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October 2012

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Fw: [gang8] 11th Post-Keynesian Conference at UMKC last week
by robert searle 04 Oct '12

04 Oct '12

----- Forwarded Message ----- From: Geoffrey Gardiner <geoffrey.gardiner(a)btinternet.com> To: gang8(a)yahoogroups.com Sent: Thursday, 4 October 2012, 9:55 Subject: Re: [gang8] 11th Post-Keynesian Conference at UMKC last week Michael, Many thanks for taking so much care to give us a detailed report of a fine speech. Randy’s analysis fulfils our expectations, but now he needs to move on to flesh out the solutions, which is going to be hard work. Saying one must tax property and capital gains is nowhere hear enough. We need details. We need a viable system of taxation. Moreover is he not forgetting that if one stops the sort of lending he has rightly criticised, the capital gains will mostly vanish as they are the product of the lending, and the same is true of property prices? Indeed as regards property our plans must now include how to soften the blow for those working class people (I include all forms of real work in that category) who will see their house values sinking to below construction cost, as they were before credit became easily available. Here inflation is hiding the drop in real values. In my street a drop of about ten to fifteen per cent in money values over 8 years cannot reflect the 20 per cent fall in the value of money. The new values reflect a movement back to sensible prices. Tax the houses more and the values will drop further. Moreover a ‘mansion tax’ is a menace if its effect is to increase the price of the houses in the lower categories, and that is indeed what it is bound to do as the profile of the supply of houses takes 100 years to adapt to a change in the profile of demand. The new profile of demand, by the way, will cause a lowering of the average standard of housing, quite unnecessarily. I hope Randy fully realises that no power on Earth can turn a house into food and lighting for state pensioners. To raise capital taxes in money, assets have to be sold, and they have to be sold to savers if prices are not to collapse. Experience has shown, I think, that the scope for capital levies is limited to one or two per cent. To illustrate the problem, imagine what would happen to the price of Microsoft if one tried to mulct Bill Gates of $20bn. It was in 1974 that two Oxford academics published a paper called, ‘Why We Need a Wealth Tax’ and included detailed suggestions which would have raised more money that the total savings of the personal sector of the economy, which made their proposals impossible to carry out. Of course this ineptitude did not stop one of them from becoming the chief economic advisor to the Bank of England. If you tax savings will people still save? Maybe, as so much saving is contractual. For the same reasons as above tax, the need for liquidity on capital gains has to be on realised gains, not paper profits. If one’s purpose is to reduce wealth disparity there are two ways of achieving it. 1. The way done in Britain prior to Nigel Lawson’s tax changes. High death duties, the assets sold being bought up by pension funds. It is a slow process. 2. Expropriate and use the income of assets to reduce the deficits. One might be able to slowly convert the assets into money. If one wants immediate results to prevent increased deficits, one has got to increase income taxes. Income is what the state spends. And the income taxes will have to apply to the middle classes, as they in the aggregate have the big bucks. The very rich are few and far between. Even a net family income of £70,000 puts a couple in the top 3 per cent of incomes in Britain. You can try this out for yourself by feeding sample figures into the calculation scheme on the Institute of Fiscal Studies web site. People with this income would however consider themselves to be middle class, not plutocrats Of course both Romney and Obama funked this one in their debate. Both promised to protect the middle classes. MMT economists should not be exhibiting the same cowardice. Should not there be some attempt to discriminate the good from the bad in the business system? A capital gain resulting from manipulation of money is surely of a different quality to the community from a capital gain from saving and real investment in equity. There was a perfect example of this in the news this week. Britain's best performing share in recent years is James Halstead plc, a company which has raised its dividend every year for 35 years. It increased its final dividend 12.2 per cent. Its success has been entirely due to organic growth. I have known the company since 1981 and so far as I can recall it has never bought a business. It has sold businesses, and indeed its current activity bears little resemblance to what it made 30 years ago. Oh yes, I forgot to mention it manufactures. Nor does it borrow much. Indeed it ended the year with £38mn in cash, much the same as it had at the beginning of the year, despite spending about £5mn redeeming shares. The current dividend is 33 per cent of the share price in 2001. Of course there are companies which which would love to mount a take-over of James Halstead. Luckily it is family controlled. We do not want a tax system, such as we used to have, which would change that. So come on all. Let us have some constructive, well thought out, viable plans for rebalancing society without wrecking the economy in the process. Let us get on with the hard work. Geoffrey rom: Michael Hudson Sent: Wednesday, October 03, 2012 11:34 PM To: GANG8 Subject: [gang8] 11th Post-Keynesian Conference at UMKC last week On Saturday, Randy Wray and others gave a set of really good speeches to the 11th Post-Keynesian Conference at UMKC. Here are my notes (I’ve added my own comments and extended them, I think). Randy’s speech: The Minsky moment occurs when enough people recognize that the financial sector has turned the economy into a Ponzi Scheme. Debts have lost their no counterpart in the ability to pay. So they become part of the fictitious capital base. Sept. 14, 2007: the Northern Rock Crisis. It became clear just HOW AND WHY the Ponzi game was over. Failure to deal with this problem turns the “moment” into a permanent depression. It is made permanent because there is no endogenous dynamic leading to escape. The “solution” must come from outside the existing financial environment. (Economists call this exogenous.”) And it must involve a writedown of debt to the existing ability to pay. President Herbert Hoover’s Treasury Secretary Andrew Mellon urged that this be done by “liquidation” across the board – at sharp writedowns of asset prices to correspond to the bankrupt economy’s inability to pay. The Roosevelt administration had a more progressive answer, avoiding the disruptions of mass unemployment. The present crisis was 50 years in the making. It began in the 1940s, and entered a serious phase in the 1980s. It now consists of Wall Street’s attempt to financialize almost everything, layering debt on debt on debt. As property and companies are securitized and pledged to banks for loans to buy real estate, raid companies and simply gamble, a rising share of profits and value added is diverted to the financial sector. In the United States the process was marked by fraud from the outset, starting in the 1980s with the junk bond financing pioneered by Drexel Burnham. This was closed down on felony charges, as raiders bought forward options to buy – without announcing their intention. Arthur Andersen also was closed down for fraud in its Enron accounting. All the accounting firms were engaging in approval-for-fees business. Then, the S&L crisis occurred. Every bank that failed had fraud involved. After 2000, the Alan Greenspan “goldilocks” economy set the stage for fraud. The financial sector was thoroughly permeated by fraud. The real estate appraisals were fraud. The lawyers were fraud. The liars’ loans were fraudulent (the “lie” was put in by the mortgage bankers, not by the borrowers.) And exploding interest rates guaranteed a leap beyond the ability to pay. The problem is that the market of honest housing loans is limited – by the homebuyer’s ability to pay, and even to make a down payment. Honest growth in this market is limited to the population of family-forming age cohorts, multiplied by the rise in overall prosperity (enabling larger and better homes to be built.) But there is no limit on fraudulent loans. All you need is to sell them – and the solution is to find suckers. These were the domestic pension funds and foreign banks, who looked up to the U.S. economy and trusted it. Most people associate the Mafia with the construction industry. But a new financial mafia emerged at the lending source: the banks. Having found German Landesbanken and other gullible buyers of packaged mortgages, fraud absorbed the financial sector and its symbiotically joined real estate sector. Fraud usually is the most profitable behavior that is going on. So it drives honest players out of the market. And the fraudsters use part of their earnings as payoffs to the “police”: the regulatory agencies and law courts, culminating in control of the political system itself. Minsky’s term for this is Money Manager capitalism. So we are now in the endgame of finance capitalism in its casino capitalist stage of “money manager capitalism.” Goldilocks was a fairy tale. “Everything is all right. We have achieved post-cycle stability,” when things are not all right at all, and fragility is building up to a crash. Trends were supported as things-in-themselves, rather than viewing the economy as a holistic overall dynamic. Trends are the RESULT of different forces, not a self-directing force in themselves. The public knew about the $800 billion TARP giveaway, which they found unpopular when it was approved by Congress. They DIDN’T know about the $29 trillion Treasury/Fed bailout of loans. The crisis that has ensued is part of a long-term transformation, characterized by Ponzi debt-driven speculation permeated with fraudulent activity, now that Erik Holder is not prosecuting financial fraud at the Justice Department, and President Obama is doing whatever Wall Street tells Tim Geithner to tell him to do. So what we have is much more serious than merely a “liquidity crisis.” The problem is insolvent borrowers. This goes deeper than just a few bad apples like Citibank, Countrywide and Bank of America. The debts are unpayable on an economy-wide scale – so the U.S. economy is facing a massive insolvency crisis. Under these conditions, rescue of banks – which true reporting would show to be in negative equity – rewards the reckless risk and fraud in which they have engaged. The Fed’s Special Purpose Vehicles have subverted 13(3) constraints by buying toxic waste. True, the Fed CAN spend money on whatever it wants, without Congressional oversight. The Supreme Court ruled that if Congress does not PROTEST, then the Fed’s actions are deemed to have its approval! This is a politicization and decriminalization of fraud. In QE1 the Fed bought Treasuries. In QE2 and 3, it is buying toxic waste. It seems bout to start selling these at great discount to vulture buyers, or shifting them onto Fannie Mae and Freddie Mac. This will require another rescue down the road. The problem with these Fed loans is not that they are inflationary, but that they subsidize the 1% with a giant free lunch. The peak outstanding was $1.7 trillion in December 2008. But cumulatively, the sum was over $29 trillion. Of this, 40% were “questionable” under 13(3): $11 trillion. The operative clause is “Unusual and Exigent Circumstances” under which the Fed can discount notes, etc., if the borrower cannot secure adequate credit from the banking system. The Fed has become the lowest-cost finance to the banking system, with no questions asked – and no concern for the viability of loans it is discounting and being willing to be stuck with. Fed commitments are as official as those of the Treasury, but is “free” of political oversight. This brings into question whether the Fed SHOULD be “independent” of government. The problem is that the government itself has become privatized and financialized. And in today’s environment, this means criminalized. We would have had a crisis even without fraud. But we can’t ignore fraud, and in fact it magnified the crisis – using the Fed’s and AG’s attempt to keep inflating the economy as an opportunity to take advantage of the government’s reckless deregulation. The problem is that the mortgage debt never could have been paid anyway, given the exponential growth in debt that diverted more and more income away from spending in the “real” economy to pay debts. After the dot.com bubble crashed, the Fed had a problem: how to sustain economic growth and prosperity. The fraudulent mortgage sector was a SOLUTION to this problem. But the old axiom remains true: The solution to any problem creates new, often unforeseen problems. Pumping credit into an already over-indebted economy (hoping that it will “borrow its way out of debt” by finding some new sector in which to make a killing) provides an infusion of spending power somewhat akin to the government running a budget deficit. EXCEPT for the fact that when governments run deficits, this NORMALLY involves buying goods and services and hiring labor. And it often creates infrastructure and other social capital investment. But pumping money into the banking system lets IT lend new credit, on which it creates interest, whose payment withdraws yet further borrowing power from the economy. The taboo against discussing financial fraud and proposing a “monetary” solution to the debt problem (giving banks more money, and then buying their bad loans) blocks society from solving the problem. It mutes popular opposition to huge giveaways to the banks, that the government could do at much less cost simply by writing down the debts. TARP and TALF were unnecessary, if Congress or the Fed would simply have written down debts. Policy solutions . Debt write-down or outright write-off . Raise the minimum wage. Any decrease in employment will be more than offset by the injection of new purchasing power at the lower end of the income spectrum where it is most needed. Opponents say, “This will discourage employers from hiring teenagers.” But what about minimum wage-earners with families? . Lower the retirement age. This will open the job market for younger people. (The rentiers and deficit hawks urge RAISIG the retirement age.) . Jail the fraudulent bankers, above all those of the largest 5 or 9 banks. This will deter fraud. Close down the banks, wipe out the stockholders and bondholders. . Raise income taxes on the higher brackets, and shift the tax burden back onto property and “capital” gains. This will solve the problem of how to recapture the enormous doubling of wealth held by the top 1%. . Establish a targeted loan program akin go Japan’s MITI. . Recalculate government deficits so that capital expenditures on infrastructure are an asset that reduces the GROSS deficit, into a smaller NET basis. However, if you do this, you must include depreciation calculations to measure how much the infrastructure is being worn out or obsolescent. And as an extension, you may need to include environmental cleanup costs. Discussing the South economies, Manuel Montes pointed out that neither Latin America nor India are providing credit for industrialization. They continue to de-industrialize. And their agricultural sectors remain backward, as do their tax systems remain regressive. Political corruption still concentrates power among the leading rentier families. The recovery of many Asian economies are linked to that of China, especially as a result of booming commodity prices. But this merely increases the value of mining, agriculture and low value-added manufacturing rather than real industry. So the South’s position has not really increased its economic independency, food self-sufficiency or autonomy from the North’s/China’s economic dominance. So growth rates for “developing countries” are declining. __._,_.___ Reply to sender | Reply to group | Reply via web post | Start a New Topic Messages in this topic (2) Recent Activity: Visit Your Group The gang8 list is devoted to Creditary Economics. To unsubscribe, email: gang8-unsubscribe(a)yahoogroups.com Switch to: Text-Only, Daily Digest • Unsubscribe • Terms of Use . __,_._,___

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Fw: [gang8] Mosler viewpoint
by robert searle 01 Oct '12

01 Oct '12

----- Forwarded Message ----- From: Hugh Whinfrey <market(a)svarsmaal.dk> To: gang8(a)yahoogroups.com Sent: Monday, 1 October 2012, 5:25 Subject: Re: [gang8] Mosler viewpoint Interesting piece. Thanks for sharing. I read this stuff with a critical eye, so there are some points I would take issue with, on the other hand I recognise that when you distill a complex situation into several short paragtaphs, one necessarily does have to simplify, which inevitably provides somewhat unfair entry points for criticism. The only real nitpicking of this type that I think is worth openly mentioning: -------- >This type of system famously can’t accommodate a net desire to save To which I think it is crucial to be crystal clear that "saving" is future consumption. If the asset can't deliver future consumption, then it isn't savings no matter what you call it or how you model it. ---- As for its conclusion: > What this means for the euro zone is that inflation control >ultimately comes down to limiting government spending by >limiting selected prices member nations are allowed to pay >when they spend. Like central banking, it’s about price, >and not quantity. In essence, this is an argument for centrally enforced deflation. It has its merits, i.e. it can force the price level down and perhaps affect the factors causing stickiness of wages, thus addressing unemployment. However, that is only productive in a 'closed system'. Such deflation would cause the Euro to go through the roof vs. the dollar in terms of the exchange rate (maybe as much as 5 or 6 to the dollar), sink Germany's export-based economy in the process and procure massive gains for speculators with leveraged long positions in the Euro. So while it may be "economically" sound, depending on one's viewpoint, politically - it isn't tenable. The US would have to do the same thing for it to stand a chance. Hugh ----- Original Message ----- >From: Geoffrey Gardiner >To: gang8(a)yahoogroups.com >Sent: Sunday, September 30, 2012 9:33 PM >Subject: [gang8] Mosler viewpoint > > >Here is a statement which Warren Mosler has prepared. He approves my distributing it. > > Rome, 26 October, 2012 > >National Government Debt Dynamics- Causes and Policy Options > >I’ll first address what I believe is the most misunderstood question, which is why the euro national governments debts are as high as they are. > >The answer begins with the absolute fact that government debt is equal to global ‘non government’ accumulations of euro financial assets. For any given ‘closed sector’ the euro is a traditional case of ‘inside money’, as with a ‘giro’ or ‘clearing house.’ The only way an agent could have net euro financial assets would be for another to be net borrowed. For every euro asset there is a euro liability. The net is always 0. > >This type of system famously can’t accommodate a net desire to save, unless there is a provision for net financial assets to enter the sector in question. In the case of the euro, this means the non government sector requires government deficit spending to satisfy its net savings desires, should there be any. > >Additionally, note that all government spending is either used to pay taxes or remains as net savings in the economy, in one form or another. And unemployment, as defined, is the evidence that the economy does not have sufficient euro income to pay its taxes and fulfil its net savings desires. > >The answer to why national government debt is so high continues with an investigation of the ‘savings desires’ that generate the need for net financial assets. > >European institutional structure includes powerful incentives to not spend income, and to instead accumulate financial assets. Historically these have been called ‘demand leakages’, and include tax advantaged as well as mandatory requirements for income to go into retirement funds, corporate reserves, as well as actual cash in circulation. Without an equal expansion of private sector debt by other agents spending more than their incomes, these savings desires can’t be realized, unless governments spend more than their income. > >In the years immediately before the euro, the member nations with today’s high debts had their own currencies. As currency issuers, whether they realized it or not, they had no solvency issues, they set their own interest rates, and they accommodated domestic savings desires with government deficit spending, which allowed them to sustain growth and keep unemployment relatively low. > >The point here is that high deficits were offsetting the high demand leakages built into the institutional structures. And that requirement has not gone away, as the traditional demand leakages remain. And note that the nation with the lowest deficit, Luxemburg, never had its own currency, and instead market forces caused them to fund their net financial assets with net exports. > >What changed with the euro, and the ‘divorces’ from the national central banks, was the ability to fund national deficits. The euro nation’s financial dynamics became very much like the US states. They can no longer ‘print the money’, and are instead revenue constrained. However, the difference is that, unlike the US states, the euro members entered the euro with the higher debt levels incurred when they were issuers of their currencies, not constrained by revenues, and acting to offset demand leakages as required to sustain output and employment. > >Today, the ECB is the central bank for the euro. I often call it the ‘score keeper’ for the euro. The ECB system spends and lends euro simply by crediting accounts. These euro don’t ‘come from’ anywhere. They are ‘data entry’. As Chairman Bernanke responded when asked where the hundreds of billions of dollars lent to the banks came from: ‘...we simply use the computer to mark up the size of the account they have with the Fed.’ > >In fact, any central bank, operationally, can make any size payments in its own currency. When the ECB makes a 500 million euro securities purchase, no one asks where the euro came from, whether it was taxpayer money, or whether the ECB somehow borrowed it from China. Central banks are not revenue constrained in their own currency. This puts them in the unique position of being able to act counter cyclically during a down turn in the economy. > >Conversely, the euro members, like the US states, are not financially capable of reacting counter cyclically to increased savings desires when private sector credit expansion fails and economies slow. Only the ECB can, as I like to say, ‘write the check’ to allow for the provision of the net financial assets demanded by the institutional structure, as evidenced by the rate of unemployment and the output gap in general. > >Given the state of private sector credit and net export potential, the euro zone currently needs even higher levels of government deficit spending than otherwise to sustain growth and employment. And only the ECB can write that check. And yes, I realize the political difficulties this implies, the most pressing issue being that of moral hazard. > >Given the necessity of more national government debt and with only the ECB ultimately capable of writing the check, I’ll now discuss policy options for closing the output gap, and their associated risks. > >A simple ECB guarantee of national government debt and an expansion of Maastricht limits to perhaps 7% of gdp would trigger an immediate surge of sales, output, employment, and general prosperity. However, without adequate enforcement of limits, it would also surely trigger an inflationary race to the bottom, as the nation managing to run the largest deficits would benefit the most in real terms. So the challenge is to allow the right level of fiscal expansion to accommodate the demand leakages of the independent member nations, but without the direct central fiscal control of a currency union like the US. > >Tax credit bonds are another option. These are bonds that have the same characteristics of today’s sovereign debt, but in the case of non payment (there is no default condition) these fully transferrable bonds can be used for payment of taxes to the government of issue. This means that taxpayers of other members will never be asked to pay any other member’s obligations, which I presume would have wide political appeal. > >A third option is for the ECB to make ‘cash’ distributions to the member nations on a per capita basis of perhaps 10% of euro zone GDP annually. This would begin a systematic reduction of member deficits towards 0 over a multi year period. It would also have to include strict spending limits to regulate aggregate demand. To that end, the ECB could withhold payment to violators, which is far easier to do than imposing and collecting fines, as is the case today. > >20 years ago I was in Rome at the finance ministry meeting with Professor Luigi Spaventa, along with my colleague Maurice Samuels of Harvard Management. Those, too, were dark days for Italy. Debt was over 100% of GDP, interest rates over 12%, the global economy was weak, and Professor Rudi Dornbusch had been making the rounds proclaiming that Italian default was certain. I asked Professor Spaventa, rhetorically, why Italy was issuing CCT’s and BTP’s. Was it to fund expenditures, or was it because if the treasury spent the lira, and did not issue securities, and the Bank of Italy did not sell securities, the overnight rate would fall to 0? There was a long pause before Professor Spaventa answered ‘no, rates would only fall to ½% as we pay interest on reserves’ indicating full and sudden understanding that there was no default risk. He then immediately rose with an attack on IMF conditionality. A great weight had been lifted. The next week it was announced ‘no extraordinary measures would be taken- all payments will be met on time” and the debt crisis receded. > >Solving that debt crisis was relatively easy, as in fact there was no debt crisis. Today the situation is both more serious and more complex. The economic problem is that deficits are too small, while the political understanding is that deficits are too large. And the consequential ECB funding with conditionality translates into lower rates and higher unemployment. > >Note that I have made no mention of interest rates or monetary policy in general. My 40 years of experience as an insider in monetary operations tells me they matter very little for growth and employment. And for nations with high deficits, I’ve come to expect high rates from the CB to function to promote inflation from both the interest income channels, and through the general cost structure of the economy. > >I will conclude with very brief word on inflation. Just like the dollar, yen, and pound, the euro is a simple public monopoly. And any monopolist is necessarily price setter, not price taker. > >Furthermore, a monopolist sets two prices. First is what Marshall called the ‘own rate’ which is how the monopolist’s thing exchanges for itself. For a currency that is the interest rate set by the CB. > >The second is how that thing exchanges for other goods and services. For a currency we call that the price level. I say it this way- the price level is necessarily a function of prices paid by the government of issue when it spends, and/or collateral demanded when it lends. > >What this means for the euro zone is that inflation control ultimately comes down to limiting government spending by limiting selected prices member nations are allowed to pay when they spend. Like central banking, it’s about price, and not quantity. > >Thank you. __._,_.___ Reply to sender | Reply to group | Reply via web post | Start a New Topic Messages in this topic (2) Recent Activity: Visit Your Group The gang8 list is devoted to Creditary Economics. To unsubscribe, email: gang8-unsubscribe(a)yahoogroups.com Switch to: Text-Only, Daily Digest • Unsubscribe • Terms of Use . __,_._,___

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