The Fed has traditionally one big tool to stimulate lending: cutting interest rates. The only trouble is--what do you do when you have already cut interest rates to near zero? You're already pushing on a string. The fear is that you pour too much money into the system, it fuels inflation, which you need to tame by withdrawing money from the system, i.e., raise rates, which can trigger a recession.
In fact, many on the Fed are worried about about the opposite happening: ruinous, vicious circle deflation. Falling prices and wages could leave banks holding another batch of bad loans. Consumers and businesses don't want to catch a falling knife, e.g., why buy a house at today's prices when 6 months from now I bet I'll be able to buy it for $20,000 less...Fewer products and services require less workers.
"Helicopter Ben" Bernanke was a student of the Great Depression and is convinced the major issue was allowing the money supply to shrink down. So now he's responding with a different tool, with less than ideal results from the Japanese economy facing similar issues since its 1990's correction: quantitative easing. The basic idea is to swap troubled monetary assets for fresh money. In particular, Bernanke is talking about, instead of reducing his balance sheet, buying long-term Treasury debt. (This makes the price of T-bills higher and interest rates lower.)
The problem is that (like the large national debt) sooner or later you have to do the reverse, and it's going to have exactly the opposite effect on the economy. That's why the national debt is driving me crazy. Our children and grandchildren are going to have to deal with a situation where their government operational budget will be in a zero-sum game with existing debt--while competing in a difficult global economy where economic growth will likely be lower than the historical mean.
The Republicans Need to Toughen Their Stance on Deficit Spending
Carolyn Lochhead has an interesting critique today on the GOP campaign on reducing federal spending. I'll paraphrase the basic gist in my own way. This fall we are looking (so far) at the difference between maybe a $450B-deficit GOP vs. the $1.4T-deficit Dems. You can't finesse your way through a $1.4T deficit. She points out that you aren't going to get there by freezing earmarks and federal hiring and by excluding or not addressing entitlement and defense spending from the get-go. She principally prefers a couple of steps: (1) letting all the Bush tax rates expire (not just the upper-class), and (2) looking seriously at Paul Ryan's (R-WI) Roadmap.
In this blog, I've repeatedly called for uniform policies: we have to put the entire federal budget on the table, not carve out favorable niches (e.g., defense spending). I've basically said with respect to the Bush tax cuts: either do all of them or do none of them. I think we need to move towards a more mixed, simpler tax system (by more mixed, I'm referring to a consumption tax versus more income taxes). I've also said that I don't blame the GOP for not being too explicit in terms of spending cuts, because the President and the Congressional Dems will make the Republicans eat each and every cut and use fearmongering tactics. I've also said that the GOP has to be very careful over setting unrealistic expectations where even under the rosiest scenarios, the Democrats will have a filibuster-sustaining minority in the Senate and Obama's veto. Obama would love nothing better than to run for election by demagoguing against "bad cop" Republicans. Britain's Prime Minister Cameron did not campaign (to the best of my knowledge) on austerity measures, although now he is talking about about real cuts in budgets, not just the usual "cut-in-next-year's-increase" gimmicks. Ms. Lochhead misses the biggest point: if the GOP wins control of both houses this fall, the era of Big Government expansion is done.
Political Cartoon*
Gary Varvel shows what happens when the spendthrift Dems insist on keeping the keys to the car. But when the cops finally arrive at the crash scene, no doubt the driver will show a fake ID featuring George W. Bush. In Sunday's post , I gave alternate takes on Obama's beloved driving metaphor.
* I made the political cartoon feature part of the standard format for this blog several months ago. I am suspending this feature effective immediately. I will probably revamp the concept in a new Political Humor feature, but will probably make more use of links to external sources. (I will say that from all the feedback I've received on this blog, nobody references the Political Cartoon feature.) But also, I have to admit it's getting harder to find decent material to use in this feature on a daily basis. There are also some websites which feature create-your-own-comics or videos, and I may try experimenting with that as time permits.
To explain my position to date: I often embed images and clips from source websites on a fair use basis for personal, non-commercial purposes and clearly reference ownership of said clips or images. Video clips often come from Youtube and Daily Motion. Cartoons are available from sources like townhall.com and gocomics.com. The basic purpose for including clips on the blog is for the convenience of the reader because I often want to comment on the clip in context or promote the source or artist (however, I have often linked sources which I will not embed). For example, I'm a fan of Michael Ramirez' work, but only a sample of his cartoons has been featured on this blog. You can find copies of his most recent cartoons on his Facebook account and the investors.com website. I encourage you to visit websites which license or subsidize through ads the work of these artists. (As for anyone attempting to plagiarize my blog, well, chances are any professor you'll encounter is a progressive, and you'll probably get an F...)
Quote of the Day
Blessed is the man, who having nothing to say, abstains from giving wordy evidence of the fact.
George Eliot
Musical Interlude: The American Songbook Series
Larry Clinton, "Over the Rainbow"
