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1. Fed needs to lend unsecured to any member bank in unlimited quantities and set term as well as ff borrowing rates.

This will normalize bank liquidity, and should have been done as soon as we went off the gold standard domestically in 1934(?).

To keep solvency accounting with FDIC the FDIC can insure all fed deposits at member banks.

This does not ‘create money’ or ‘inflation’ or have any macro economic effect beyond normalizing liquidity.

2. Congress needs to declare a ‘payroll tax holiday’ and drop the regressive social security and medicare deduction rates to 0% to restore demand from the bottom up.

This increases take home pay and cuts costs for business some, allowing both the means to make their payments to the financial sector and support it via reduced delinquency and rising credit quality.

It will also support growth and employment as the higher wages are also spent on real goods and services.

As this happens banks will very quickly resume lending to corps either directly or via commercial paper.

If people want to work and produce and not spend their income (for any reason) the government can either ‘spend it for them’ or increase their income via tax cuts until they spend sufficiently.

And don’t forget the need for an energy policy to prevent any recovery from merely driving up gasoline prices.

>   On Tue, Oct 7, 2008 at 9:19 AM, Davidson, Paul
>    wrote:
>   Good comment — but what is the most unconventional thing
>   the FED can do? I think by now the FED can only prevent
>   things from getting exceedingly bad– but bad it will get–
>   What we need now is fast fiscal policy– but until a new
>   administration comes in, I do not see that happening.
>   Anyone got something in there head that can save the world?
>   By the way did you see Bill Black’s wonderful performance in
>   the Obama Keating 5 video released yesterday?

>   Sent: Tue 10/7/2008 12:10 AM
>   The U.S. economic data began to show signs of an outright
>   cumulative contraction before the September/October credit
>   crisis.
>   The September/October events are a massive shock to the
>   system. The only thing I can compare it to is the combination
>   of a 20% Fed funds rate and a call for curbs on credit card use
>   in late winter 1980. In the months that followed aggregate
>   demand fell faster than at any time in the post war period.
>   I believe the Fed realizes all of this.
>   Bernanke realizes that if income falls the financial crisis, already
>   almost unimaginably severe, will also get much worse.
>   Fed Chairman Bernanke went before Congress and said that if
>   the Paulson Bailout Bill was not passed and the stock market
>   fell, there would be economic Armageddon. The Bailout bill has
>   passed. The stock market has fallen. Credit spreads have
>   widened. Based on Bernanke’s own public statements, he
>   should be thinking we are entering economic Armageddon. I
>   believe there is a raging hedge fund crisis, knowledge of which
>   is being suppressed. There are other unrecognized crises. I
>   think the Fed is aware of all of this.
>   Meanwhile, the Fed has not changed its policy rate. But in
>   fact, Fed funds have been trading below the policy rate

>   target. Also, the Fed is expanding its balance sheet in a
>   spectacular way, and it has announced this morning that it will
>   expand it much further with newer, larger auctions.
>   It would seem that Rome is burning and the Fed is fiddling. It
>   is my assessment that the Fed sees more of the burning than
>   we do. It realizes that all the conventional policy responses do
>   not fit the current monstrous circumstances. It is being held
>   back because it must come up with a more dramatic policy
>   response that we can conjure out of the precedents from the
>   past.
>   Forget coordinated rate cuts. If it happens it will be cosmetic.
>   Japan has almost no interest rate to cut. The ECB will, but
>   Europe will prefer to resort to government guarantees of bank
>   deposits and will not hesitate to quasi nationalize banks.
>   The Fed has no more time to stay its hand. Something will have
>   to be done very shortly.
>   Based on Bernanke’s writings of the past several years, I would
>   expect a shocking policy change from the Fed which will
>   probably result in an almost unimaginable increase in its balance
>   sheet.


21 Responses

  1. Warren,

    i have been reading everywhere that now we are heading towards a great depression and not much can be done to make the pain less.

    by great depressions, people are predicting that unemployment(official) will shoot up as much as 10-20%.

    housing will fall another 30%(panic sales and foreclosures) and will stay there for 4-5 years.

    businesses are going to now start laying off preparing for a long recession and consumers are already maxed out and scared hence they will pull back sharply, sending the consumption on a cliff dive.

    stock market will go down further 30-40%, destroying wealth and bringing more angst to consumers.

    but i feel that if the government wanted it can definitely lessen the pain by doing the below:

    1. backstop housing by buying and removing from market all default/foreclosure property(will the current bailout plan do it?)

    2. FED interest rate lowered to 0.5%, and mortgage interest lowered to 5%(fannie and freddie are gov entities and can loan money infinitely)
    3.more benefits given to home buyers to help housing(how about increasing the short term tax break from 7500 to 25000, which can also be financed from IRA or 401k with no penalty)
    3.stimulus checks every three months to help consumer income(or tax breaks….or penalty free 401k withdrawel etc)
    4.Faciliate interbank lending by being the middle man(use the trust of the government).
    5. Massive infrastructure projects to support job.

    in other words…fight deflation and debt with inflation to stave off the sharp pain.

    i think these are doable….but will they do it?

    people may ask where will they get the money for all this, if i am not wrong government can still borrow at less than 4%, and if FED rate is lowered and we go into recession people will be happy to loan the government at less than 3%.

    since price of food and energy is going down, there is no more worry that more money into the system will cause inflation.
    right now money is getting destroyed faster than FED can inject money into the system.

    or is it possible that nobody will do anything and the world will go into a deep recession/depression?


  2. Hey, its not just Obama, McCain is criticizing Obama for spending TOO much.

    They both have to say that stuff, imagine if they went up there and told everyone that the national debt is also everyone’s savings. It would be political suicide.

    Obama doesn’t even promise that he’ll balance the budget in 8 years. McCain has pledged to do it by the end of his 2nd term. Of course neither will, but they both have to say stuff like that.

  3. Warren says: “Congress needs to declare a ‘payroll tax holiday’ and drop the regressive social security and medicare deduction rates to 0% to restore demand from the bottom up.”

    Warren have you considered how this will affect renters versus homeowners? The renters aren’t underwater on their mortgage like a homeowner, so this payroll tax reduction rewards them more than the homeowners.

    Aram says:1. “backstop housing by buying and removing from market all default/foreclosure property”

    LOL! I was going to keep paying my mortgage, but if uncle sam is gonna buy my neighbor’s house, I am gonna stop paying. Unintended consequences are a bitch.

    Aram says: “4.Faciliate interbank lending by being the middle man(use the trust of the government).”

    Trust of the government – HAHA! That is going to be gone soon if it isn’t already!! Look, the general up in the ivory tower is not set up to do what the soldier down in the battlefield does, different roles, different training. The fed cannot be as efficient as what idividual banks and their individual branches do – this is going to end badly – the tower of babel dreams of my friends at the CFR is blowing up in thier faces.

  4. 1. my payoll tax holiday adds maybe 5% to gdp and should do the trick before more damage is done. other spending suggestions are ok but will take too long, maybe. and both are ok. govt spends first and then borrows to support rates, not to fund expenditures. there are no financial/operatinal constraints on spending

    2. 3. we can only hope they are not being truthful. sad to have to hope for that.

    4. the ‘reward’ is for workers who are getting their pay reduced by the taxes.

    5. the fed (and all cb’s) has always been the middleman of interbank lending.

  5. 5. the fed (and all cb’s) has always been the middleman of interbank lending.

    Great point–they run the payments settlement systems

  6. The general is the middleman for the factories making the guns and food back in the homeland and sending them to the troops in the field, but how does putting the general in the field with a gun make sense and be efficient? I don’t get it. Middleman are in the middle for a reason.

  7. False analogy. The Fed’s ALWAYS in the middle of interbank lending because it runs the payments system that clears and settles the transactions.

  8. Scott, there is this town called Mayberry that andy griffith lives in. The local banker in that town knows the familys, their history, thier kids, their finances, their values and morals, he sees them at church, his kids and thier kids play together at the ball field. He knows the town wino’s, and town mob and the people who will stick through their business through thick or thin because of personal character. How does ben bernanke come down from his fed tower on his money helicopter and come into mayberry and decide who needs to get loans and who doesn’t? I don’t understand. The general is good at being a general, not being a foot soldier fighting with his bayonet in the trenches. This is a total farking disaster GLOBAL WORLD COORDINATED rate cut and we go down 200 pts – pathetic.

  9. Again, false analogy. We’re talking about the interbank market only here. The Fed is their regulator (one of them, anyway). It already lends to them via the discount window and via overdrafts everyday (to the tune of $35 billion on average outstanding every minute, and over $100 billion at peak settlement times–that’s under normal circumstances when there’s no crisis). Net interbank transactions already happen on the Fed’s payments system via debits/credits to accounts they hold at the Fed. The Fed’s already a middleman.

  10. Dr. Fullwiler,
    What did Minsky mean by As emphasized by Minsky, policies should be designed to minimize the creation of additional financial assets and greater financial instability (from the paper)

  11. It’s sort of like Warren’s point when he invokes the phrase “serves no public purpose.” Minsky argued that the financial system should serve the goals of production and growth in the real sector. He used the term “money manager capitalism” to describe an economic system in which finance had become the tail that wagged the dog.

    Numerous papers at Levy–several of them very recently published–go into much more detail regarding Minsky’s views, if you are interested.

  12. “Minsky argued that the financial system should serve the goals of production and growth in the real sector. ”

    In the REAL WORLD I need cancer cures, I need life extension genetic research, I need cold fusion energy research, I need virtual reality algorithms and 3d holodecks. However I bet NONE of that got advanced this week, but you Scott, and You Jorge RL, and you Warren Mosler spent tons of time and energy and effort reading news about iceland banks and clicking buttons on bloomberg terminals, so can any of you explain to me how your actions doing that silly stuff affecting “bowling score” made any REAL DIFFERENCE to the big problems of humanity? Pathetic.

    You are all part of the problem, and you sit here and quote minsky talking about the finance people being a cancer on the rest of humanity, but you all are still little parasites wasting your lives not getting any of the real problems of mankind solved clicking your buttons back and forth. I don’t see how producing ONE MORE MBA on this planet helps the REAL WORLD, yet warren is sponsoring more agent smith clones, too many damn agent smiths – Neo had to kill off those agent smith clones, they were choking the real world to death. All of you could go up in a puff of smoke tomorrow and it wouldn’t really make one lick of difference to the REAL problems of mankind, what a testament to the usefulness of your lives – sad.

  13. Warren, is it true that every economic depression this country has had was preceded by a budget surplus? If anyone would know you probably would. Thanks.

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