Perhaps the most novel (and perhaps effective) suggestion to free up credit and keep banks from hoarding Fed injections:
2. Easy Reforms: Eventually I will get to quantitative easing, but there are some even easier steps that could make the problem much more manageable, without incurring the risks of highly unconventional policies. One easy step would be to stop paying interest on reserves. These interest payments increase the demand for reserves, and are thus deflationary (as were the reserve requirement increases of 1936-37.) Of course this would make T-bill yields immediately fall to zero, and banks would still probably hoard substantial amounts of reserves. But then why not go one step further and charge an interest penalty on excess reserves? That would end the current problem of banks treating reserves and T-bills as near perfect substitutes. Yes, it wouldn’t solve that problem with respect to cash held by the public, but so far most of the hoarding of base money has been done by banks. (This is probably because, unlike during the early 1930s, deposits are now FDIC insured.) I don’t know if the interest penalty idea would work, but the Fed should certainly consider it. [More, worth wading through]As of this morning, the banking crisis is reasserting itself as THE issue to be dealt with before consumer actions can be modified. Charging "negative interest" is a stunning idea, but I follow the logic that it would be low cost and powerful. Do you get the sense that any government action is now possible as we look for new kitchen sinks to throw at this problem?
I also suspect that detractors of government intervention (other than any directed directly to their bottom line, of course) will see their numbers dwindle as adherents lose jobs, retirement funds, and futures. Sadly, the calls for fiscal discipline could not have come at a worse time for the Republican party, I suspect. Aside from the impossible-to-hide hypocrisy, as events demonstrate a deepening crisis such the fallout from not stimulating becomes more apparent daily. For example, consider Sen. Shelby's commitment against auto company bailouts if Toyota closed a couple of AL factories. The risk a resurrecting Hooverism is now looming large with similar political results likely.
Much to my dismay, we are not having much luck restarting our banking system, and it appears at this time even more wealth will have to disappear before finding a bottom. I think this impression could be highly suspect, as I perhaps follow the day-to-day developments more closely than is healthy.
[via MR]
8 comments:
Has anyone mentioned that this is the first technological economic crisis ? All this stuff would have been impossible without computers. Like they say : You need a computer to really screw things up.
John,
I think you are, as many, confused on the opposition to Obama's bailout plans. Most of the opponents are not opposed to gov't action as the way it is being done, a straw man pushed by Obama and the Dems. The stimulus package, with most of its spending in the out years will not be very effective in injecting liquidity into the market, as a payroll tax holiday would, even with those losses to savings. Bailing out the big three would do nothing to solve the reasons they got there to begin with,as bankruptcy would. Why tackle big problems now, such as health care, when we don't have a plan to solve problem #1, the banks. How is raising taxes going to create more jobs? (When the new taxes destroy jobs, fire the people with the Obama bumper stickers first.) Obama is making the same mistakes that lengthened the Great Depression, raising taxes, targeting businesses. John, it is time to turn in you libertarian card.
anon:
Gosh, I turned that in after Ron Paul got flamed. In fact, that is when I realized that being right (and they usually are) is more important to libertarians than getting into a position to have any effect. I mean, we really put the whammy ag subsidies with our faultless arguments, didn't we?
Seriously, I dispute several points. I am ambivalent on bailing out US automakers, and actually think that is a rather minor sideshow compared to the banking system. And I believe the Toyota Republicans would echo similar pleas should their factories start closing.
Second, the CBO scores the stimulus at 65-70% spent in the first two years. I too would prefer a payroll tax holiday, but what the package has is preferable to nothing, and I for one think time is the biggest enemy of all. The deflationary spiral is much worse than we thought even a month ago. Ag may be about to find out how bad.
Finally, taxing the top sliver of Americans at the level of the Reagan years does not strike me as the same as an across-the-board tax increase. To be sure, the middle class will have to pay more taxes in the future, but that is not in the stimulus package.
Basically we are borrowing an unthinkable amount of money from the future, when our children will likely repeat the favor. In the meantime we sow a crop of inflation that won't look so horrible for a few years as it devalues our debt and reinflates assets.
Is this a sorry way to run an economy? Yup. Do I see other good alternatives that would be better? Nope. There is a consequence of action and that is criticism. But no critic ever led people to safety.
More importantly, those content to let the chips fall where they may better be prepared for some far-flung chips.
I just sent in my federal and state taxes. Combined with the local taxes they took 43% of my net. This gov't spending is going to get us back to the 70's tax rates when fed. alone was taking over 50% off the top end of our income. Really kills the incentive to do more!
anon:
I understand your point. However, it places you at distinct competitive disadvantage to those who can operate under another 3% of taxes. Maybe your backing off will be offset by the thousands below you tax bracket who will see lower taxes.
Most studies I have seen do not support the disincentive assertion, and indeed we have seen other economies grow at similar rates with much higher marginal taxes.
Finally, subtract your subsidy payments (1099G) from your taxes to see what your actual contribution to the US treasury is.
John,
Actually, we are thinking of opting out of all gov't programs so we will be free to clear all those pesky wetlands we are now farming around. If they will reduce the subsidy payments it would make the decision easier.
anon:
We're pondering the same strategy, but since the payments attach to acres not operators, wonder if owners will be permanently ineligible (once out, always out?) I'm not sure my cash rent contracts give me that right.
One hope I've had is that the DCP would become so small relative to the hassle, that guys like us would go "nah, thanks"
If by wild chance the $250K limit passes, we will essentially create a layer of producers who are finally free. That's what I'm rooting for.
This whole bailout and stimulus process makes me question the intelligence of our elected leaders as well as their constituents (US!). For years, our government's silver-bullet solution to problems has been TMAI (throw money at it), and this is no exception. We pushed banks into the sub-prime mortgage business and allowed them to take advantage of uneducated or naive borrowers. We let the situation get out of hand by allowing companies to become "too big to fail." Our budget is so complicated and filled with pork it is depressing. Now we are asking Joe Taxpayer Jr to pay for the consequences of the inept policies that Joe Taxpayer Sr's leaders enacted. We're slapping billion dollar bills on these financial wounds like they're band-aids. At what point in time are we going to start curing the disease rather than treating the symptoms? We have left the port of Capitalism and set adrift. We know neither our destination nor our route to get there. Who is going to take the helm, restart the engines, and get us back on track? I read the "Obituary of Common Sense" last week and almost cried. We need a leader!!
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