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Two ‘bailouts’ today, the Fed asset purchase program and Citibank:

Comments on the asset purchase program:
Major theme- the answer to the housing and automobile issue is consumers with enough income to be able to afford their mortgage payments and car payments along with expanding employment prospects to ensure the ability to repay in full over time.

The Fed’s function is to set the interest rate. This is all in the realm of monetary policy. Income adjustment at the macro level is a function of fiscal policy.

Specifically on the securities purchase announcement:
They finally got it right – the Fed purchases the financial assets, not the treasury. The TARP should have been a Fed operation.

What the fed does is set interest rates. It’s about the price of money, not quantity of money.

Buying agency collateral will lower the interest rates on agency mortgages. It does not ‘pump in money’ or anything like that.

Buying other collateral will lower interest rates for those types of lending.

This is what ‘monetary policy’ is all about – setting interest rates in the economy, and not quantity adjustments.

This does not directly add to the demand for mortgages or the demand for other loans.

It does lower interest rates for those loans with the hope that the lower interest rates increase borrowing to spend on houses, cars, and other purchases.

They could have done this a year ago before it became a crisis with no ill effects if there was no crisis.

Letting the crisis happen first did not serve public purpose.

This foot dragging due primarily to not fully understanding the fundamentals of monetary operations has contributed to the crisis.

While this ‘top down’ approach does improve the operations of the financial sector, it does not give them what they fundamentally need, which is borrowers with sufficient incomes to make their payments, aka declining delinquency rates.

This is directly achievable by the likes of a payroll tax holiday where the treasury makes all FICA contributions, or direct spending via revenue sharing to the states for their operating budgets and infrastructure projects.

Comments on the Citibank bailout:
What they did right is break the pattern of taking 79.9% of any remaining shareholder equity, which has meant the government has been the hand of death for shareholders. There is enough risk priced into stocks with that questionable addition.

What they did wrong is complicate matters by doing more than buying a sufficiently large preferred equity position to accomplish exactly what the rest of the relatively complex package accomplished.

This was probably done to minimize usage of funds allocated under the TARP.

They are also perhaps starting to acknowledge that a substantial part of Citibank’s difficulties are due to the failure of government to sustain reasonable levels of output and employment.

Assets that were not problems a year ago have become problems today as the economy has deteriorated due to a lack of aggregate demand.

This might be a good first step towards government fessing up and taking responsibility for the collateral damage of its own fiscal and monetary policies, and stop blaming the victims by putting them to death when they require assistance. In fact, if I were Obama I would take this approach.

The government already gets 30% of all earnings through the corporate income tax. If they want more, they can raise that tax rather than demand a percentage of the outstanding shares.


12 Responses

  1. W, in the past week, I have heard two CNBC analysts call for pay-roll tax holiday. That is progress. Steve Moore last night and John Brown last week. Unfortunately, they are both deficit hawks. After hearing Steve Moore propose this last night, Robert Reich countered by saying the public would put the money in the bank and that a large spending program would be a more effective stimulus. At least both sides are now arguing about the the best way to increase the deficit rather than to do it at all.

  2. “Robert Reich countered by saying the public would put the money in the bank”

    As if restoring household balance sheets was not a desirable goal in and of itself! If they put it in the bank, just give ’em more. I guess I have a lot more faith in the ability of Americans (especially lower-income Americans, who would be disproportionately helped by a payroll tax holiday) to find things to spend money on. But of course, a lot of the debates about the best “bang for the stimulus buck” are still mired in the thinking that imagines limits on the Treasury’s ability to spend.

    It’s like Warren says: we don’t need to make any substantial changes to the system, which is on the whole the best system yet devised for running an economy and a monetary system – we just need to use the system we have properly.

  3. Fiscal conservatives are beside themselves with delight as they now have an have an absolute vice grip on policy. They’ve had it for years. The hard money crowd has seen their leader resurrected and installed back in his throne with Volker.

    Under this team I am skeptical that we will get the kind of demand stimulus that is needed. His first term will likely fail to achieve its economic goals. As a result, he will be blamed–not because of the fiscal conservative policies of his administration–but simply because he is a Democrat. Thus, you will see the “tax and spend” rote criticisms being hurled at him.

    Paving the way for even a more extreme version of fiscal conservatism.

    Fiscal conservatism is dead! Long live fiscal conservatism!!

    P.S. Argentina proposes infrastructure spending equal to 10% of GDP

  4. Jim,

    Most likely in dollars. Perhaps they will default again and allocate the $20 billion that had been earmarked for interest payments toward additional domestic stimulus. 🙂

  5. Volcker is even older than McCain. And never did figure out monetary operations

    glad the payroll tax cut is on the table.

    agreed not a bad thing if not all spent. lots will go to mtg payments and clean up the credit issue.

    that counts as ‘savings’ by the way.

    obama is in way over his head, like the rest of them,
    but seems to be leaning toward large deficits for 09 and 10,
    but yes, the jury is still out.

  6. Volker’s whole claim to fame was breaking the back of inflation right? Raising interest rates to the teens. Of course I remember because my first house had a 13% mortgage.

    Doesn’t seem like the right man to me. Inflation simply isn’t a problem right now.


  7. He didn’t even get rid of inflation as is commonly thought, aside from high rates effects on the banking/S&L, ag, and export sectors (via the $), which aren’t the mainstream’s views on the transmission mechanism. Inflation actually rose for a bit while he jacked up rates, since interest is a COST of business. But oil fell substantially from its peak in 1979 by 1982-3, which helped A LOT, just as now.

  8. With Volcker, I don’t know if his attempt at monetarism was because he actually believed it, or just wanted an excuse to raise interest rates skyhigh to cripple the big unionized manufacturers enough to prevent them from raising wages or prices. Either doesn’t speak too well of him…

  9. 9. as scott said, inflation fell only because oil broke due to a supply response after nat gas was deregulated in 78. led to a 15 million bpd supply response. volcker had nothing to do with it.

    11. exactly!

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