Posted by Michael A. Kamperman on July 31, 2010
The GDP report was horrific. It came in at 2.4%, well below month ago estimates. What’s worse is it included a 27.9% rise in housing due to the bump in the home-buyers tax credit and it included a small positive contribution from state and local government spending. The tax credit is gone and stimulus based state aid will soon fade away. Also gone is the boost from inventory adjustments. So where do we go from here…down. The economy is clearly heading back down. The President is too busy campaigning and vacationing and doesn’t have the time to focus like a laser beam on jobs. The Senate is a complete embarrassment. This week the Republicans and the Democrats couldn’t agree on the procedural rules to move forward on a critical bill to revive small business lending. Majority Leader Reed is so anxious to return to Nevada to try and save his seat that he was only willing to offer the Republicans a chance to vote on three of their amendments to the bill. The Republicans balked and filibustered with both sides pointing fingers at the other. Yet out of Ben Bernanke’s ‘unusually uncertain’ economic outlook and what to do about it emerges St. Louis Fed President James Bullard. A man with a solid label as an inflation hawk is willing to step away from people’s perceptions of him and call it likes he sees it. He sees the risk of the U.S. heading straight for a Japanese style deflationary trap. He said the Fed may never hit its target of 2% inflation targets if the U.S. enters the trap. An inflation Hawk says the facts have changed and he is willing to print money, soon. When asked how he felt about raising taxes he said it wouldn’t be helpful to reviving the economy. He has firmly placed restoring economic growth and avoiding deflation higher on the priority list than deficit reduction or current U.S. debt levels. While not asked about federal spending it seems as though he would have given the same answer as he did on taxes, it’s not helpful to reviving the economy.
Bullard did more than just say quantitative easing was the best tool available to the Fed, he offered a game plan on how to use it. He has come forward with the innovative idea the Fed should keep a close watch on the data meeting by meeting and adjust the level of quantitative easing based on the data. Basically if things are looking up print less and if things are looking down then by all means print more. He is willing to print as much as is necessary to prevent the slide into deflation. I’m already on record stating the Fed will need to buy back virtually all of the outstanding federal debt, and perhaps much more, to restore the economy to full health.
What we need now is for a prominent Republican or Democrat to step forward and call it like it is: namely now is not a good time to either raise taxes or cut federal spending. Its time to break with type-castes. Its time to say the world changed in 2007 and both sides need a contemporary play book. It probably won’t happen. But with Bullard leading we may survive in spite of the partisans. Monetary policy is an extremely powerful tool. Paul Volcker brought the economy to its knees to battle inflation. The Fed has an unlimited check book to throw at economic revival. It has lacked the wisdom and the will, but Bullard just changed all of that. Look for his strategy to be implemented much sooner rather than later. If not by the election, then soon after. Bullard has proven himself to be not just a leader, but a hero.
Posted by Michael A. Kamperman on July 22, 2010
Federal Reserve Chairman Ben Bernanke gave a speech in 2002 in which he famously said that if it was necessary to prevent a Japanese style deflationary-depression the Federal Reserve could figuratively speaking “drop money from helicopters.” Now, with a Japanese style deflationary-depression staring the U.S. right in the face, the man we placed in charge of the Fed confesses that he doesn’t know how to fly a helicopter. His paper was theoretical after-all, and now he claims he is not sure of what the risks would be if his theory were put into practice. He will place the theory into practice if there is another ‘panic’ and have the Fed resume aggressive quantitative easing. But short of that he is content to watch this “unusually uncertain” economy and dither. There is nothing uncertain about the economy. We are in a deflationary-depression ala Japan. We are repeating the policy mistakes of the 1930′s by focusing more on the deficit than on economic growth. To this day the variables programmed into the Fed’s econometric forecasting model and most other econometric models are based solely on the post World War II inflationary expansion. Hence, what is ”unusual” and causing “uncertainty” is the economy is not responding the way the models predicted. Right now the Fed’s model anticipates unemployment will fall to 7.5% by the end of 2012 without any changes in Fed policy, tax policy, or stimulus policy. To reach that target the economy would need to generate 7.5 million new jobs, which is an average of 250,000 new jobs per month for the next 30 months. I must have missed where Washington D.C. jumped the gun on California to become the first in the nation marijuana tourist destination. At least I hope these guys are smokin something, because it is depressing to think this is actually the best work they can do. Mr. Bernanke, throw away the models and open your eyes.
Short of a ’meltdown’ the Fed is willing to take three steps to vigorously support the job market. First, they are willing to say they will keep interest rates near zero for a really really long-time, rather than for just an extended period of time. Wow, that should open up the job market. Perhaps he should consider how effective this has been for Japan before relying on it as our next line of defense. Second, the Fed might be willing to stop paying the Zombie Banks a quarter of a point interest on the one trillion dollars in reserves they have at the Fed in-order to jump start lending. The WSJ detailed how many many small businesses are being asked to back their loans with cash, in many cases for the full amount of the loan, in addition to the equipment and real estate already pledged to the bank. The Zombie Banks keep insisting that they are ready to make loans to all that qualify, which means if you give them the money to loan back to you you qualify. Small business credit cannot get any tighter than this. Again, hard to imagine the Zombies would open up the credit spigot if they were denied that 1/4% interest payment from the Fed. Third, and this would help at the margins, the Fed is willing to re-invest the mortgage and bond payments it purchased back into the economy. Right now those payments simply lower the Fed’s balance sheet and go back to money heaven. They are neither saved nor spent in the economy. Effectively, the Fed is currently tightening the money supply because all those mortgages payments are not being recirculated back into the economy.
Mr. Bernanke has already presided over an economic slide greater than the slide in 1930 at the start of the Great Depression. Yet despite his reputation he lacks the wisdom and the will to head off either another slide mirroring the one in 1932, or a long drawn out nightmare mirroring the Panic of 1873 and the Two Lost Decades in Japan. He should have told the Congress that the key tool under consideration is the Fed stands ready to support the Treasury market with aggressive purchases to back whatever fiscal stimulus policies Congress deems necessary to spur private sector growth. There is a time and a place for everything, and now is the time to drop concerns about Fed independence and have the Fed and the Congress work together. The housing market is terribly underwater. Why not have a bail-out for the people instead of the Zombies? Congress could offer to refinance and modify any existing mortgage in America for 4% with no credit check. A home would be appraised and if the mortgage is underwater Congress would authorize the balance over and above the value of the home to be paid off by the Treasury. These mortgages started out no higher than appraised value. All Congress would be doing is hitting the housing reset button. Anyone with half a brain is not really worried about the debt or the deficit because they know the U.S. can print what it owes. Democrats want social spending and they want the rich to pay for it. Republicans simply want a strong national defense and to pay less in taxes. Democrats are unwilling to cut out social spending to avoid a deficit. Republicans are unwilling to pay higher taxes to avoid a deficit. Both sides don’t want to pay in some way for the other sides issues. The “tools” the Fed and the Congress need to fix the economy are simple. The wisdom and the will are what seems like a bridge too far.
Posted by Michael A. Kamperman on July 12, 2010
Paul Krugman hasn’t gone left, he hasn’t gone right, he’s gone real. Paul was a progressive liberal, is a progressive liberal, and will probably continue to be a progressive liberal. But he is also a Princeton Economics Professor and a Nobel Prize winner. He sees the economy is in the ditch, what he calls a third depression. He also sees the Whitehouse doesn’t have a coherent plan to lead us out. So he has decided to tell it like it is and not worry about who with whom he curries favor. First he distanced himself from the approved Whitehouse phrase “the steps we have taken have avoided another Great Depression.” Now he has called out the Federal Reserve led by his Princeton colleague Ben Bernanke to be much more aggressive. His basic argument is we must try something because what we are doing is not working. He is rallying around the Keynesian principle that when private sector demands slumps it is best to replace it with public sector demand. This is a 180 from the Hayek championed Austrian School of Economics’s view adopted by libertarians and unwitting Tea Partiers that public spending only crowds out the private sector and the best way for a government to instill confidence in the economy is to balance the budget. President Hoover tried this and it failed. President Roosevelt tried this in 1937 and it failed. With history as our guide why are we trying to emulate failed policies? Professor Krugman has decided that his standing at the Whitehouse, in the Princeton faculty lounge, and preserving his Nobel reputation by being aloof is not as important as his speaking the truth. More power to him.
John Maynard Keynes famously said “when the facts change sir I change my mind, what do you do?” Well the facts are the unemployment rate is 9.5%, but it would be close to 12% if the workforce remained constant with end of 2007 levels plus population growth. Currently the average person has been unemployed for 35 weeks, significantly eclipsing the post World War II era record of 21 weeks set in the early 1980′s. One in seven mortgages are delinquent (30 days or more past due) and one in four mortgages are underwater. State budgets have imploded. The number of people on SNAP (food stamps) has risen from 26 million in the summer of 2007 to over 40 million today.
Paul singled me and some others out when he said “As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now the nightmare has become reality.” Guilty as charged. But the issue is not who was right and who was wrong, it’s where do we go from here? Krugman is right. We need more fiscal stimulus and we need more monetary stimulus. For a sick economy stimulus is medicine. Few in America believe a sick person shouldn’t have modern medicine. Sadly many believe a sick economy should have 100 year old medicine, namely Austrian Economics.
Posted by Michael A. Kamperman on July 6, 2010
I thought it would be helpful to interpret David Brooks column in this morning’s New York Times on ‘A Little Economic Realism’ into plain English. Be sure to read the actual column before reading the translation: http://www.nytimes.com/2010/07/06/opinion/06brooks.html?_r=1&hp
You’re President Obama. The economy is starting to tank again. You’re feeling stuck between a rock and a hard place.
The vast majority of smart and sensible economists say we need another stimulus bill. Some aligned with Republicans favor more tax cuts aimed at jump starting the private sector, while others aligned with your Democrats favor more federal spending to support state governments. Almost all of these economists agree stimulus focused on infrastructure projects that make the nation more competitive would be a good way to go. They all have models they swear by, all of which failed to predict the downturn in the first place. They claim the solution is a simple math problem where 2+2=4 and that you shouldn’t trust the other guy’s model. Yet because the economy is $14 trillion the price of poker in all of the models starts at several hundred billion dollars and goes up, way up from there.
The Keynesian economists are giving you a plan for another round of stimulus. But your not married to Keynes. Your a practical politician and are paying attention to the polls.
Krugman and his colleagues are brilliant economists, and they dismiss the ridiculing of their ideas by people who can’t walk and chew gum at the same time. They have complete faith in their models. But they and economists of other schools of thought failed to predict the downturn because they only modeled on the post World War II inflationary era and ignored the deflationary era of the Great Depression. Who knew national home prices could actually fall? You are therefore very hesitant to risk your political career on their advice.
My fellow NYT columnist Paul Krugman thinks everyone who disagrees with him is either immoral, a moron, or both. While some economists want tax cuts and spending cuts and others want spending increases and tax increases, virtually no reputable economist thinks the U.S. should raise taxes and cut spending at the same time in the current environment. However, the Germans and Trichet, the head of the ECB, think now is the time for just such austerity moves. German taxpayers don’t want to subsidize Southern Europe. Trichet actually believes austerity measures in countries with over 20% unemployment like Spain will gain confidence as unemployment rises to 25%. You know this man needs to retire but your not sure you can go against the political flow and back your Keynesian economic advisers.
Professor Krugman has a very good explanation for the last two years. The stimulus bill needed to be $2 trillion as he suggested and not $789 billion. The increases in federal spending have been offset with spending cuts at the state and municipal level, hence the fiscal spigots have not been wide open. The federal deficit has ballooned saving many jobs in the public-sector. But because you slashed infrastructure spending in the stimulus bill there has not been little private-sector job growth. Because you oversold the stimulus bill and continued to insist it was enough for political reasons, when it clearly wasn’t, you can’t get another stimulus bill passed and therefore you pray every night the Federal Reserve will come to its senses and save your bacon by opening up the printing presses.
Paul Krugman and his cohorts think their so smart, but they know little about psychology. Keynes wrote that the state of confidence “is a matter to which practical men pay the closest and most anxious attention.” The rhetoric of a coalition of those who want to win in November have convinced the public that debt-fueled government doesn’t work. Because we have actually lost jobs since the stimulus plan was enacted only 6% of the public believes my rhetoric that it actually created jobs. People fear debt because we allowed the banks we bailed out to cut their credit card limits and jack up their interest rates to 29%. These good-hearted but simple-minded people are afraid this could happen to the U.S. Government, even though we owe everyone dollars and we can print them any time we want.
I don’t like to read economic models. I prefer to contemplate my pollsters focus groups consisting of people who started websites in the middle of no-where. They think deficit spending could bankrupt the U.S., and at a minimum it will raise their taxes. They don’t realize teachers, soldiers, policeman, and fireman are government employees. Since they do the hiring and firing and voting I value their opinion the most.
Krugman doesn’t understand the pressure I’m under. Because I was sleeping and golfing while Massachusetts was voting I no longer have the votes to do what I want. My supporters on the left would rather die than a cut a deal with the far right who would rather die than cut a deal with me. The right and the left cannot agree on whether to spend on defense or programs for poor people. No one wants to take on more debt for the other sides issues.
To justify my hesitancy to take a stand my researchers have discovered an obscure academic paper by three Harvard profs. They found that congressional districts with the most pork have more people working for the government than for the private sector versus districts with the least pork. While this proves nothing the name ‘Harvard’ allows me to sound impressive as a columnist and I agree your grandkids shouldn’t have to pay for the other sides programs.
Mr President you are unsure of what to do but you want to be re-elected. Therefore you must choose something. I see your choices as being too hot, too cold, and just right. Running up the debt to save the economy risks a run on the dollar. Adopting euro-style austerity risks turning you into Herbert Hoover. Doing a little bit of spending while promising a little bit of future austerity could be just right.
Well, Mr. President here is what I advise. First, extend unemployment benefits or your left will go ballistic. Second, offer to provide aid only to those states who cut some spending now and cut pension benefits in the future to pick-off that vote from Massachusetts you let slip through your hands. That would save some public-sector jobs now and ease some contractionary pressures without throwing the country into a fiscal-debt spiral that makes Greece look prudent.
But the main message is this: Don’t listen to Paul Krugman. Don’t borrow all the money you could dream of for less than 3% interest and spend it to revive the economy just because you can. Also, don’t go Ron/Rand Paul nuclear and end the world as we know it. Instead, trim a few programs you don’t like and spend a little more on your pet projects. Be a minimalist.
You don’t have the ability to play the economy like a fiddle like the fiddle-fool Krugman is advising. Let’s face it, while neither you nor I nor your political advisers know diddly about the economy, you should listen to us and the polls and not economists like that know-it-all Krugman. And you do have the ability to keep my taxes low by cutting Medicare and Social Security in the name of deficit reduction. Keep up the good work Mr. President, love David Brooks.
Posted by Michael A. Kamperman on July 3, 2010
Nobel Prize winning Economist Paul Krugman has ended the unchallengeable mantra that we have avoided the risks of another Great Depression by claiming in his liberal leaning New York Times column that he believes we have already entered a new depression. He is an expert on global trade and on the Japanese depression of the last two decades. Yet our chronically tin eared President declared after a widely agreed upon disappointing unemployment report by both the right and the left that “make no mistake — we are headed in the right direction.” About the only other thing the left and the right agree upon is that make no mistake-we are NOT heading in the right direction. After that the road forks. President Obama has failed to heed the pleas of those begging for job creation policies and for jobs to become the number one issue on his agenda. Every few months he says jobs is now number one and then jobs quickly move to the back burner. Well the chickens are coming home to roost. Rather than hailing the drop in the unemployment rate from 9.7% to 9.5%, the media is highlighting that this only occurred because 652,000 people dropped out of the work force. The country has soured on smoke and mirrors and wants substance. President Obama praised Senator Robert Byrd as someone with “quintessential American quality, and that is a capacity to change, a capacity to learn, a capacity to listen, a capacity to be made more perfect.” Hopefully President Obama will gain the capacity to listen because we desperately need a change in economic policies.
The President’s tin ear resulted in his being summarily dismissed in his calls for more European stimulus spending and ended up with the G-20 agreeing to halve their budget deficits by 2013. The President has not championed extending stimulus spending at home for 2011 and he plans to raise taxes by letting both the stimulus tax cuts and the Bush tax cuts expire. What he has championed is a bi-partisan deficit cutting commission. Leaders need to walk the walk and not just talk the talk. The reason the President is desperate for Europe to continue to spend is his whole plan to restore the U.S. economy depends on exports. Many of his economic advisers believe the U.S. doesn’t need a vibrant housing market, or vibrant consumers. They believe we need to be more like China and focus on manufacturing and exports. Hopefully the President ”listened and learned” that we can’t export our way to prosperity because there are no buyers out there. We need to recreate demand here. To build a home in America one needs to be physically in America.
By spending the last year with a tin ear the President has squandered any chance to push fiscal policies through the Congress that will make a meaningful economic difference. This failure to fight for jobs every day has consequences. For many they will lose their job or their business. For the President, he will lose the large majorities he enjoyed in Congress and he may lose any majority at all. After only one and a half years the President is heading towards long-term lame duck status. This prediction will become a certainty unless the President gains the “quintessential American quality, and that is a capacity to change, a capacity to learn, a capacity to listen, a capacity to be made more perfect.” The reason the deficit is so large is because we have so many people hurting. The President needs to call for a plan that leaves no unemployed person behind. He needs to say that every willing and able person in America that wants a job will get one, preferably from the private sector but also from the public sector if need be. He needs to say the way to cut our deficit is not through austerity, but through growth. He needs to say we need to look to ourselves to solve our problems and not to others. He needs to fund this Jobs for Every-One program with printed money and continue to print money to fund the program until the budget deficit reaches a sustainable target of less than 3%. Working people pay taxes, pay mortgages, and don’t collect unemployment benefits. Can you listen Mr. President? Can you learn Mr. President? Can you change?
