Let Ben Do It

Prof. DeLong presents a clear case for quantitative easing; reading this as a clarion call for fiscal stimulus would be harder, but that is what the headline writer did:

A Time to Spend

BERKELEY – The central insight of macroeconomics is a fact that was known to John Stuart Mill in the first third of the nineteenth century: there can be a large gap between supply and demand for pretty much all currently produced goods and services and types of labor if there is an equally large excess demand for financial assets. And this fundamental fact is a source of big trouble.

...

By contrast, a gap between supply and demand when the corresponding excess demand is for financial assets is a recipe for economic meltdown. There is, after all, no easy way that unemployed workers can start producing the assets – money and bonds that not only are rated investment-grade, but really are – that financial markets are not adequately supplying. The flow of workers out of employment exceeds the flow back into employment. And, as employment and incomes drop, spending on currently produced commodities drops further, and the economy spirals down into depression.

Thus, the first principle of macroeconomic policy is that because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government’s task to do so. The government must ensure that the money supply matches the full-employment level of money demand, and that the supply of safe savings vehicles in which investors can park their wealth also meets demand.

Obviously, the process of borrow, spend and run a deficit creates new, presumably safe government debt.  But of course, having the Fed purchase sorta-kinda safe assets and deliver deposits at the Fed also creates new, safe assets.

 

Comments

[AL]

These communist idiots (erroneously regarded as Keynesians, which they are not) still do not comprehend the most basic fact of capitalist economy (which is no less than half millennium old): it is the private market, not government, who could and does effectively create wealth. If government can outcompete for-profit capitalist pigs, Cuba and North Korea would be the most prosperous nations.

Theoretically, government could perform damage control function in the time of severe recession. But, apparently, not US one.

[Lightning Metropolis]

The best argument for QE is that when these $ get to China, the Chinese need to print RMB in order to soak them all up.

Thus bringing the real value of the RMB to something closer to what it's actually worth and aiding American competitiveness.

[Rick Ballard]

AL,

The US commies know full well how capitalism works. They also know that it does not provide them with the structure necessary to impose the regimentation necessary to achieve the blessed state of complete immiseration in which all are truly 'equal' (except those beneficent souls who must be adequately compensated for their tireless efforts on behalf of equality. They are, of course, slightly more equal).

Now shut up or the First Lunch Lady will make you eat a double portion of veggies - for your own damned good.

[Cecil Turner]

I was thinking something similar. Best thing about QE2 (and money printing) is that we borrow dollars from the Chinese at one rate, inflate the currency, then pay 'em back with cheaper dollars. (And judging from their howls of protest, they see it that way too.)

[NK]

CT and LM-- I opposed QEII because of its obvious effect of debasing the US Dollar, thereby creating commodity asset inflation see Gold and Oil. The obvious harm that does is to impose a heavy oil tax at the gas pump for hard pressed american consumers, and starve the equity markets of capital. So on the face of it QEII was inflationary AND harmful to economic growth at the same time. Lose Lose.I know I'm right about those effects because 1+1 still equal 2. But maybe helicopter Ben was playing chess to my checkers. Ben doesn't control congress and the POTUS and those SOBs have exploded US sovereign debt. Getting over that debt hump had to be Ben's top priority, because a US Fed Gov't sovereign debt crisis makes all other issues moot. So as Cecil points out, Ben's monetizing the debt, and the ChiComs are paying for it. Long-term, balancing US-China trade imbalances is a priority because "ChiMerica" 1988-2008 is OVER. To do that the Yuan has to appreciate and the ChiComs have to save less and consume more. Making the ChiComs pay for monetizing the US debt "encourages" them to do so. Ben also did this at a time of Euro weaknes so he didn't tank the Dollar. When QEII is finished in June, or maybe terminated sooner, capital should rotate out of commodities and into equities. Gas prices and drop wealth effect improves, US consumers feel better, spend more and employment improves. Ben may know what he's doing.

[SteveP]

DeLong's argument is that the government hasn't debased the currency enough and needs to do more-a lot more- currency inflation to strengthen the economy.
That's just stupid. It's simply more of what caused the problems in the first place.
Continuing to debase the currency will caused its eventual collapse.

[NK]

SteveP-- you're absolutely right. But see my prior post, Ben B may be doing something quite productive here out of the necessity caused by the maniac Democrats in Washington who exploded US Sovereign debt to make political payoffs to the Unions, democrat state Legislatures and low income voters.

[Ignatz]

--CT and LM-- I opposed QEII because of its obvious effect of debasing the US Dollar, thereby creating commodity asset inflation see Gold and Oil.--

See also lumber, up about 40% in the last couple of months, which is why I'm all for QEII. We folks in hard assets say bring on QEIII.

[Cecil Turner]

Ben also did this at a time of Euro weaknes so he didn't tank the Dollar.

That much I'm pretty certain is true. The rest is harder to follow (but then, this ain't my best subject).

[NK]

Just to be clear: the fed is dealing with the immediate mess of the Democrats' (and Delong/Krugman's ) fiscal insanity and duplicity (borrowing to pay for political payoffs). The Fed also has to work long-term on dramatically reducing US-China current account imbalances. QEII is consistent with doing both. However, we would all be far better off if the dems hadn't borrowed that extra 2 TRILION DOLLARs or so over the last 2 years to pay for spending so the Fed didn't have to QE I or II.

[NK]

Ignatz-- at least you're an honest man-- different people's oxes are being gored here. Bond coupon clippers and fixed income retirees are getting killed. Commodity asset owners are thrilled. Be careful of the investors rotating out of commodities though; Ben and the fed might pull this off.

[NK]

One last thing-- the Fed could use real help from House Republicans. If they stick to their guns and pass a budget that spends LESS, and make real reductions in the federal governments's deficit spending, what the Fed is doing could really work, and the US taxpayer could survive what the Dems did to us in '09 and'10 by adding 3 TRILLION DOLLARS to the National Debt, 2 TRILLION of which was insane and politiccally motivated.

[Ignatz]

--Ignatz-- at least you're an honest man-- different people's oxes are being gored here. Bond coupon clippers and fixed income retirees are getting killed.--

I'm being a bit facetious NK. I'd much prefer stable to rising commodity values based on a sound and expanding economy rather than idiotic gov policies, but then I'm also being a bit serious since hard assets, particularly my little niche, have been on a gov sponsored whipsaw roller coaster ride so long I'd kind of like a chance to get off at the top rather than being driven into the ground one more time.

[Rick Ballard]

NK,

The Chinese fascists (they've moved beyond communism) are quite capable of making moves of their own. Mad Ben might pull something off but the history of taxing people with inflation to provide the illusion of "growth" suggests otherwise.

The cost of lumber isn't being driven by a demand for new houses and it doesn't appear that the requisite demand is going to show up any time soon. The economy appears to be resting comfortably - it may regain consciousness any day. There may even be growth in the spring! Green shoots everywhere - like last year.

[NK]

Hey Ignatz-- you REALLY are an honest man. Commodities are by definition more volatile than other assets. But the last decade, the crazy movement is driven by globalization of markets and carry trades seeking yield. It's now very hard to rely on a 'sound and expanding economy" for commodity profits. there are big forces -- government and investors-- at work whipsawing prices. Good luck with it my friend.

[Melinda Romanoff]

I am still convinced that QE2 is being done to inject capital into the money center banks, solely. They still haven't solved any of the problems they created for themselves and the losses they are staving off are a massive deflationary event still to come.

And come it will.

Just my 2.

[NK]

Rick-- I don't take issue with anything you said. I don't like any of this. This is being driven by the insane debt the Dems generated all the while egged on by Delong and Krugman. But, we are where we are. The debt has to be paid. That disgusting fact has to be dealt with before we see real growth. AND cutting government spending and repealing Obamacare would help restore growth as well, especially employment growth.

[NK]

Melinda-- right as usual about the condition of the banks. In this case though, I don't think QEII was geared towards that, even though Ben B sold as helping the housing market and the banks by reducing long-term rates. I think Ben's gift to the money center banks remains 0% interest rates, which gives them a risk free 3-4% spread buying T-Bills and some munis. The toxic assets are still out there, you're right about that. I have no idea what happens when that bill comes due.

[Melinda Romanoff]

Capital injections into money center banks remain local. The mechanics of QE2 show that by front-running POMO, the PD network can build big margins into the securities bought and, therefore, boost the Tier 1 levels. The lowering of interest rates , building housing, blah, blah, blah, in my opinion, we're all bald faced lies. The money has never left the street except through paychecks.

The collapse of the money center banks is what Ben fears.

[Melinda Romanoff]

NK-
I'm going out on a limb here, but if Ashton Kutcher, Economist and Futurist is predicting the coming Apocalypse hitting here. I feel completely comfortable with this all working out for us.

[Lord Whorfin says Smoke the Damn Cigar!]

Slightly OT:

"When you owe a bank a million dollars, the bank owns you. When you owe the bank a TRILLION dollars, you own the bank"

Could this be applied to the Chinese??

[Melinda Romanoff]

Lord W-

No, because, through their fixed exchange rate, they are subjecting themselves to Unca' Ben's monetary policy, rather than have one of their own. Their jiggering of overnight reserve rates is operating on the margins, only.

If they move their currency, they wreck the value of their own holdings. So, they've painted themselves into a corner.

Ooops.

[NK]

LordW-- scroll back up to Rick Ballard's link to the Pettis blog about China. I never read that blog before, it looks to be very informative and realistic.

Melinda-- Ben indeed focuses on the money center banks-- by statute they in many ways own the Fed. I can't think too hard about the legal status of the Fed, because my head starts to hurt real bad.

[NK]

Melinda- check out the Rick Ballard link above to the Pettis blog, I found it very thoughtful about the China situation. Pettis and his commenters also discuss the ChiCom leadership changes and the lame duck status of the current leadership. Uh Oh-- we've all seen what outgoing management does to companies, and countries. It's going to be a bumpy ride.

[Old Lurker]

Iggy, I'm with you there. That ocean front lot I mentioned buying on Nantucket one year ago, suspecting a bottom, appears to have doubled in value based on the recent sales of identical lots on either side... (Nantucket values, using that word loosely, are very dependent on Wall Street year end bonuses.)

Which makes me feel a little better about the 0.26% the CDARS banks are paying me on my cash.

[Melinda Romanoff]

NK ( And Rick)-

I read through the Pettis post and have some comments, but I have to leave. Rick, thanks for the link, and NK , thanks for re-pointing it out.

[Charlie (Colorado)]

$5 says the headline writer doesn't know the difference between quantitative easing and bifidobacteria.

[NK]

Melinda-- this gets to be real complicated, but right now the ChiComs are pissed because QE monetizes the US Debt to foreign investors (i.e Brig. Generals in the People's Army) thereby reducing the value of the treasry assets they own. Increasing the Yuan would have the same effect of reducing treasury asset values, but increasing the Yuan would have the benefit of reducing Chinese inflation and cost of commodity imports-- both would help the "real economy" in China and chinese consumers. So QEII gives the ChiComs the pain of Yuan appreciation but not the benefits. Hence, our ChiCom friends are very unhappy. Ben may hold the winning hand here, the ChiComs may have to allow the Yuan to appreciate significantly, increase consumption and prick the Chinese property bubble. But as Pettis points out, that's being left to new management to handle. Hang on, it's going to be a bumpy ride.

[Rick Ballard]

OL,

I've been amusing myself from time to time by using this site in conjunction with Redfin to get a feel for rent to cost ratios in distressed areas. The rental site provides street addresses and Redfin provides last sale data as well as decent area trends. It's not too tough to find 10% returns using 25% management, vacancy and maintenance assumptions.

If we didn't have commies at the top, housing might have a certain appeal.

[glasater]

Plus, one doesn't have to pay FICA taxes on rental income...yet.

Thanks for the links Mr Ballard.

[NK]

RickB-- interesting market research you're doing there. the risk is continued employment weakness and limited income growth coupled with inflation of heating/cooling costs PLUS property tax increases. BUT-- someone will take the right risk and make a killing like Old Lurker.

[PaulY]

Rick, I disagree with your statement that "The Chinese fascists (they've moved beyond communism), Fascists and Communists operate the same way. Political spectrum should be viewed as circle with Communism/Fascism on oppoosite side of Freedom. Mussolini was socialist theorist and Facism was his marketing tool just as Hilter remade International Socialism into National Socialism. Same animal, different names.

[narciso]

So how does the supposed drop in unemployment,
work itself out.

[NK]

Narciso-- do you mean first time jobless claims down to 388,000? The gov't claimed there were no "unusual circumstances" last week. Huh-- week before Christmas, gov't offices closed on Friday so no new claims processed that day. Even Bloomberg LP didn't buy that. Unfortunately I think employment growth will be slow and unemployment will stay high for a long while. What small business would hire in today's political environment-- healthcare mandate, taxes a political ping pong ball. Small business will continue to push current employees harder rather than new hires.

[Danube of Thought]

Is what De Long describes as a "central insight of macroeconomics" in fact a central insight? And does anyone know where Mill revealed it?

[Chubby]

((See also lumber, up about 40% in the last couple of months, which is why I'm all for QEII. We folks in hard assets say bring on QEIII.))

speaking as someone who lost quite a bundle in the last hard asset bubble which peaked in 2008, I'd be wary of 'hard assets.' While the assets may be "real", the increase in value really isn't, (like the increase in real estate wasn't real), it is based on dollar games

[PD]

I'm sure I'm not smart enough to understand what The Ben Bernank is trying to do with QE2, but what I have observed is that the actual effect has been to destroy the bond market -- the "safe" harbor in which we increase our nest egg percentage as we approach retirement age. I'll bet retirees are simply thrilled at what The Ben Bernank has accomplished for them.

[Chubby]

((I'm being a bit facetious NK. I'd much prefer stable to rising commodity values based on a sound and expanding economy rather than idiotic gov policies, ))

exactly

[NK]

Chubby--very true. The current commodity pricing has the look of a bubble-- driven by carry trades and currency flucation not real demand-- so when the investor winds change direction, the price adjustment may be very fast.

[Chubby]

I can't remember where, but yesterday I read something about real estate values going to be going down with accelerated force this coming year. Hard to believe.

[NK]

PD--Fed policy has killed bond holder coupon clippers and fixed income retirees. No question. I don't like QEII, all I am saying it may be the right thing to do about the fiscal mess the Dem Congress created and keep pumping "free" money into the banks. Right or wrong, those are Fed responsibilities.

[Chubby]

((I'd kind of like a chance to get off at the top ..))

I doubt there will be a forthcoming "top" that will exceed a long past "top"

[jimmyk]

Is what De Long describes as a "central insight of macroeconomics" in fact a central insight?

No, it's basically reframing Keynesian analysis, trying to give it extra authority by associating it with Mill. How anyone can still think there's an excess demand for financial assets with the Fed tripling its balance sheet and flooding the system with excess reserves is beyond me. This whole episode should be a stake through the heart of Keynesian ideas, but just like those vampires in the old horror movies, they keep finding a way to come back and suck our blood.

[Chubby]

((The money has never left the street except through paychecks.))

I believe that as well. Perhaps driven by a compulsion to feather nests in advance of known impending doom.

[glasater]

Peter Schiff has an article in the WSJ regarding RE pricing.

[Old Lurker]

Rick, for the first time in a long while, money is moving into rental units in the DC markets. There had been a glut caused by too many condos being built before the bubble burst which then flipped to rentals midstream. Much of that has been absorbed now and one of my pals finally secured financing for a rental project. Of course for some strange reason, the DC market continues to add jobs, and housing prices actually rose a small amount this year.

[Old Lurker]

NK...OL's killing is a) only on paper, and b) is in an insane market where they use monopoly money in place of real currency!

[NK]

OL-- why don't you take the comp sales to an appraiser, show the paper value apprecation, get fresh 100% no doc financing from Fannie Mae, take the loan proceeds and buy another house based on the same appraisal based on the same comps, finance that house with a 110% loan... wait a second.. didn't we see this movie before?

[Old Lurker]

Don't think that did not occur to me NK.

[NK]

OL-- fight the temptaion. Collect the rent, pay the taxes and mortgage let the asset value climb and you'll have something very worthwhile someday soon. Use future happy days to pay down the mortgage and you have a lovely annuity. That's the course my happiest clients took.

[DrJ]

For a bit of economic good news:

Benefitting 'omics (genomics, proteomics, metabolomics, etc.) IPOs this year was the improvement in the general IPO market. According to Renaissance Capital, an IPO research and investment company, through Dec. 28, 261 IPOs have been filed this year in the US, up 129 percent from 119 for all of last year.

There were 154 IPOs priced, a 144 percent increase from 63 a year ago. Meanwhile, total proceeds raised increased 77 percent to $38.7 billion this year, compared to $21.9 billion in 2010.

Source: genomeweb.com

[Rick Ballard]

PaulY,

I certainly don't disagree with your main point, although I use a three faceted prism rather than a circle for the imagery. I believe that the Chicoms have flipped to the fascism facet for the time being. Ownership and control has shifted to an oligarchy which is siphoning off a tidy sum which a capitalist might regard as a profit.

Glasater,

I'm familiar with the premise espoused by Schiff but every default also creates a new renter and we don't live in a 'shelter optional' world. When I see houses less than 10 years old selling for less than the value of construction costs in red states, my ears perk up a bit. I don't follow the Blue Hells at all but Phoenix is rather interesting, considering the increase in the number of people retiring plus the cyclical cooling trend which we appear to have entered.

[glasater]

When I see houses less than 10 years old selling for less than the value of construction costs in red states, my ears perk up a bit.

Isn't that something Rick?

[caro]

DrJ,the hard sciences need a PR campaign. I see what you are saying. All of our technological superiority in weaponry really depends on the hard sciences.And the scientists responsible know what the R&D will be used for.

[caro]

Or was that another thread?

[DrJ]

It was the college campus thread, Caro, but I do think you are right.

The amount invested in fundamental research is comparatively small, and there really is a role for the government supporting longer-range research. Much of research is too long-term and uncertain to attract private funding.

I admit to having a vested interest. :) My next proposal is going full-force against an esteemed Harvard chemistry prof. My approach simply is better. Let's see if the reviewers agree.

[home buyer]

This was kind of a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.