at the data, December 2007 is the point at which Borrowings first exceeds Reserves. A semi-helpful graphic of the difference:

For October and November, there are over US$1B more Reserves than there are Borrowings. We would be able to see that, except that in December of 2007 there are US$13B more in Borrowings, by April of 2008 the number exceeds US$100B, and it has basically been increasing ever since.**

There may be a few institutions out there lending, but they appear to be doing it primarily with borrowed funds.

*Month chosen because that is where the Excess Reserves data starts being measured. Depository Borrowings starts in 1919.

**There is a slight decline from June (ca. 169) to July (ca. 163.7), possibly due to tax rebate processing; by September, the excess is over US$200B and it soared in October to over US$380B.

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Taxation’s Rhetoric: Today and yesterday’s economic crap

by: Divorced one like Bush

In a posting regarding which presidents would be considered socialist I found the following curious:
1921 – 4% 73% Census
1922 – 4% 56% Census
1923 – 3% 56% Census
1924 – 1.5% 46% Census
1925-1928 – 1.5% 25% Census
1929 – 0.375% 24% Census
1930-1931 – 1.125% 25% Census

1982-1986 12 brackets 12% 50% IRS
1987 5 brackets 11% 38.5% IRS
1988-1990 3 brackets 15% 33% IRS
1991-1992 3 brackets 15% 31% IRS

2001 5 brackets 15% 39.1% IRS
2002 6 brackets 10% 38.6% IRS
2003-2008 6 brackets 10% 35% IRS

Notice anything about these 3 groups of income tax rates? No, I’m not suggesting that the lower rates are the smoking gun of today’s economic crap. Don’t want to run afoul of those scoldings of association is not causation critiques. But, do you not find it just a bit curious that approximately 8 years prior to an economic troubling time we get talked into reducing that tax rates? Three periods in history, all preceding an economy of crap. Varying degrees of crap, but crap just the same. We even had a housing bubble for 2 of them!

None of these tax changes can happen without convincing. A dialog has to have happened to convince the people that it is a good idea. And, I bet that the rhetoric of tax reduction is only part of a package regarding the overall idea of what is best to “grow the economy”. I bet, that tax reduction presentations have never been presented as a stand alone, single issue, unrelated to accomplishing a larger money shift. Being that we are relating today to the Big One, while at the same time hearing muttering that we are in “new territory”, my Angry Bear side asked: What else is similarly presented in the 20’s as part of a sales job of an over all ideology that preceded today’s and yesterday’s crap?

Installment Sell

Manufacturers realized they could expand their profits if they could grow their markets and so installment selling was introduced. The increased production volumes reduced the unit cost of items making them more affordable, and easy terms made for easy sales.

There is a reprint of an article specifically looking at the pros and cons of credit purchasing. Rather fascinating reading.

PAYING FOR THINGS ON “EASY” TERMS has become such a conspicuous element in American life, and so large a factor in our prosperity, that the economists have been doing a great deal of worrying about it. Source: The Literary Digest for March 5, 1927

Sub-prime anyone? Oh, did you notice that it was a concerted effort to sell the consumer that installment purchasing was good? I wonder if blaming the consumer for spending what they did not have was part of the discussion when the economy turned to crap then?


Christmas distribution of bonuses in Wall Street, when finally added up, is expected to prove the most generous ever made except during some of the flush World War years.

No accurate account of sums paid out can be made, according to the New York Times, because many firms do not announce their benefactions, but last year’s total was estimated at $50,000,000, and it is expected that the Wall Street firms paying bonuses are being no less generous this year. In fact, some firms which have never paid bonuses will start the custom this Christmas. Probably the largest distribution, we read, is being made by banks, which have been exceptionally prosperous.

Converting that $50 million we get various amounts: $586 million via CPI, $494 million via GDP deflator, and (drum roll please), $1.999 million via unskilled wage factor.

There was one perspective that was not accurate in their prophecies for America:

America has played square in China, and will have an inside track in China against the commerce of other nations.
China buys one billion dollars worth of outside goods every year. But that’s only, a drop in the bucket compared with what this customer may buy some day. “When the per capita foreign trade of China,” runs one government report, “is equal to that of Australia, the total will be sixty-five billion dollars a year which China will pay to the outside world for her imports.
“You can’t help seeing American business grow in China,” a business man from China told me. “Why, it has multiplied itself by four within the past dozen years. It’s eight times bigger than it, was thirty years ago.

The inaccuracy? The quotes are from a perspective of the American selling to China, not from China. And you thought Nixon opened up China.

Getting back specifically to the tax reductions, this web site offers a lot: The Tax History Museum
From reading the site, it appears a progressive tax system was put in place for the WW I war effort. They even put in a munitions tax to “appease” opponents of American involvement in the war; levied on manufacturers of military equipment, it was designed to prevent war profiteering”. There was an “excess profits” tax put in place which appears to be what the later progressive income tax became. Arguments for it were as today: equality. Against it:

It attracted bitter opposition from business groups, who considered the tax a threat to managerial prerogatives. They were certainly justified in their suspicion, since both Wilson and his allies in Congress considered the levy a legitimate means of business regulation.

Well slap me silly! A tax used to curb the excess of business. I hear some of you saying: Excessive CEO compensation regulation please?

After the war, the argument was that such high rates were “unsustainable”. It was the party of today’s tax cuts who yesterday cut the taxes:

Republican lawmakers joined with a series of GOP presidents to engineer tax cuts in 1921, 1924, 1926, and 1928. Andrew Mellon — who moved into his Treasury office in 1921 and stayed their until 1932 — was the principal architect of these reforms.

Certainly some Democratic elected joined in (early Blue Dogs, DLC’s of their time?).

In 1980 we got schooled in the Stockman trickle down theory of economic growth which included lower taxes will raise collections and bolsters economic growth. It was all about cutting taxes by his confession though. So, as I look to find evidence of selling tax cuts as a part of an ideology sell job regarding how an economy should run, such being clues that in the near future we will have economic crap, the following regarding Mr. Mellon’s position just confirms how ignorant we have been in our recent times (post 1981) to have followed those who suggest tax cuts as part of their economic program:

“Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”

Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.”

Can we have been any more stupid, shown our ignorance more than to have taken as a new idea, language regarding taxation’s need to be reduced and it’s effect on filling the government coffers that is as old as almost the day progressive taxation came into existence? Unfortunately, our stupidity has been worse than accepting Mr. Mellon’s similar arguments to those used by Reagan et al suggests. That is because, back in Mr. Mellon’s day he at least understood what Mr. Buffet of today understands but congress and by extension US do not:

Of particular note, he suggested taxing “earned” income from wages and salaries more lightly that “unearned” income from investments. As he argued:

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.

Surely we can afford to make a distinction between the people whose only capital is their metal and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.


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Perception v. Reality

Perception, per the NYT: Fed Leaves Key Rate Steady as It Worries About Growth

Reality: TSLF (Mar 11), PDCF (Mar 16), expanded acceptable collateral pool (multiple times, most recently Monday), loans to the parent from the subsidiaries to cover capital needs.*

And it may not be enough. (Of course it’s an AIG link.)

There’s more than one way to manage monetary policy. And Ben Bernanke is using all of the ones that will not increase aggregate consumer spending.

At least that’s the optimistic view. UPDATE: Brad DeLong appears to disagree. UPDATE II: But Mark Thoma is thinking the same way I did (though he’s much better at the number-sense game).

*I note, strictly for the record, that since this was a New York State, not a Federal, initiative, it may well become illegal under the current Administration’s proposed guidelines for the SEC. If there’s an intelligent reporter out there, maybe they should ask the campaigns whether they oppose Governor Patterson’s actions?

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Fed values Bear Stearns assets at a level where it has only cost them $100,000nothing—so far. (Indeed, there’s a $50,000 “buffer” left.)

Strangely, the scuttlebutt in the market yesterday was that the valuation should be around $24 billion. Or at least that’s how I read this paragraph:

If the portfolio’s value were to drop to below about $24 billion, that could indicate mortgage-backed securities have fared even worse in the second quarter than markets have already reflected, analysts said.

So the Fed thinks the market for those securities is about 23% higher than market professionals were telling Reuters it was yesterday.

If I were a Fed policymaker, and I hadn’t been worying about the TSLF before, I would be now.

via CR

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A Quick One: Inflationary Credit Recession Strategies

Tom’s doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you’d think the CEA was actually the Shadow Government.

So I just want start easy, and take a look at three easy-to-compare data points:
First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):

If you make money easier to get, standard theory says that people will get it. While this raises the “threat” of inflation, it makes credit easier to get as well. So the theory goes.

Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn’t happening. Pull quote:

Friends in the mortgage industry are telling me you have to be “rich” just to get a home loan now.

Even granting I have a vested interest right now in peole being able to get mortgages, this is keeping the market from clearing and expanding the housing crisis. Again, contrary to the theory that easier money means, well, easier to get money.

So we have easier money and tighter credit. The implication is that the banks are keeping that money, no circulating it. No wonder they want to be paid interest on reserve requirements.*

But what about the inflation fears of easier money? Surely, if the money is not circulating, that shouldn’t be a fear?

Not so fast, says Kansas City Fed President Thomas Hoenig (h/t Mark Thoma):

Hoenig said rising inflationary pressures are “troublesome” and a “serious” matter. “The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s,” he said. Hoenig added that “there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.” He tied rising prices primarily to overseas factors, including a “sizable decline” in the U.S. dollar’s value.

Welcome to the Global Economy. But Hoenig is sanguine about the Fed Funds rate, even if he is willing to use the R word:

Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being “at the brink of a recession.” He suggested interest rates were close to where they needed to be.

“The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy,” he said. As the economy and markets improve “it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner.”

Citing “room for optimism,” Hoenig said “financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold.” The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the “credit crunch” hasn’t proved as damaging as some had feared.

So there we have it. We have inflation, but cutting rates was the right thing. And the credit crunch isn’t too bad, even if only the rich can buy a house. And that 325 basis points of easing in the past eight months just hasn’t gotten into the economy yet; give the banks another six months or so.

I feel better; how about you?

*Meanwhile, I am reliably informed that Bank of America just cut the rates on their (currently in place) contracts with consultants by 5-15%, depending on length of service (greater for longer).

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Monetary Policy in America v. Europe: Whatever Happened to Expenditure-Switching?

Sebastian Mallaby writes about how the U.S. Federal Reserve is pursuing easy monetary policy to stimulate our aggregate demand while the European Central Bank is pursuing a tighter monetary policy on the concern that Europe might slip into an inflationary spiral from excessive aggregate demand:

The divergence in approaches on either side of the Atlantic is likely to stoke tensions. Americans resent Europeans for not sharing the burden of stimulating the world economy, forcing them into unilateral action. Europeans resent Americans for blundering foolishly ahead, exacerbating inflation. For years there has been an unhealthy imbalance in the world economy, with the United States contributing disproportionately to the growth in demand and doing too little in the way of saving. The response to the current economic mess increases that lopsidedness. Americans are spending heavily to head off the risk of recession while Europeans close their wallets.

One would think that we were still under the Bretton Woods regime of fixed exchange rates. OK, we might have a Bretton Woods II regime with certain Asian Central Banks avoiding the appreciation of their currencies with respect to the dollar. But as our graph shows – the value of the Euro has been rising with respect to the dollar, which tends to push U.S. net export demand as it tends to push down European net export demand.

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