Remember how, post 9/11, President Bush urged patriotic Americans to go to the mall? It appears the officialdom is fond of time-tested remedies.
Bloomberg tells us that the Fed and Treasury have a plan,, using TARP funds, to get consumers to spend again by supporting consumer lending. There are a few problems with this approach:
1. The banks have already been given support right, left and center. They are still not lending,
2. Some of the stinginess is warranted. Um, a credit bubble means a lot of people got loans who shouldn’t have. Do we want banks again to make unsound loans? I should hope not, but I could be wrong here. A fair bit of consumer credit ought to contract. And even if a lot of good customers also have their credit lines cut, do you really think the banks are going to turn around and reverse these decisions on a meaningful scale. Ain’t happening.
3. Consumers are scared about employment and the loss of their home equity piggybank. They also know they borrowed too much. They want to lower debt levels. So as a reader put it, “Even if you throw the horse in the lake, you can’t make him drink.”
4. Banks are so desperate to restore profits that they are jacking up prices on existing consumer credit, even as the Fed and Treasury have been provided lots of low-cost support. Citibank and American Express are raising interest rates on existing loan balances for a a significant proportion of customers, and they no doubt have company. If consumers face higher charges on their outstanding debt. it considerably reduces the odds that they can or will take on more debt.
And a separate issue: consumer debt and consumer spending were at unsustainable levels. They need to fall. Trying to shore up consumers is a wrongheaded way to stimulate the economy. Fiscal expenditures, including a broadening of safety nets, is a much better way to go.
Persisting in a failed course of action is not a sign of intelligence.
From Bloomberg:
The U.S. Treasury and Federal Reserve will unveil as soon as today a lending program to shore up the consumer-finance market, using money from the government’s $700 billion rescue, two people familiar with the effort said.
The Treasury and the Fed will help fund new loans packaged into securities for sale to investors, the people said. Treasury Secretary Henry Paulson, who scheduled a press conference for 10 a.m. New York time, said two weeks ago that he wants to spur lending for automobile purchases and college education while also reducing the cost of credit-card debt…
Senator Charles Schumer, a New York Democrat, urged the Treasury and Fed yesterday to use the $700 billion fund to make it easier for automakers’ finance units to lend….
Paulson previewed the new program in a Nov. 12 speech, when he said the Treasury and Fed were “exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.” The government could use some of the bailout fund to encourage private investors to re-enter the market, he said.
“Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Paulson said..
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Persisting in a failed course of action is not a sign of intelligence.
Exactly! And that’s precisely what Geithner and Summers will do!! Direct lending to consumers (was turning AmEx into a bank not good enough?) isn’t even clever.
Again, our two major policy tools at this juncture are quantitative easing and Keynesian stimulus.
Keynesian stimulus can crowd out private demand because the government has to borrow in order to fund its programs. While that seems like it’s no big deal with interest rates so low, those are nominal rates. Real interest rates matter much more, and they’d go up through Keynesian stimulus. You can’t watch those go up at this point because deflation’s severity is masking the pricing of bonds. Instead, you’d witness it only through increasing severity of deflation. Our hope is that Keynesian stimulus is a net positive to demand, because the private sector will begin to recycle this spending. But it’s no more than hope, and Japan has already experienced that it is counterproductive when government debt is high. “Stimulus” may actually drain economic vitality further.
We’re already using stealth quantitative easing. It isn’t working, because risk-adjusted returns on investment are judged to be around or below 0%. That means the bank just deposits the extra cash with the Fed and walks away. To fix this, we’d have to reduce the risk involved or allow these investments to become so cheap that that return goes above zero. Allowing the investments to deteriorate that badly defeats the purpose of the program in the first place. Reducing the risk is extremely difficult and costly to do, and fraught with unintended consequences if it’s even possible.
I’m very sorry to keep repeating myself, but this is maddening. Policymakers, we’re counting on you guys to think about this stuff before you do it! Don’t keep throwing things at the wall and hoping something sticks! With the best of intentions, you are making things worse!
Persisting in a failed course of action is not a sign of intelligence. I’m very sorry to keep repeating myself, but this is maddening.
p.s. Does this mean I’m stupid? Uh-oh.
The powers that be are working overtime to figure out a way to service 50 trillion in US aggregate debt and it is just not working, nor will it.
There will have to be a massive debt writeoff because without it the U.S. as an on going concern is insolvent.
And then there’s the variant: if we can’t get consumers to spend, then let’s get the government to spend.
“Persisting in a failed course of action is not a sign of intelligence.”
I think we’re all persisting, and all our persistence is failing.
Arggh! Can we just switch the Dow/bar love meter off please. Everyone thinks the good times are back. No one seems to think death is part of the natural process in life anymore, damm zombies.
Skippy
What choice do they have but to try to crank the debt bubble up one more time. Most large companies are leveraged due to rapid expansion and the economy collapses like a pack of cards as all the large employers fold if they cannot get the bubble going again. At least if they can get a bubble going they might be able to push the pain down the road abit.
This sentence by Paulson tells all exactly what the Treasury Secretary is betting all the marbles on…
“Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Paulson said..
One would think that Paulson, et al, would look at the results that history provides. Where has a bubble been reinflated, Hank?
Paulson and Bernanke are willing to gamble all on an attempt to accomplish what has never been accomplished. Does anyone need further proof of the dire straights the economy is in?
Why no talk about Woodrow Wilson and his foolish decision to allow the creation of the Fed?
This seems fine to me, at least in principle (details matter, of course). This is the “Bank of the Fed” approach I’ve been advocating since the TARP was proposed, applied to consumer loans rather than working capital loans. Much as with working capital, private money that had been going into consumer loans, via securitization, is now fleeing into treasuries. If the Fed can’t avert the flight, a reasonable patch is for the Fed to act like a bank, accept “deposits” in the form of sold Treasuries, and then loan the money out. Since the Fed hasn’t the infrastructure to loan directly, it has to use indirect processes like this.
If the Fed makes bad loans using this process, we have a problem. But, that’s not guaranteed and they’ve done fine in the auction facilities. Again, we need details to know whether this will work.
If the Fed is going to loan hundreds of billions to consumers by supporting securitization markets for auto loans, credit cards, and student loans, in addition to the $7.7 trillion it’s loaning/backstopping in the banking markets, why even try to save the banking system? Why not just hit the reset button on the current system and have the Fed be THE BANK until a new system is created from scratch.
No choice but to reinflate the consumer credit bubble otherwise we have a shrinking economy with massive layoff’s that go far beyond the manufacturing floor and into the whole structure of the demand side employment.
This reminds me of the Vietnam era with the Adminstration either Republican or Democrat taking the same actions with daily briefing’s and of course light at the end of the tunnel.
Like today the media are quick to point out how the men running the show were the best and brightest were running the show.
If only we could securitize the short-sightedness of our political and economic elites then we’d all be rich again.
This move is long bubble and short sanity. Can’t America just hurry up and re-industrialize!? sheesh!
“Trying to shore up consumers is a wrongheaded way to stimulate the economy.”
I don’t understand how putting money in consumers pockets, money they will go forth and spend, is the “wrongheaded” way to stimulate the economy.
In the end, don’t we want people to go buy stuff? Isn’t that stimulative?
I ask in seriousness. Help a newbie out. The idea floated in the link NDK provided on Japan just seems off-point; it implies that Americans won’t spend it if we’ve got it. The Japanese might not, but us…?
I’m not anonymous. I’m zak822
Anonymous 12:02 – The problem with simply giving the money to consumers is twofold:
1. Most of it won’t be spent on goods and services, but rather used to pay down debt.
2. Given how import dependent our economy is, what little is spent will go to foreign firms rather than stimulating the economy.
Giving it directly to firms would be a better idea, if not for the fact that they too are overburdened by debt and would use it to deleverage rather than make job-creating capital investments.
What the “smartest people in the room” don’t want to admit is that there is no easy way out of this situation.
The U.S. recession probably deepened as consumer spending plunged in October by the most since the 2001 downturn and businesses slashed investment, government reports may show this week.
The GDP Price Deflator tells us the rise in nominal GDP that is attributable to a rise in prices.
To Austrian-Economics and Libertarian friends:
1. PLEASE, stop predicting deflation or saying that the Fed is powerless. You just encourage them to waste more money. We have not had deflation for a very long time and it is seriously doubtful that we will see deflation in our lifetimes. Make an effort to refrain from even saying the word “deflation” until consumer prices really drop over, say, at least a whole year.
2. Do not talk about Keynes or Keynesian economics unless you have read Keynes’ writings and understand his political views. You make it sound as if Reagan or GWB were Keynesian (Keynes must be turning in his grave). Let us agree that we debate without using the combination of letters “Keynes”.
The idea floated in the link NDK provided on Japan just seems off-point; it implies that Americans won’t spend it if we’ve got it. The Japanese might not, but us…?
zak822, fiscal stimulus is public sector spending. It’s spent by definition.
Do not talk about Keynes or Keynesian economics unless you have read Keynes’ writings and understand his political views.
Tortoise, I read his General Theory from cover to cover. I thought it was a magnum opus of economics and I gleaned a lot of novel insights from it. That deferral of consumption is not always possible and not usually beneficial was my favorite. I don’t believe it’s the bible, nor do I believe fiscal stimulus is the right policy at this point.
Why do you think quashing debate is the right policy?
ndk, Quashing debate is something beyond my capacity but, more importantly, totally contradictory to my desire. You seem to think that any spending and any deficit spending are, you know, the K word economics. I beg to differ, my friend. I would submit that saving Citi is not. Reducing taxes for the wealthy is not. Lending more money (at 20-25%) to the already insolvent poor is not.
As for “fiscal stimulus”… Fiscal stimulus is what Reagan applied in 1982 — was he a K——-n? Was it the right policy? I would love to hear your views.
You seem to think that any spending and any deficit spending are, you know, the K word economics. I beg to differ, my friend. I would submit that saving Citi is not. Reducing taxes for the wealthy is not. Lending more money (at 20-25%) to the already insolvent poor is not.
Any fiscal deficit is Keynesian stimulus. You can do anything with it: saving Citi, reducing taxes, lending money, dig ditches in South Dakota, whatever. His key insight was that the government could create a propensity to investment when none existed. Ideally, the investment would be one that led to further beneficial multipliers. But the private sector is extremely hungry to invest right now, and it probably has higher multipliers than the public sector’s spending does. If it doesn’t, we should just convert to central planning now.
As for “fiscal stimulus”… Fiscal stimulus is what Reagan applied in 1982 — was he a K——-n? Was it the right policy? I would love to hear your views.
Yes, it was the right policy, in my opinion, and in a sense it was Keynesian. It was a different world, with major inflation and high unemployment. His policies, combined with Volcker’s monetary stranglehold, raised real interest rates significantly. That was needed then. We need lower real interest rates today.
Essentially, I think everyone is way too ignorant of real interest rates. The conventional wisdom is that higher deficits are always inflationary and lower deficits are deflationary. I disagree; that depends on a lot of things. I do believe that higher deficits raise real interest rates, and depending on the environment, that can be good or bad.
ndk, It is interesting to hear your views. You refer to a wikipedia article (not always the best place to be enlighted, but not a bad article, I must admit!)
However, this article seems to dispute your categorical “Any fiscal deficit is Keynesian stimulus.” In fact, the article plainly states: “Deficit spending is not Keynesianism.”
The point that paragraph is trying to make is that deficit spending is not always Keynesian. It’s only Keynesian when it’s used specifically for policy goals.
I’m going to start using “fiscal deficit” or “deficit spending” instead of Keynesianism, because it’s not attached to a particular individual or subject to variable interpretation. Sorry about that, and thanks a lot for chasing down the terminology.
Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle.
Einstein once defined “madness” as “repeating the same experiment and expecting a different result”. It seems this “madness” has truly afflicted Paulson, Bernanke and the rest. The credit balloon has burst, and the just don’t seem to understand that it can’t be re-inflated.
As for Keynes, he gets a bad rap sometimes. Of course Reagan’s fiscal stimulus was “Keynesian”, in that it was counter-cyclical spending designed to stimulate the economy. Here’s some Keynsian food for thought: we’ve spent trillions (so far) trying to implement the “no banker left behind” policy, yet our infrastructure is crumbling and the future drivers of economic growth remain elusive.
I read recently that the total cost of the Apollo space program in equivalent dollars today is in the order of $100bn. That’s a third of what was just squandered on Citi. For that, we achieved major advances in earth and lunar science, materials science, aerodynamics and space dynamics, guidance and control, and computing (the basis of the IT revolution and the huge productivity growth that it has delivered).
What will we get for $300bn spent bailing out Citi?
I am late to this thread, but a basic element of a Keynesian prescription is the deficit spending needs to go to those with a high propensity to spend. The whole point of the exercise is to increase consumption. That is why the so-called stimulus package of earlier this year was ineffective. Gary Skilling did an analysis that showed that 80% of the tax rebate was saved.
And BTW, “Keynesianism” has a lot of elements that Keynes would not have approved of. He thought that government-generated stimulus was warranted only in cases of severe demand shocks, not the kind of fine-tuning that later economists have attempted.
We’re still here, no worries. :D
He thought that government-generated stimulus was warranted only in cases of severe demand shocks, not the kind of fine-tuning that later economists have attempted.
This over-use on the short end combined with the petrodollar/Chinese recycling on the long end was really a remarkable confluence of events. Maybe some of the pharmacological metaphors other readers use aren’t so far off the mark.
Do we really face a severe demand shock in this sense right now, though? It really doesn’t feel like that sort of an endogenous downturn to me. This mess originated from massive, persistent indebtedness and leverage, the likes of which have never been seen before, not a demand shock. Visual representation here.
I know a deficiency in demand is arising, but it’s a secondary effect, and yet the leading economists of our time are egging on the most aggressive application of leeches possible, cautioning against prudence or thinking things through. It scares me.