Month: March 2009

Passive Aggressive Anger Release Machine

“All you have to do is insert a coin, and a piece of china will
slowly move forwards and fall into the bottom of the machine, breaking,
and leaving you happy and relieved of anger.”

The link is here.

Henry Blodgett writes:

If the "TARP bonus" bill the House passed today becomes law, any of
the hundreds of thousands of people who work for Citigroup, Bank of
America, AIG, and nine other major US corporations will have to fork
over 90 cents of every dollar they make that puts their household
income over $250,000.

That's household income, not individual income.*  If you're
married and filing singly, you'll have to surrender anything over
$125,000.  Indefinitely.

Read the whole thing.  There is this too:

The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.

(Remember?  That's the reason we bailed Citigroup, AIG, GM, and the
rest of them out–to save them.  Because we convinced ourselves that
civilization would end if we didn't.)

Thanks to our stupidity
bailouts, we now own major stakes in these firms (at mind-boggling
expense). So it's not clear why we want to destroy them.  But that's
what we seem determined to do.

Addendum: Here is one of many stories about death threats against A.I.G. employees.

Bernanke will do it.  I'm sitting in an airport, so here is a very quick take.  It is cheaper and quicker than fiscal stimulus; this should have been our first move.  It is more likely to work.  There are two effects: lowering long-term interest rates and the helicopter drop of the cash.  It belies previous talk of a liquidity trap.  It does not address most of the underlying problems in the real economy and as you know I see the "sectoral shift" element of this downturn as very much underrated.  In that sense don't expect too much.  It shows that at the limit fiscal and monetary policy blur together.  The more the Fed takes on its balance sheet, the more the long-run independence of the central bank is damaged.  Monetizing so much government debt is what Third World nations do.  Draining the new money from the system will someday be a problem.  It may introduce a round of "beggar-thy-neighbor," central bank-engineered currency depreciations.  "Operation Twist," from the 1960s swapped short- for long-term assets but did not seem incredibly effective, although it was done under very different circumstances.  Trillion is the new billion.  If this fails the U.S. economy, and the stock market, will test new bottoms.  The most articulate advocate of quantitative easing is Scott Sumner.

It's about time.  Shows how peculiar it is to define a liquidity trap in terms of short-term rates.  The fact that the Fed usually buys short-term bonds is a minor issue as far as monetary theory is concerned, like the fact that the Fed usually prints $1 bills but not $2 bills.

The very healthy influence of Scott Sumner has induced me to read the Irving Fisher works I had never looked at before.  Wow.  It’s Fisher, not Keynes, who is the prophet of our times and the superior analyst of the Great Depression.  Circa 1932, Fisher wrote:

…in the depression of 1929-32, while the volume of deposit currency in member banks was falling 21 per cent, the velocity of it was being reduced by 61 percent….a mere new supply of money, to replace what has been liquidated or hoarded, might fail to raise the price level by failing to get into circulation…a mere increase in M might prove insufficient, unless supplemented by some influence exercised directly on the moods of people to accelerate V — that is, to convert the public from hoarding.

One wishes that Keynes were so clear. And what is the best way to restore confidence and break the liquidity trap?  Restoring confidence in banks, so that a multiplier, working through credit, may be effective again.  Fisher also suggests negative interest on reserves and he outlines in detail how this might be done.

That is all from his Booms and Depressions, First Principles, a very sophisticated work.  Pigou, Hawtrey, and Viner are also all worth reading; they are more advanced in their thinking than Keynes was willing to admit.

Hail Irving Fisher, still one of the most underrated economists of the 20th century.  By the way, 1936 – 1932 equals 4.

On Intrade, users are betting on a futures contract that pays out if
Mr. Geithner is out of his job by June 30. Right now, the futures
contract shows a low probability of that happening – it’s currently at
15 percent, or $1.50. Still, that’s up from previous levels, according
to the prediction market’s Web site.

Here is the (brief) story.

pp.7-8 tell you what they don't want to do, take a look.  Maybe that above list sounds reasonable, but it also sounds designed to prevent money market-like institutions from…guess what…competing with money market funds.  It also sounds designed to preserve the good name of money market funds next time something goes screwy.  It is designed to preserve p (share) =1 without requiring a legal commitment to that effect and without instituting overly burdensome regulation.  Pretty neat, huh?  It's a circle the wagons approach, combined with a reluctance to ante up any cash on the table.  You don't suppose they are still planning to depend on the Fed as a lender of last resort, do you?

You'll see a lot more proposals like this from industry participants.  "Help me look good again," but with little recognition of the toothpaste tube metaphor and with few remedies for wherever the next bout of systemic risk gets squeezed to.  I don't blame the money market sector for not solving this problem (economists can't solve it either), but at the same time it's important to recognize such proposals for what they are: the new financial services sector equivalent of NIMBY.  Put your systemic risk junk somewhere else.  But where?