Monday, March 12, 2012

416 Fed 2008 Bailout cf ECB Austerity. Ireland should rescind guarantees to banks' bondholders

Fed 2008 Bailout cf ECB Austerity. Ireland should rescind guarantees to banks' bondholders

In the US bank bailout, Treasury was authorized by Congress to sell new bonds, to buy up to $700 bn of Mortgaged-Backed-Securities (MBS) from insolvent banks. The goal was to restore their Capital Adequacy; otherwise, they would have had to close.

But over $1 trillion of MBS (largely bought from banks) are now on the books of the Fed - which spent $3.3 trillion on the bailout without the need for approval from Congress (item 3).

See Fed stats for 4 November 2010:
cf Fed stats for 5 March 2009:

Can anyone elucidate the role of the Fed as compared to that of Treasury? Did they work together or separately?

Michael Hudson argues that the Bailout was wrong, because it was based on keeping asset prices at the highs the Bubble had inflated them to. The benefit was solely to the owners of capital, rather than to those buying (or renting) a house to live in.

But the Government should not have "done nothing". This is the ECB & IMF formula for Europe in its "sovereign debt" crisis, and it is what the "Libertarian" Republicans have in store for the US.

Rather, he says, Ireland should guarantee bank deposits (to protect the public), but not bailout the owners (shareholders) & creditors. Let bondholders take the hit, instead of bankrupting Ireland as a whole. Iceland has done this, and is in much better shape as a result.

Edward Harrison says that Ireland should rescind the  guarantees it made to the banks' bondholders. (item 7)

The ECB is now being urged to abandon "austerity" and act like the Fed in 2008, buying toxic assets (in this case government debt ie government bonds). (items 6 & 7)

- Peter Myers, December 4, 2010

(1) Bailout: Treasury paid face value for MBS, otherwise banks' Capital Adequacy would have been too low
(2) Treasury bought shares in banks, which counted as Tier 1 capital - thus raising their Capital Adequacy
(3) Treasury’s Tarp bailout fund was $700bn, but Fed doled out $3,300bn to stricken banks
(4) European banks took big slice of Fed aid
(5) Fed reveals it lent billions to hedge funds during crisis
(6) ECB should print money on a mass scale to purchase government debt - Ambrose
(7) ECB should emulate Fed's buying of toxic assets (sovereign debt). Ireland should rescind bank debt guarantees - Edward Harrison
(8) Brazil shows how to curb a lending boom, without raising interest rates
(9) Brazil raises reserve requirements to avert bubble
(10) Corporations trashed the economy - Henry Mintzberg
(11) Ireland should guarantee bank deposits, but let bondholders take the hit - Michael Hudson
(12) Republicans will impose ECB/IMF austerity - and Flat Tax - by blocking rise in Federal deficit, creating a fiscal (spending/taxing) crisis - Michael Hudson
(13) The Angry Rich: Self-pity among the Privileged - Paul Krugman
(14) Krugman: GOP Tax Cuts for the Rich, in the guise of tax breaks for ordinary families
(15) Krugman: Niall Ferguson wrong on Budget Deficit leading to Hyperinflation
(16) Krugman: Keynes on Government intervention (print, money, public works) during slumps

(1) Bailout: Treasury paid face value for MBS, otherwise banks' Capital Adequacy would have been too low

The Federal Bailout

The US government actions, described earlier, to unfreeze credit markets are best thought of as ‘first aid’. ...

The Treasury intended to buy mortgage-backed securities at a discount from banks, which hopefully would induce banks to start lending again since lenders would know where they stood financially and borrowers would no longer have the taint of toxic assets. The price offered by the Treasury would be less than face value of the CMOs but more than the depressed current market value, assuming one could even find a buyer. The trick was to find the right price.

One potential consequence of the plan was that bank sales of CMOs at a loss could lower bank capital below the levels mandated by regulation, requiring the government to close those banks. The banks, therefore, proved reluctant to take the capital loss, hoping they could get a better price in the future, when CMOs became more widely traded again. ...

A key difficulty with the original TARP program was how to choose a price which accurately valued the CMOs. Government has no particular expertise at this. TARP III was designed to get around this problem by letting private investors determine the price, something they are experienced at, but then allowing the Treasury to share in any profit. The government would finance up to 85% of the investment. The remainder would be covered by half private equity and half US Treasury equity. [ Footnote: The government finance would be in the form of non-recourse loans, meaning in the event of default the government would take ownership of the underlying properties. ] Any profits would be shared 50-50 with the private investors, but any losses would have to eliminate all private equity before the government loans would be at risk. The private investors would be able to leverage their investment, but they also would have a strong incentive to get as lean a price for CMOs as possible. ...

In June 2009, the ten banks which “passed” the stress tests prepared to begin repaying their TARP money. Since TARP III, US banks have raised nearly $100 billion in new capital, leading FDIC Chairman Sheila Bair to comment, “Banks have been able to raise capital without having to sell bad assets through [TARP III], which reflects renewed investor confidence in our banking system.” ...

(2) Treasury bought shares in banks, which counted as Tier 1 capital - thus raising their Capital Adequacy

Troubled Asset Relief Program

The Troubled Asset Relief Program, commonly referred to as TARP, is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector which was signed into law by U.S. President George W. Bush on October 3, 2008. It is the largest component of the government's measures in 2008 to address the subprime mortgage crisis.

Originally expected to cost the U.S. Government $356 billion, the most recent final net estimate of the cost, as of October 5, 2010, will be close to $30 billion, including expected returns from interest in AIG.[1] This is significantly less than the taxpayers' cost of the savings and loan crisis of the late 1980s. The cost of that crisis amounted to 3.2% of GDP during the Reagan/Bush era, while the GDP percentage of the current crisis' cost is estimated at less than 1%.[2] While it was once feared the government would be holding companies like GM, AIG and Citigroup for several years, those companies are preparing to buy back the Treasury's stake and emerge from TARP within a year.[3] Of the $245 billion invested in U.S. banks, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010. AIG is considered "on track" to pay back $51 billion from divestitures of two units and another $32 billion in securities.[2] In March 2010, GM repaid more than $2 billion to the U.S. and Canadian governments and on April 21 GM announced the entire loan portion of the U.S. and Canadian governments' investments had been paid back in full, with interest, for a total of $8.1 billion.[4] This was, however, subject to contention because it was argued that the automaker simply shuffled federal bailout funds to pay back taxpayers.[5]

Contents [edit]Purpose

TARP allows the United States Department of the Treasury to purchase or insure up to $700 Billion of "troubled assets", defined as "(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages ...

Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. ...

The TARP will operate as a “revolving purchase facility.” The Treasury will have a set spending limit, $250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the 'coupons'. The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets.  ...

On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants in the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. ...

Most banks repaid TARP funds using capital raised from the issuance of equity securities and debt not guaranteed by the federal government. ...

This page was last modified on 22 November 2010 at 04:00.

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008 (Division A of Pub.L. 110-343 , enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks.[1] [2] ... The Act was proposed by Treasury Secretary Henry Paulson during the global financial crisis of 2008. ...

Paulson proposal

U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.[24]  ...

The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.[37] ...

This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. ...

A key challenge would be valuing the purchase price of the MBS ...

On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the $300 billion or so dollars remaining in the TARP funds. He mentioned that the U.S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released.[42] Yet, there is still some skepticism if Taxpayers can buy troubled assets without having to overpay. ...

This page was last modified on 22 November 2010 at 01:29.

(3) Treasury’s Tarp bailout fund was $700bn, but Fed doled out $3,300bn to stricken banks

From: ReporterNotebook <> Date: 03.12.2010 03:46 AM
From: joe webb <>

Wall Street owes its survival to the Fed

By Sebastian Mallaby

December 2, 2010

For a brief, surreal moment, the prevailing narrative in Washington was that the 2008-09 bail-outs were not really so bad. In September, Treasury secretary Tim Geithner called the government’s troubled asset relief programme “one of the most effective emergency programmes in financial history”, claiming that the final cost to taxpayers would be less than $50bn.

Steven Rattner, the Wall Street banker who oversaw the Obama administration’s rescue of the auto sector, wrote in the Financial Times in October that “without exaggeration, this legislation [establishing Tarp] did more to keep America’s financial system – and therefore its economy – functioning than any passed since the 1930s”.

But Wednesday’s document dump from the Federal Reserve – a congressionally ordered “WikiLeak moment” – puts this bargain-bail-out patter in a new perspective. The post-Lehman rescues were far broader than Tarp, and far riskier for taxpayers, even if the alternative of a systemic meltdown would have been worse.

The Federal Reserve’s revelations underscore the might of unelected central bankers. The Treasury’s Tarp rescue fund, at $700bn, was considered so audacious that Congress at first refused to authorise it. But the Fed doled out no less than $3,300bn in loans to banks and companies without a congressional say-so.

What’s more, the Fed frequently ignored Walter Bagehot’s dictum that central banks should provide liquidity freely, but against good collateral and at high interest rates. The Fed’s borrowers included institutions such as Lehman and Citigroup, which were insolvent rather than illiquid. It accepted collateral that included toxic asset-backed securities, and it charged interest rates that were more palliative than punitive. Moreover, while the Fed took all these risks with US taxpayers’ money, a large chunk of its emergency lending went to foreign banks.

In its statement accompanying its data dump, the Fed claimed soothingly to have “followed sound risk-management practices”. It is hard to square that boast with the Fed’s Maiden Lane facility, which accepted some of Bear Stearns’ most toxic assets as collateral for a $29bn loan to its acquirer JPMorgan Chase. The Fed also stated that its “facilities were open to participants that met clearly outlined eligibility criteria”. But one wonders about criteria that permitted taxpayer-backed loans to everyone from Verizon Communications and Harley-Davidson to Sumitomo Corp and the Bank of Nova Scotia.

Richard Fisher, president of the Dallas Fed, manfully concedes that the central bank took “an enormous amount of risk with the people’s money”. But he adds that the risk is now behind us – that the loans have been paid back and “we didn’t lose a dime and in fact we made money”. Yet it is too early to say that. The Fed has yet to recoup the money leant to JPMorgan in the Bear Stearns rescue; and its later Maiden Lane programmes, created to help AIG, have not been repaid either. Indeed, the Fed still has some $29bn of AIG loans on its balance sheet. The collateral backing this largesse includes $9bn of subprime mortgages and other smelly assets of dubious value.

The point is not that the Fed was wrong in its determination to stem the panic following the Lehman bust. Indeed, if the European Central Bank were similarly audacious, the euro-zone might be better off today. The most recent leg of Europe’s crisis began when the ECB ran out of good collateral to lend against, and demanded that politicians assume the burden of the bail-out – a role that the politicians predictably bungled. Far better to have an activist central bank that takes ugly risks with its own balance sheet than a fastidious puritan that throws the economy to the elected dogs.

Rather, the point is that the Fed bail-outs were hair-raisingly enormous, and that neither the regulators nor the regulated should be allowed to forget that. Wall Street institutions that now walk tall again survived only because the taxpayers saved them. Goldman Sachs turned to the Fed for funding on 84 occasions, and Morgan Stanley did so 212 times; Blackrock, Fidelity, Dreyfus, GE Capital – all of these depended on taxpayer backstops. The message from this data dump is that, two years ago, these too-big-to-fail behemoths drove the world to the brink of a 1930s-style disaster – and that, if regulators don’t break them up or otherwise restrain them, they may do worse next time.

(4) European banks took big slice of Fed aid

By Robin Harding and Tom Braithwaite in Washington and Francesco Guerrera in New York

Published: December 1 2010 17:30 | Last updated: December 2 2010 00:12

Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.

However, news that banks such as Barclays of the UK, Switzerland’s UBS and Dexia of Belgium borrowed billions of dollars at favourable terms from US authorities may further anger critics already enraged about the Fed’s rescue of Wall Street.

(5) Fed reveals it lent billions to hedge funds during crisis

By Sam Jones, Hedge Fund Correspondent

Published: December 2 2010 20:14 | Last updated: December 2 2010 20:14

The US Federal Reserve lent billions of dollars to hedge funds as part of its emergency liquidity programme during the financial crisis, data released by the central bank show.

According to Fed data, $71bn of loans were made through its term asset-backed securities loan facility (Talf) mostly to non-bank institutions. They included hedge funds run by managers including FrontPoint, Magnetar, and Tricadia, many of which reaped handsome rewards from the collapse of the housing market.

FED Opens Books Revealing European Megabanks Were Greatest Beneficiaries

Shahien Nasiripour

Friday, 03 December 2010
Huffington Post

NEW YORK -- The Federal Reserve on Wednesday reluctantly opened the books on its monumental campaign to save the financial system in the midst of the recent crisis, revealing how it distributed some $3.3 trillion in relief.

The data revealed that the Fed's aid was scattered much more widely than previously understood. Two European megabanks -- Deutsche Bank and Credit Suisse -- were the largest beneficiaries of the Fed's purchase of mortgage-backed securities. The Fed's dollars also flowed to major American companies that are not financial players, including McDonald's and Harley-Davidson, through unsecured short-term loans.

The measure, initiated in Jan. 2009 to stimulate the flow of credit and keep household borrowing costs low, led the nation's central bank to purchase more than $1.1 trillion in mortgages packaged into the form of securities. The mortgage bonds are backed by Fannie Mae and Freddie Mac, the twin mortgage giants now owned by taxpayers.

Deutsche Bank, a German lender, has sold the Fed more than $290 billion worth of mortgage securities, Fed data through July shows. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.

The data had previously been secret. It was released Wednesday per the recently-enacted law overhauling the federal financial regulation. The Fed, ferociously backed by the Obama administration, fought lawmakers' desire for full disclosure throughout the financial reform debate.

The mortgage purchase program has come under withering criticism by economists and financial experts who believe the Fed's initiative has unnecessarily inflated the housing market, and prevented the cleansing that pretty much all experts believe is necessary for a full economic rebound. However, the program has also been heavily praised for preventing an Armegedon-type situation in which mortgage costs could have skyrocketed, collapsing the housing market and leading to even more foreclosures.

Data released Wednesday shows which Wall Street firms have been the biggest beneficiaries of the Fed's bond buying program. The fact that foreign lenders benefited the most is sure to irk lawmakers.

(6) ECB should print money on a mass scale to purchase government debt - Ambrose

Ambrose Evans-Pritchard

Europe stumbles blindly towards its 1931 moment

It is the European Central Bank that should be printing money on a mass scale to purchase government debt, not the US Federal Reserve.

By Ambrose Evans-Pritchard

14 Nov 2010

Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.

If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.

“Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece.

“If that is not enough to worry about financial contagion, what is? The ECB's lack of action begs the question as to whether it is fulfilling its financial stability mandate,” he said. That is a polite way of putting it.

The eurozone’s fiscal fund (European Financial Stability Facility) is fatally flawed. Like Alpinistas roped together, an ever-reduced core of solvent states are supposed to carry the weight on an ever-widening group of insolvent states dangling beneath them. This lacks political credibility and may be tested to destruction if – as seems likely – Ireland is forced to ask for help. At which moment the chain-reaction begins in earnest, starting with Iberia.

It was a grave error for Germany’s Angela Merkel and France’s Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder “haircuts” at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states.  ...

(7) ECB should emulate Fed's buying of toxic assets (sovereign debt). Ireland should rescind bank debt guarantees - Edward Harrison

Three options for the euro zone: monetisation, default, or break-up

Edward Harrison

29 NOVEMBER 2010

Judging from rising sovereign borrowing costs and euro weakness, market participants are not impressed by the Irish bailout. Marc Chandler’s group at Brown Brothers Harriman is right when they write the market is clearly disappointed with the rescue package of Ireland.

This period in Europe reminds me very much of the period after the Indy Mac failure in the U.S. ...

Analogously, the Europeans have had an opportunity to deal with the fundamental problems of its financial sector’s undercapitalisation and the sovereign indebtedness at the euro zone’s periphery. They have dithered, choosing superficial and phony approaches like stress tests instead of addressing fundamental issues. The first warning shot of so-called "sovereign debt delusion" in Europe was the Dubai crisis last November. The immediate crisis eventually faded but the contagion persisted in terms of stress on Greek sovereign debt. Here too, much time was wasted as Greece was eventually bailed out – not before contagion to Ireland, Spain and Portugal increased significantly. By June, some contagion had reached France and Belgium. And eventually, Ireland came under attack and has now been forced into a bailout as well. But the fundamental problems remain: the Europeans’ financial sector’s undercapitalisation and the sovereign indebtedness.

Now, the day of reckoning is at hand. Ireland is the Indy Mac moment in this European crisis. Superficial fixes will no longer work. ...

So what’s next? Here are three options: monetisation, default, or break-up.


This approach is the easiest and therefore a very likely outcome. Let me frame what I think the issues are and how to go about it. Note, this is not an advocacy piece so I am framing what could occur more than what I would recommend.

The monetisation scenario ostensibly involves an attempt to separate liquidity from solvency issues by using the currency creator’s power to stand behind debt obligations with a potentially unlimited supply of liquidity. This is the traditional lender of last resort role that a central bank is expected to play. For example, the Fed played this role in buying up financial assets during the crisis in 2008 and 2009. Of course, it did so recklessly by buying up dodgy assets at inflated prices instead of good assets at penalty prices so as to discriminate between the illiquid and the insolvent.

Now that the credit crisis has moved on to sovereign debt, the central bank can play this role with sovereign debt as well. The best way to accomplish this task would be to start buying enormous quantities of sovereign debt, inducing a huge shift in the price/interest rate of those assets. Only afterwards, the ECB would announce that it was prepared to supply unlimited liquidity to stand behind these assets at specific target interest rates and would do so at the most inconvenient moments for speculators wishing to make a quick euro. (Update: see comments of a similar nature after this was written from Willem Buiter at the bottom.)

The point would be twofold:

1.Market participants would understand that the ECB had unlimited means to back up threats with action, the stress clearly on the word unlimited.

2.Market participants would understand that the ECB intended to penalise speculators by targeting them with its unlimited liquidity.

As Willem Buiter first mentioned last November, the ECB will not risk its anti-inflationary credibility to monetise the debt of smaller euro zone countries like Greece or Ireland. This is why they were forced to take a bailout. On the other hand, it could be a possibility for Spain because Spain is simply too large to bail out in the way that Greece and Ireland were bailed out.

The immediate impact of this kind of action would be a rise in the euro-denominated gold and silver price, currency depreciation more generally, and increased inflation expectations. So this is a beggar thy neighbour economic policy – competitive currency devaluation, if you will. Clearly, countries like the UK and the US will choose inflation and exchange rate depreciation instead of default as a way of dealing with the sovereign debt problem. That is certainly part of what QE2 is about.  If forced, the ECB could go this route as well. ...


The second path is more tricky and therefore not likely in the near-term unless it is forced upon the Europeans. As Edward Hugh pointed out yesterday, Greece is not headed in the right direction.  Default is inevitable. I don’t think the default issue is controversial anymore. The question now is who defaults and under what conditions.  What Europe should strive for is a default by the ‘right’ players under the most benign conditions.  And so that means this option is not mutually exclusive with the first. You could have a monetisation-default scenario whereby the monetisation leads to the ‘right’ players defaulting i.e. the insolvent as opposed to the illiquid.

As I mentioned, Greece is clearly not making the grade and will be unable to lower its debt to GDP through internal devaluation and austerity without serious growth via exports and currency depreciation. There are almost no circumstances in which all of these positive factors can come together.  Ireland, on the other hand, despite having socialised its banks losses like Iceland, is in a fundamentally better position than Greece. Its debt-to-GDP is lower, its structural deficit is also lower, and it has good export competitiveness. It is the banks in Ireland which are insolvent – and these losses, having been socialised, are threatening the sovereign with insolvency too. The right thing to do would be to de-couple the bank/sovereign issue by rescinding the senior and junior bank debt guarantees. And politically, this would also be favourable with the Irish people as well.  Instead, with the bailout, we are seeing the government raid pension funds  i.e. the ‘people’s money’ to pay off the debts of the banks, ‘the foreigners’ money.’  That is a solution built for social and political upheaval. ...

(8) Brazil shows how to curb a lending boom, without raising interest rates

Brazil raises reserve requirements to avert bubble

Fri Dec 3, 2010 11:38am GMT

By Ana Nicolaci da Costa and Isabel Versiani

BRASILIA, Dec 3 (Reuters) - Brazil's central bank raised on Friday reserve requirements on bank deposits, looking to reduce liquidity in the financial system in a bid to slow activity in Latin America's largest economy that has been pressuring consumer prices upwards.

Yields on interest rate futures contracts fell sharply as investors pared bets on future rate hikes.

Under the central bank requirements, banks will have to earmark more of the deposits they hold with the central bank, effectively reducing the amount of funds available for consumer and corporate loans.

Thus, the higher reserve requirements are seen curbing the lending boom in Brazil that stoked demand for appliances, vehicles and real estate and raised concerns of a possible bubble in credit markets.

"This measure, which has a macroeconomic and preventive nature, reduces liquidity in financial markets and the emergence of non-sustainable trends, the bubbles in credit volume growth and the assumption of risk that could be negative to the economy," Central Bank President Henrique Meirelles said at a news conference.

The yield on the contract due January 2011 DIJF1 tumbled to 10.71 percent from 10.83 percent on late Thursday, while yields on the January 2012 contract DIJF2 dropped to 12.12 percent from 12.24 percent.

Reserves on term deposits were raised to 20 percent from 15 percent, while the additional requirement on demand deposits was raised to 12 percent from 8 percent. The measures will cut liquidity in the banking system by 61 billion reais ($36 billion), the bank said.

The measures took place just days before policy-makers meet to decide on benchmark interest rates, with analysts in a Reuters survey forecasting the Selic to remain unchanged at 10.75 percent. [ID:nSPG003161]

($1=1.695 reais)

(Writing by Elzio Barreto,.Editing by W Simon )

(9) Brazil raises reserve requirements to avert bubble

By Jonathan Wheatley in Rio de Janeiro

Published: December 3 2010 15:14 | Last updated: December 3 2010 15:14

Brazil on Friday moved to cool its economy and fight inflation by raising bank reserve requirements in a step designed to help it fight back in the global currency wars by curbing a local lending boom without hiking local interest rates already among the highest in the world.

The policy change, which follows similar moves by China last month, aims to contain the growth in Brazilian credit, which is expanding 20 per cent a year. Along with a spike in global food prices, the lending boom has helped push inflation above the government’s target of 4.5 per cent a year.

(10) Corporations trashed the economy - Henry Mintzberg

How the enterprises trashed the economy

Dec 3rd 2010, 14:36 by Henry Mintzberg | McGill University

Henry Mintzberg is Cleghorn Professor of Management Studies at McGill University and an author of the recent books "Managing" and "Management? It’s not what you think!".

GET it America. The problem with the economy is not economics but enterprises. Accordingly, no manner of economic intervention will put an end to this “recession”. The problem has been created in corporate America, and that is where it will have to be solved

It is the enterprises that play the game of business, while the economists keep score. Too many corporate “leaders” have trashed their enterprises, taking with them America’s legendary sense of enterprise. The scorekeepers cannot fix that. To understand the basis for such a sweeping claim, add up the stories you have heard about the goings on in so many of the largest American enterprises. Then you may get it.

Get it, not just about the scandal of executive compensation, but also about its destructive consequences. Any chief executive who accepts a compensation package that so singles him or herself out from everyone else in the company is not a leader. Leadership is about conveying signals that engage other people in the company. How many leaders are left among America’s large enterprises? There is an Israeli expression that a fish rots from the head down. So too does an enterprise.

Many economists and journalists see the CEO as the be-all and end-all of corporate success. The worst CEOs believe it. They thus allow themselves to be paid accordingly to “shareholder value”, which is a fancy term for increases in the price of a company’s stock.

There are two basic ways to increase the price of the stock: by exploring and by exploiting. Explorer companies achieve this by doing better research, making improved products, and offering superior service. This is hard work, and it takes time. Exploiter companies have it easier: they depreciate the brand, cut investments in research, confuse the customers with bamboozle pricing, and stay as close as possible to the letter of the law while lobbying politicians to reduce its level. These behaviors can raise the price of the stock long enough for the executives to cash in their bonuses and run, as have so many in the large American companies.

Get it about the consequences of favouring heroic leadership over engaged management. America is obsessed with leadership, probably because it gets so little of it. Now it is fashionable in corporate America to dismiss plain old management: leadership is the glamorous stuff.

The problem is that leaders who don’t manage - who don’t get off their pedestals and into the fray - don‘t know what’s going on. Who among the executives of those failed banks and insurance companies knew what was going on when they allowed their enterprises’ futures to be bet on mortgages that were such obvious junk?

Get it about the mass firings of “human resources”. If the CEO is the enterprise, then everyone else is a “human resource”, to be “downsized” en masse at the drop of an earnings report. After all, resources are conveniently dispensed with, especially when the wolves of Wall Street are baying at the door, and need to be thrown the bones of some human resources to quiet them down. But why not: the company can carry on, in the short run, at least until the bonuses are doled out. Unfortunately, the short run has now run out for American enterprise.

At what price these firings? The answers are all around us: in overworked, unappreciated, discouraged and burned out workers and middle managers.

A robust enterprise is not a collection of human resources; it is a community of human beings. How many large American corporations can claim that kind of robustness? Effective strategy, for example, is not about a planning process that comes from the “top” so much as a learning process that can come from anywhere in the enterprise. The key to IKEA’s successful strategy, to take a pointed example, lies in its provision of unassembled furniture that is easily transported. That idea came from a worker who had to take the legs off a table to get it into his car. He was apparently not downsized or discouraged by the leadership of his company.

Treated decently, respected by a leadership that engages itself to engage others, the people of a corporate community devote themselves to their products, their customers, their company and its strategy. They care. Did the employees of those failed banks and insurance companies care about their businesses any more than their leadership knew about those businesses?

Get it about the unproductiveness of “productivity”. Economic statistics tell us that these firings are productive. After all, the companies go on to produce their products and services with fewer resources. That this takes place on the backs of the workers and middle managers is of no concern to these statistics, nor is the longer term consequences of all this. These things don’t count, not to the economists who have been trying in vain to fix the American economy.

Here in Canada, the economists are constantly berating us about our economy not being as productive as that of the United States. This is curious, because our economy has been doing much better. Can our lower productivity be the secret to our success?

Finally, get it that most economists, analysts, and executives have been the source of the problem, while robust enterprises have to be the core of the solution. Enough of the abstract measures and disconnected policies of the economists. Enough of the wolves of Wall Street on the backs of American enterprise. Enough of the mercenaries in the executive suites, and the elites in the board rooms. Americans will have to rebuild their economy with determination and patience, enterprise by enterprise, in order to regain their legendary sense of enterprise.

(11) Ireland should guarantee bank deposits, but let bondholders take the hit - Michael Hudson

See the next item (item 12). I have given it two headlines.

(12) Republicans will impose ECB/IMF austerity - and Flat Tax - by blocking rise in Federal deficit, creating a fiscal (spending/taxing) crisis - Michael Hudson

Schemes of the Rich and Greedy

November 24, 2010

By Michael Hudson

Tax-Avoidance – The Worst is Yet to Come

“Let me tell you about the very rich. They are different from you and me.”
“The Rich Boy,” by F. Scott Fitzgerald

The 30-year campaign of the wealthy to rig our economic system – especially the tax component – for their own benefit will accelerate with the GOP capture of the House of Representatives and the likely capture of the presidency and Senate in two years. For a foreshadowing of what is to come, a dress rehearsal has been conducted in Latvia, Iceland, Ireland and other financially strapped countries. Latvia has been burdened with the world’s most regressive tax system, while Iceland and Ireland have become record setters in tapping taxpayers to bail out financial crime syndicates, a.k.a. banks.

The Irish bailout will encumber its people with perhaps as much debt as a $9 trillion bailout would be here in the United States. The Irish also are expected to also gut unemployment insurance, their minimum wage and similar social safety nets while boosting interest rates and home property taxes to pay tribute to the European creditor agencies that have “rescued” them. They will relinquish ownership of much of Ireland to their creditors, capped by ownership of government policy-making. The new banks will be owned by foreigners, who will put Ireland on a debt treadmill to transfer its taxable surplus to mainland Europe and Britain.

Just as the U.S. taxpayer saved Goldman Sachs and the other high rollers from taking a loss, the Irish are being forced to “socialize” (that is, oligarchize) the losses of the banks. Think of how the Federal Reserve gave the banks 100 cents on the dollar for the some $2 trillion of toxic assets they took off the books of the banks and you get a sense of how the Irish bailout money will be used. It will keep the banks and creditors whole.

Bad banking is going unpunished. Shareholders, bondholders, large depositors and bank executives are not facing constraints on moral hazard. The European Central Bank (ECB) has cleaned up their mess, enabling and their wealth to grow on its trajectory as before – at the price of impoverishing the non-financial parts of society. Every effort will be made to re-inflate the property bubble putting off the day of reckoning. Taxes – like accountability – are for what Leona Helmsley referred to as the “little people” (not referring to Irish leprechauns).

The key to the success of the wealthy is their ability to hold the economy hostage (dependent of course on the government’s willingness to be unnecessarily held hostage). This dictates the fiscal and financial strategy of the super-rich: to create a crisis and then present their demands. Inasmuch as I expect the U.S. Congress to be plunged into this situation next spring, it is worth quoting Luke Johnson’s observation in Wednesday’s Financial Times: “The probable cost to the Irish taxpayer” of its government’s announcement on September 30, 2008, that it would fully back Ireland’s insolvent banks – a cost “running in the tens of billions of euros – helped the banks but left the country in need of a bail-out. A measured restructuring would have been far better, with domestic depositors kept whole, but all levels of bondholders forced to share plenty of pain. In a panic, the bureaucrats and lawmakers who preserved the banks in their entirety struck an ill-judged, carte-blanche deal that will haunt Ireland’s taxpayers for years.”[1]

The key phrase above is, “In a panic …” The actions of European Central Bank and IMF (imposing domestic austerity to make sure that Casino Capitalists do not have to take a “haircut”) provide a set of experiments replete with rhetorical patter talk that Republican and Democratic plutocratic protectors are watching as an object lesson for how to maneuver this spring by creating a financial emergency – a grab-bag 9/11 for the bankers – to trot out their Financial Invasion plans into the domestic U.S. economy. Lacking a Democratic party committed to reverse the recent redistribution of wealth up the economic pyramid, we may expect Congress to shed crocodile tears as they complete the tax shift off the oligarchy onto the middle class – the constituency they are in a position to sell out.

First, consider the GOP cover-up lie: “We are tax cutters, because we want you to keep more of your money.” A more verifiable, restatement of the impact of their actions would be: “Our designated task is to legislate tax shifters to shift the tax burden onto middle-class voters so as to shift more of the wealth of this nation upward to our core campaign contributors.”

In their ability to buy this political support, the super-rich are indeed different from you and me. Freed from the normal societal constraints on greed and selfishness, they are able to buy whole armies of propagandists and politicians. What is noteworthy is that such prominent members of the super-rich as Bill Gates Sr. and Warren Buffett exercise a form of responsible wealth rather than letting themselves be pulled towards the dark side. As the ancients well described, wealth is addictive. The enlightened attitude of the would-be “responsible rich” is more than offset by the rapacious greed of others at the top of economic pyramid.

This means that societies polarize if they don’t maintain vigilant protection against wealth addiction, above all in the financial sphere. If regressive taxation and an oligarchic (anti-socialist) state is not resisted, the economy will shrink. And as it shrinks, the wealthy will gain even more relative power, and make the tax system even more regressive – locking in a dynamic of economic and financial decline.

“Rapacious” and similar words are necessary to describe how the super-rich wish to “free” themselves from taxes, above all on financial wealth or property. They want whatever funds that government does have to be used for their benefit – to bail out financial losers (such as A.I.G. or Bear Stearns in 2008) so that winners such as Goldman Sachs can collect on bets that otherwise would be owed by deadbeats. The wealthy want subsidies and guarantees for their deposits, and to be “made whole” on whatever gains they are threatened with losing, regardless of how fictitious these gains may be, as in the case of junk mortgages. The aim is simply – crudely, often covertly, with bribery and junk economics as its rationale – to increase their share of wealth and income and to make their takings tax-free.

Everyone would like to be free of taxes. But only the rich have sufficient wealth to “buy up Congress” to give themselves enough tax breaks to shift the cost of running government off their shoulders onto the rest of society – and while they’re at it, to make sure that the government uses its resources to make the rich even wealthier, again at the cost of stifling the economy below them.

This is the situation into which American society is now falling. And at the end of this road is a flat-tax dystopia. It not only ends progressive taxation, it frees from taxes altogether the kinds of income that the wealthy take – returns to financial wealth and property.

The danger the United States faces today is that the government debt crisis scheduled to hit Congress next spring (when Republicans are threatening to vote against raising the federal debt limit as the government deficit soars) will provide an opportunity for the wealthy to give a coup de grace on what is left of progressive taxation in this country. A flat tax on wage income and consumer sales would “free” the rentiers from taxes on their property – just the opposite of Keynes’s hoped-for “euthanasia of the rentier.”

Obviously, all governments have to levy taxes – that is, they have to tax somebody. But the super-rich would like this tax to be shifted off their shoulders onto those who have to work for a living. In diametric opposition to Adam Smith and other putative “founding fathers” of “free market” neoliberalism, the super-rich want to shift taxes off “free lunch” economic rent – off interest, dividends, rents and capital gains – onto wage-earners.

This tax shift already has been underway for the past thirty years. It has doubled the proportion of the returns to wealth (interest, dividends, rents and capital gains) enjoyed by the wealthiest 1%, from a reported one-third in 1979 to an estimated two-thirds of the U.S. total today.

This regressive tax shift off wealth onto wage earners has occurred in three ways. The largest and most egregious was the Greenspan Commission’s ploy of moving the cost of Social Security and Medicare out of the general budget (where it would have to be financed by taxpayers in the higher brackets) onto the bottom of the scale in 1982. Instead of being treated as “entitlements” paid by the highest tax brackets, it is treated as “user fees” by employees with a cut-off (currently about $102,000) for higher-income earners. The pre-saved “Social Security fund” was invested in Treasury bills and then lent to the government – enabling it to cut taxes on the higher brackets. “Social Security and Medicare” became a euphemism for giving the government enough “forced saving” of labor so that the Treasury could cut taxes on the higher income and wealth brackets.

This First Great Republican Tax increase was folded into a reduction in tax rates across the board – above all on the highest tax brackets. This has been ongoing since 1981. The 1981 tax “reform” also gave an accelerated depreciation allowance to absentee property owners, permitting them to pretend that their real estate was losing value even as it was soaring in market price. The effect of this “fictitious property accounting” was to free the real estate industry as a whole from having to pay income tax. (The loophole was not available to homeowners!) The rental income thus “freed” was available to be paid to banks as interest.

Meanwhile, at the state and local level, governments have scaled back property taxes and replaced them with income taxes and sales taxes. These taxes fall mainly on wages and on consumer goods, not financial and property income.

The trick has been for Republicans (and “Blue Dog” Democrats) to pose as “tax cutters” rather than tax shifters. Many wage earners now pay more in FICA paycheck withholding and other taxes cited above than they do in income tax. These changes over the past thirty years have reversed the 20th century’s tendency toward progressive taxation with a regressive tax system.

The 2000 Republican presidential primaries saw Steve Forbes run on a plank that would be the capstone of this tax shift off wealth: a “flat tax,” one that would do away with taxing the wealthy more than blue-collar labor. Mr. Forbes was laughed out of the presidential primaries for proposing this flat tax. It was promoted as being “tax simplification.” The problem was that it is so “simple” that it falls only on employees and their employers as a wage tax.

The details are much more regressive than seem at first glance. The flat tax actually would tax wage earners much more steeply than the wealthy, whose income it would largely exempt! The flat tax is supposed to fall on employment, not returns to wealth. Employees and their employers would pay the tax, as they pay today’s 12.4% FICA paycheck withholding, but the flat tax would not be levied on financial and property income.

The flat tax is supposed to be accompanied by a European-style regressive value-added tax (VAT). By taxing “value,” it essentially falls on labor – as in “the labor theory of value.” The tax does not fall on “empty” pricing in excess of value – what the classical economists termed “economic rent,” that element of price (and income) that has no counterpart in actual cost of production (ultimately reducible to labor) but is a pure free lunch: land rent, monopoly rent, interest and other financial fees, and insurance premiums. This economic rent is the major return to wealth. It is grounded in the finance, insurance and real estate (FIRE) sector.

The effect of untaxing the FIRE sector is twofold. First, it increases the power of wealth, privilege, monopoly rights and property over living labor – including the power of hereditary wealth over the living. Second, it helps “post-industrialize” the economy, creating a “service” economy. A service economy is mainly a FIRE-sector economy. Does any of this sound familiar?

I think that matters are going to get much, much worse for U.S. taxpayers. In fact, we have a dress rehearsal of what is likely to occur already before our eyes. Un-remarked by the press, the flat-tax has been applied with increasing disaster abroad. One might think of this as a cruel psychological economic experiment to see just how far a national economy can be pushed in terms of income and wealth inequality causing poverty at the bottom of the economic pyramid.

Tigers in debt

The cruelest economic experiment has been in the post-Soviet economies. The “Baltic Tiger” Latvia has become a testing ground for how far living standards can be depressed, how steeply an economy can be taxed while removing public social support in the face of a wealthy kleptocratic class at the top.

Latvia’s GDP has plunged by over 22% during 2008-09, unemployment is rising, and the government has cut back spending on hospitals and health care, schools and other basic social integument. But what has most intrigued Europe’s ruling class is its tax favoritism that has created a Bubble Economy (euphemized as a Tiger Economy to make a debt-leveraged real estate bubble appear as if it were a road to wealth rather than to debt peonage). Latvia siphons off more than 51% of wage income in a flat tax – with only a 1% tax on property. This regressive tax system has been largely responsible for its property bubble.

When the Soviet Union broke up, neoliberal advisors were given a free hand in designing their ideal “free market” system. The result became hell for 99% of the population, but heaven for the top 1% who were given public property, enterprises, land, buildings, utilities and other property as part of their “wealth creation” windfall neoliberal style. This gave new meaning to “free” market.

Industrial production and agriculture have been scrapped, forcing the economy into chronic trade deficit – which was financed by an inflow of foreign mortgage loans (mainly from Swedish banks) to bid up housing prices for the Latvians. Without work, a rising proportion of young Latvians have had to emigrate – primarily to Ireland, only to experience the bursting of its own bank bubble this year. So without further ability of housing and property prices to rise – and hence, to pledge as collateral for bank loans – Latvia has had to borrow from the European Union (EU) and IMF.

This borrowing has involved the kind of “conditionalities” imposed only on prostrate Third World countries in times past. Last year the government cut back spending and raised taxes. But it is not enough.

My colleague Jeffery Sommers and I have written numerous articles on Latvia, and the story just gets worse and worse. The pretense is that EU and IMF lending is designed to “rescue” Latvia, to “help it get back on its feet.” The reality is that it is killing the economy – and the population, literally. I would not recount it here except to show the kind of disaster that is being celebrated as a success by the EU and IMF – and is being looked at as an object lesson by flat-tax advocates in the United States.

On November 22, Latvia’s Dienas Bizness newspaper reported how the new plan. It is to reduce the flat tax on income from 26 to “just” 25% (and as a sop to the poor, to raise the untaxable minimum from 35 lats to 45 lats a month (less than $90). The even more onerous “Social Security tax” (i.e., tax on wage-earners to free the wealthy from taxation) is to be raised to over 35%. (Employers are to contribute 24.09%, as before, while wage withholding on employees is raised from 9% to 11%.) The tiny 1% property tax will be roughly doubled and made slightly progressive.

The result is that employment taxes total 60% (25% + 35%). And it gets worse. The VAT on sales is 22%. Assuming that Latvians spend the entire remaining 40% of their wages on sales, this would amount to 8%. All totaled, this would raise the overall tax burden faced by wage earners to 68%.

However, this calculation does not take account of what Latvians have to pay for debt service on their mortgage loans, car loans and other bank debts, and on housing. If these costs amounted to just 25 or 30% of their income (much lower proportions than for the United States), this would absorb over 90% of their income before they have any month to spend consumer goods.

“Great,” say EU economic planners. Latvia has finally balanced its trade! Nobody can afford to import much. So the EU has held out Latvia as a model for Greece and Ireland to follow. In the Greek crisis, one read repeated articles urging it to “stand up and take it” like Latvians.

Here’s how Latvians are getting by – in much the same way that families in Ecuador and other Central American countries have done. The tax system is so regressive, so burdensome on industrial employment, that more than 12% of Latvia’s population is now reported to be working abroad. This leaves the elderly and the young at home, while working-age Latvians try their luck in the shrinking Irish and European economies. Their families are trying to live on what their working-age relatives can send back to the country!

The press has made much of the fact that Latvians have just voted back into office the same neoliberal coalition that has saddled them with the flat tax and VAT. What actually happened last month, however, was that the election was fought mainly over ethnic issues. The would-be progressive reformers of the neoliberal right-wing “reforms” consisted largely of Russian-speaking parties in the Harmony Center coalition. The neoliberals managed to steer voters along ethnic divisions rather than fighting the election over economic policy. So as so often happens in the United States itself, voters let themselves be distracted away from economic issues. Yet another object lesson for “how to do it” in the United States …

Can a regressive flat-tax be pushed through U.S. Congress?

Returning to the U.S. economy, the wealthy want just what bankers want: the entire economic surplus (followed by a foreclosure on property). They want all the disposable income over and above basic subsistence – and then, when this shrinks the economy, they want the government to sell off the public domain in “privatization” giveaways, and they want people to turn over their houses and any other property they have to the creditors. “Your money or your life” is not only what bank robbers demand. It is what banks themselves demand, and the wealthy 10% of the population that owns most of the bank stock.

And of course, the wealthy classes want to free themselves from the share of taxes that they have not already shed. The flat-tax ploy is their godsend.

Here’s how I think the plan is intended to work. Given the fact that voters have already rejected the flat tax in principle, it can only be introduced by fiat under crisis conditions. Alan Simpson, President Obama’s designated co-chairman of the “Deficit Reduction Commission” (the euphemistic title he has given to his “Shift Taxes Off Wealth Onto Labor” commission, STOWOL) already has suggested that Republicans close down the government by refusing to increase the federal debt limit this spring. This would create a fiscal crisis and threat of government shutdown. It would be a fiscal 9/11, for the Republicans to trot out their “rescue plan” for the emergency breakdown of government.

The result would cap the tax shift off finance and wealth onto wage earners. Supported by Blue Dog Democrats, President Obama would shed crocodile tears and sign off on the most right-wing, oligarchic, anti-labor, anti-black and anti-minority, anti-industrial tax that anyone has yet been able to think up. The notorious Flat Tax which would fall only on wage income (paid by employees and employers alike) and on consumer goods (the value-added tax, VAT), while exempting returns that accrue to the wealthy in the form of interest and dividend income, rent and capital gains.

If you think I’m too cynical, just watch …


[1] Luke Johnson, “The rights and wrongs of going bankrupt,” Financial Times, November 24, 2010.

(13) The Angry Rich: Self-pity among the Privileged - Paul Krugman

The Angry Rich


Published: September 19, 2010

Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they're out for revenge.

No, I'm not talking about the Tea Partiers. I'm talking about the rich.

These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can't find jobs; laid-off 50-somethings fear that they'll never work again.

Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won't find it among these suffering Americans. You'll find it instead among the very privileged, people who don't have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled "The Wail Of the 1%," it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It's one thing when a billionaire rants at a dinner event. It's another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, "anticolonialist" agenda, that "the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s." When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case. Yes, Republicans are pushing the line that raising taxes at the top would hurt small businesses, but their hearts don't really seem in it. Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it's their money, and they have the right to keep it. "Taxes are what we pay for civilized society," said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world's luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It's partly a matter of campaign contributions, but it's also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it's clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they'll say; we all have to be willing to make sacrifices.

But when they say "we," they mean "you." Sacrifice is for the little people.

(14) Krugman: GOP Tax Cuts for the Rich, in the guise of tax breaks for ordinary families
Krugman: GOP backs Tax Cuts for the Rich

The Tax-Cut Racket


Published: September 16, 2010

"Nice middle class you got here," said Mitch McConnell, the Senate minority leader. "It would be a shame if something happened to it."

O.K., he didn't actually say that. But he might as well have, because that's what the current confrontation over taxes amounts to. Mr. McConnell, who was self-righteously denouncing the budget deficit just the other day, now wants to blow that deficit up with big tax cuts for the rich. But he doesn't have the votes. So he's trying to get what he wants by pointing a gun at the heads of middle-class families, threatening to force a jump in their taxes unless he gets paid off with hugely expensive tax breaks for the wealthy.

Most discussion of the tax fight focuses either on the economics or on the politics — both of which suggest that Democrats should hang tough, for their own sakes as well as that of the country. But there's an even bigger issue here — namely, the question of what constitutes acceptable behavior in American political life. Politics ain't beanbag, but there's a difference between playing hardball and engaging in outright extortion, which is what Mr. McConnell is now doing. And if he succeeds, it will set a disastrous precedent.

How did we get to this point? The proximate answer lies in the tactics the Bush administration used to push through tax cuts. The deeper answer lies in the radicalization of the Republican Party, its transformation into a movement willing to put the economy and the nation at risk for the sake of partisan victory.

So, about those tax cuts: back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn't act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.

In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends. ...

(15) Krugman: Niall Ferguson wrong on Budget Deficit leading to Hyperinflation

October 2, 2010, 9:33 AM

How The Other Half Thinks

Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It's a good request, although the truth is that the other side in this debate doesn't necessarily agree on a single model, or even use models at all. Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been.

So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the "classical theory" of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we're seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications.

Oh, and the Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn't seem to be a model behind it, just a misunderstanding of what accounting identities mean.

Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it's all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.

You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson's remarks <>

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don't quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on.

Meanwhile, you can see the high-inflation prediction in pieces by Meltzer and Laffer — with the latter helpfully titled, "Get Ready for Inflation and Higher Interest Rates".

While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.

So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to "but unemployment has stayed high!" which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.

The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.

(16) Krugman: Keynes on Government intervention (print, money, public works) during slumps

How Did Economists Get It So Wrong?


Published: September 2, 2009

... As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. ...

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, "The General Theory of Employment, Interest and Money," as "moderately conservative in its implications." He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.

Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is "The Return of Depression Economics and the Crisis of 2008."

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