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Short Term vs. Long Term
SHORT TERM vs. LONG TERM....As long as we're talking about the economic long term, here's another question for the economics crowd. Conventional wisdom, after first complaining that TARP was misconceived and what was really needed was bank recapitalization, has quickly swung around to the idea that, in fact, Henry Paulson's capital injections were wasted. After all, banks still aren't lending.
Tax cuts, similarly, are in ill repute because they don't necessarily increase consumption. People are more likely to sock the money away in a savings account or use it to pay down credit card debt. So there's no bang for the buck.
But surely this is short sighted? Stimulus spending can (we hope) help keep the economy afloat over the next couple of years, but then what? When the economy starts to recover, it will certainly be helped along if bank balance sheets are in better shape than they are today. Likewise, it will be helped along if consumers have paid down some of that credit card debt and put a few dollars aside. Right? We can't keep running a negative savings rate forever, after all.
So: what's wrong with government spending to stimulate the economy now, combined with tax cuts and bank recapitalizations to help get the economy in shape for recovery a couple of years down the road? This isn't so much a suggestion as a question. Does this make sense, or is there some fundamental misconception at its core? What say the economists?
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My complaint with Obama's proposed tax rebate of 500 to 1000 dollars per taxpayer is that it is too puny to serve any kind of stimulative effect or to help people get out of debt. For most people worrying about their indebtedness, $500 is a rounding error.
Exactly right about the bank recapitalization. Healthy banks are a necessary condition for a recovery, but not a sufficient condition. The first step to recovery is to recapitalize the banks, any stimulus spending before that was done would be wasted.
The execution of TARP has been awful with no accountability. Shareholders should of been forced to take much bigger hits. But I don't think putting pressure on banks to lend at this time makes much sense either. I wouldn't be handing mortgages out right now.
Net income tax cuts, however, make no sense to me. You can reconfigure marginal rates to make them more progressive, but if you cut the total intake now, you'll just have to raise it more later.
Actually there isn't anything fundamentally wrong with Obama's proposed stimulus package. Getting more money into the hands of the middle class will help.
I am mostly worried about what the post bailout economy is going to look like. If we are smart America can position itself to be the world leader in something other than consumption of Chinese consumer goods. Developing that America is going to require at least a rudimentary industrial policy of some sort. Any hope Summers and Rubin will allow us to think about putting America in a position to start manufacturing again with an eye to sell to the world's developing economies?
Krugman's thinking is (I'm guessing) something like this: all nonlinear dynamical systems (like economies) have "sticking points" in their movements. So if it takes "X" amount of force to change direction, then if you apply ".5X", you don't get half the desired result, you get nothing. And if you apply ".9X", you get nothing. So your argument, that cleanly separates near-term from longer-term, is too linear.
Kevin Drum: Conventional wisdom, after first complaining that TARP was misconceived and what was really needed was bank recapitalization, has quickly swung around to the idea that, in fact, Henry Paulson's capital injections were wasted.
But either way the "conventional wisdom" was that we needed to give the financial industry a $700B present. How sweet.
How about this: TARP, whatever the money was actually used for, should never have been passed. Any banks that can't cut it in the free market can be taken into receivership (*cough* Citibank *cough*).
To your question, I have no factual basis to form an idea. I wonder who really does (as opposed to all the contradictory opinions) out there.
I do think the injections were over sold or not implemented correctly. The message seemed to be that this would allow the banks to carefully get back into the lending business. Some have, but not at a level that seems to have been expected.
I didn't say this in the main post, but I agree that the TARP bailouts were poorly structured. I supported, and still support, the recapitalizations, but the conditions should have been stiffer. And I remain (as I was at the time) opposed to forcing capital on everyone, instead of rescuing only the banks that really needed it. I understand the reasoning (singling out banks for help stigmatizes them) but I don't really buy it. And this was at the core of the lax condition on the TARP money.
As for tax cuts, my preference would be for some kind of cut in the payroll tax, since it would be more widespread, more progressive, and more likely to be spent.
The problem is that we don't have infinite amounts of money, and every dollar of debt we accumulate now will create some level of drag in the futre.
Instead of rescuing decrepit, corrupt and bankrupt finance institutions, new ones with transparent charters should have been financed with the TARP monies. All of the TARP monies given out so far will never be recovered from the finance instituions they were given to, leaving the debts to be repaid by American workers.
The economic problem has been made worse with TARP because it misallocated more future wealth to those who were already misallocated too much wealth through the manipulation of the political economy's rules. Misallocating more wealth to those who add little or no value to goods and services only makes the underlying problem of the inequity of the economy's distribution of its wealth worse.
It sounds like doubletalk, but, even though the payroll tax is regressive, a payroll tax cut would not be more progressive. If it it took the form of a cut in the percentage rate of the tax, it would actually be regressive - i.e., a cut of 1 percentage point in the rate would mean a break of about $4 a week for the $20,000 per year guy, but about $23 a wee for the $120,00 per year guy (the maximum to which the tax applies). (On the other hand, if if took the form of a flat dollar amount reduction in the amount due each week, its no different than the income tax reduction proposal.) A flat rate rebate, particularly a refundable one such as Obama is proposing (payable even to those who do not owe income taxes) is much more progressive. BTW, I agree that the amount seems much to small to be be meaningful and it would be better to use the $300 billion to prop up states and localities to preven them from cutting services to people who really are under the gun in the current economy, but that is a different argument from the issue of progressivity.
As for tax cuts, my preference would be for some kind of cut in the payroll tax, since it would be more widespread, more progressive, and more likely to be spent.
"More widespread" than what?
You mean a cut that applies to earned rather than unearned income? (Payroll tax is income tax, right?) If so, agreed.
We can't keep running a negative savings rate forever, after all.
I am not an economist, but I'm pretty sure that James Galbraith shows in his new book that not only yes we can but absolutely we should.
Instead of rescuing decrepit, corrupt and bankrupt finance institutions...
It's not clear that what happened was the result of corruption. The government knew what these institutions were doing -- if it had known better, it should have stepped in. Many of the people responsible for the financial practices that led to the collapse have lost their jobs, and many have lost much of their net worth as well. It's not as if they were doing something they knew to be bad for the system. This was a systemic failure, a bubble in which many ordinary citizens participated along with the financial institutions. We should be looking at new systemic controls (government regulation) to avoid such problems in the future rather than demonizing those who were participating in what were industry-wide practices.
JS: We should be looking at new systemic controls (government regulation) to avoid such problems in the future rather than demonizing those who were participating in what were industry-wide practices.
Why not do both? Yes, improved regulation (kind of like we had from the 1930's up until 10-15 years ago) is necessary.
OTOH demonizing the financial geniuses is not only accurate, and an important start in writing the history of our time, it's fun!
Alex, the full quote I was responding to was:
Instead of rescuing decrepit, corrupt and bankrupt finance institutions, new ones with transparent charters should have been financed with the TARP monies.
How would you propose to structure new financial institutions, and new charters, so that they do not fall victim to the next bubble?
Also -- as already noted, heads have already fallen, and they keep falling. In effect, when you have new managements you have new institutions. (Remember, the Citi crew most responsible for what happened there has been gone for a while -- i.e. Prince & Co. Rubin finally went last weekend).
How many of the financial geniuses could withstand a criminal investigation of every transaction they made is unkown, but such investigations should take place. Every unlawful act should be heavily fined, the fines used to finance the stimulus, and their perpetrators deemed unworthy of not only never working again in finance, but unworthy of receiving bailout funds to rescue their firms.
tpx, the significance of what happened lies in the fact that it is possible to bring down the system without doing anything illegal. (That's not to say that nothing illegal was done in this period -- but it was not the illegalities that caused the collapse).
"For most people worrying about their indebtedness, $500 is a rounding error."
Probably so. But then again, if that amount of money isn't enough to give people a chance to breathe, then the only prescription for them is a painful readjustment like bankruptcy or a major lifestyle readjustment.
I may have missed something, but I'm really curious about why it's so terrible for people to use the money already given out or any future money that will be given out to save or to pay down debt. I know it doesn't stimulate consumption directly, but (a) wouldn't it be a way for banks to have more money to lend (b) help consumers over a longer period of time by saving them money on interest and improving their credit scores if it is the start of a move towards a sounder financial footing? Again, it's not a huge sum of money, but speaking as someone who is trying to save more, it's helpful to have something to use as a starting point.
JS: How would you propose to structure new financial institutions, and new charters, so that they do not fall victim to the next bubble?
I don't think "new institutions" are really what's needed (I didn't back check the full quote you were responding to).
As for changing regulations so that institutions don't fall victim to (or themselves create) the next bubble, I think a good start would be to simply roll back the last 10-15 years of "modernization". The only thing that's new about the current mess is the buzzwords. Otherwise it's just a bunch of crap that regulations put into place as a result of the Great Depression (and even the Panic of 1907) were designed to prevent - and did prevent for decades. What changed? Financial geniuses convinced the government (or were part of the government - e.g. Rubin) that "the rules have changed", which is a sure sign that you should hang onto your wallet. 2+2=5. We can make risk disappear. We'll change lead into gold!
when you have new managements you have new institutions
Yeah, well, it's a start. A day late and a dollar short, but a start.
the Citi crew most responsible for what happened there has been gone for a while -- i.e. Prince & Co. Rubin finally went last weekend
And I'm sure they've been reduced to penury. If I see Bob Rubin selling apples on the street corner, I'll be sure to buy one from him.
Not that, tempting as it may be, there's much we can do about it. If an engineer designs a bridge that falls down, he'll be sued up the ying-yang. Unfortunately, driving a multi-billion dollar company into the ground through sheer incompetence is harder to prosecute.
They haven't been reduced to penury, but they have lost lots of $ -- these guys were holding a lot of company stock and options (they weren't "allowed" to sell their stock while employed there). It's not that they became poor -- it's that this is evidence that they didn't know they were doing something dangerous.
I place more blame on the government, because I believe in strong government controls. To the extent that many serious people (such as Buffett, Roubini, others) had warned about systemic dangers, Congress should have gotten on this and produced legislation to curb excesses. When markets get too free, horrible things can happen.
This book is one of several that argue that bubbles will always occur in free markets. Interestingly, it argues that they cannot be avoided. It says that the only thing to do is to provide muscular government aid when the bubbles burst -- which is what is happening. (I am not convinced that bubbles cannot be avoided, or at least made much more improbable, with more government preventive action).
alex,
Brilliant comment. I think my work here is almost done!
Why doesn't the modern stock market have a stockade? Do we think we are too good for that? Do we think we are smarter than our ancestors?
Seriously.
Why do we allow villians to escape justice?
Yes, I know, some of the villians here were not criminals. OK. No jail for them. Why don't they get public ridicule? Why isn't there a public mea culpa?
Why do the low-life petty misdemeanor villians get their mugshots put out on the web for all to see while the hoity toity are (supposedly) spanked in private?
I'm being serious here. People are humans, and humans have time-honored ways to deal with issues such as these. I don't mean corporal punishment, I mean shaming.
Why are we not using those methods?
The problem with the TARP/bank recapitalization scheme was that the overarching problem was not simply one of credit liquidity on the supply side. You can give the banks all the money in the world, but if economic conditions are such that there really aren't any decent things to lend money for, they're just going to sit on it. Freewheeling lending to shaky borrowers and development projects is what got them in trouble in the first place. Problem is, there's not a lot of development or investment going on out there right now that doesn't have an intolerable amount of downside risk in a severe recession. Government spending is going to have to prime the pump before the banking industry has anything solid to lend to.
Krugman's post on this topic from last November is worth reviewing:
http://krugman.blogs.nytimes.com/2008/11/17/after-the-stimulus/
Over the medium term, the US needs to lower consumption (as a share of GDP: it can still grow in real terms), increase savings (same thing, really) and boost net exports and investment.
---
Personally, I think that reducing energy consumption is one decent route, as it both decreases consumption and improves the trade balance.
As tax cuts tend to increase consumption, that doesn't look like a good medium run plan, though over the short run the stimulus will help.
JS: it's that this is evidence that they didn't know they were doing something dangerous
Perhaps so. I think incompetent covers it.
I place more blame on the government, because I believe in strong government controls.
I don't think we disagree on anything important. Incompetents, hucksters, whatever, will always be around. Bank regulation is essential. I just would have hoped that we'd learned that for good during the Great Depression. Hopefully this lesson won't be as hard learned.
Tripp: Why don't they get public ridicule?
Good question. I think part of the reason may be that too much of the MSM were cheerleading these genyuses.
Why isn't there a public mea culpa?
AFAIK Greenspan is the only one who did this. I honestly give him credit for it. It's amazing though how little is heard about it. They ought to quote Greenspan's mea culpa every time another free market disciple spouts his catechism.
Regardless of whether those managing financial institutions were specifically trying to cause the economy to fail unlawfully, their wealth was used to change the political economic rules in order for them to accrue even more wealth at the expense of median and below wage earners. It was their wealth that was used to fund the political machines that led to the deregulation of the finance sector. It should be their wealth that funds the bailouts, through fines, fees and sur taxes, not the future earnings of median wage workers.
As tax cuts tend to increase consumption, that doesn't look like a good medium run plan, though over the short run the stimulus will help.
What we need is tax cuts that will encourage long-term, supply-side investment rather than short-term income boosts for the already very wealthy. Lower the corporate tax rate, but close loopholes that compel companies to be penny wise and pound foolish about how they run their businesses; offer tax credits for investments in green technology and energy efficiency; replace the employer-paid portion of the payroll tax with a carbon tax -- encourage more employment and more energy efficiency.
In short, our tax policy should reward employment and entrepeneurship, not simply the amassing of enormous personal fortunes at the expense of shareholders and workers. Have a low corporate and small business tax rate, but if a CEO wants to suck out tens of millions of dollars of capital for his own salary, tax the shit out of him. And tax the shit out of him again when he passes that enormous fortune on to his heirs.
First, presuming the capital injections were wasted is rather superficial. Looking at American lending figures, it would appear that the recap comes before let off in the plunge in credit extension (or alternately, a stabilising in credit extension). The entirely reasonable conclusion is that the switch helped contribute to braking the panic and stabilising the American (and more importantly to me, global) financial system. That has no small value as it is widely accepted that financial panics & crises do rather serious economic damage. Of course one merely has to look at the current economic situ...
While it is probably not contestable that the outgoing American administration was "sub optimal" (at their best one suspects they were sub optimal) in their TARP execution, badly asserting that the switch to assets did nothing to change the credit situation needs a proper analysis (and benchmarking against the negative trend line before hand).
Otherwise, I continue to find it amusing that Drum's readers' bang on about corruption. Whle there was certainly corruption in the global credit boom (the Indian example drives that home), the say reality is that corruption in the major financial institutions is not the answer to the reason there is a blow up. If only.
Sadly, the problems are rather more fundamental (an ex Alex who I doubt knows anything real in the realm), notably: (i) defective risk modeling - including the "best practices" that REGULATORS were promoting internationally - that is, people were just plain fucking wrong, not satisfying emotionally but...; (ii) Hyper balkanisation of American regulators. If there is one thing that disgusts me with Drum's commentary is missing this. Piss and moan about rates, lending, but the core source of the US collapse was the insane balkanisation of the regulatory system. Americans must not realise that side from some 3rd world rubbish countries, they have the most byzantine regulatory system in the world, by a bloody country mile. Simplifying and centralising in some core specialist regulators, by scope (like frankly every other major country in the world) would vastly reduce the agency problems that allowed utter shite to enter into the system
In fact I have no more points that that: stop fucking moaning about bank lending or fictional corruption or whatever and focus on a major damned reform of your discredited financial regulatory system. Vast talent is wasted by your system - like health care come to think of it.
Tax cuts, similarly, are in ill repute because they don't necessarily increase consumption.
Nor wealth. If you don't pay taxes, you might end up with a big national debt.
This stuff is really tough, isn't it? You spend far, far beyond your means, and then you get into financial difficulty. Who could figure?
If money from a tax cut is saved, there is no effect on national savings. We just have more public debt and less private debt (if it is spent national savings falls).
We will collectively be just as much in debt as we would have been without the saved rebate checks. However, we will think were are less in debt (because people don't keep track of their share of the national debt).
That means that savings out of the tax cut will contribute to the national illusion that we are richer than we are. That illusion contributes to, indeed probably is the principal cause of, our low national savings rate.
People save now to spend later. We want people to spend now that we are in a recession and a liquidity trap. We don't want people to spend later when monetary policy can keep us at full employment. Saved rebate checks are bad for exactly the reason which makes you think they are good.
stop fucking moaning
Most of the corruption was not the pay to play kind, which is so prominent in the news now. The corruption was/is systemic. The rules of the economy have been gamed in favor of the schemers. In 1998 Robert Rubin, while Sec. Treasury, blocked the Commodity Futures Trading Commission's proposal to bring derivatives under their jurisdiction. Then Rubin went back to work at CITI with the hope this deregulated market would make high returns for his company. This was around the same time LTCM needed a bailout, which also did not trigger the need for more regulation of hedge funds. The degegulation regime was a form of legal corruption created to increase returns on diminishing market investments. Regulation might have saved Rubin's reputation and CITI's stockholders, but greed blocked it. That greed drives American financial industry corruption.
The misallocation of the economy's wealth to the wealthy through public economic policy meant there was too much money looking for return on investment, rather than in the hands of median wage earners who would spend it on consumption. In order to increase returns, the schemers also gamed tax policy. Since the markets no longer returned decent profits, taxes were lowered on capital gains to make up the difference. This legal form of corruption has led to the massive public finance deficits that will make things much worse in the long run, when investors stop funding it and workers, who add value to goods and services through labor, must repay it.
The regulatory system was deliberately 'discredited' by public servants for the interests of the very wealthy. Tax policy was deliberately 'discredited' for the same reason. America may not have the 'little bite' corruption of many third world nations, although it exists. America's corruption is embedded at the highest levels of economic power, where high returns on investment must be returned one way or another, regardless of law or which political party is in power.
Lounsbury,
Please read more "alex" and "Tripp" and some "tpx" and less of the rest.
I know your time is limited so please don't waste it on the pikers.
Join us - you have knowledge that is precious. Don't waste your time plucking the low hanging fruit.
I mean sure, I'm ignorant in some areas but I can learn. I'm not stupid.
I've already used my "If bridges collapsed like the financial system we'd hang the engineers" analogy so what about this one:
This latest cock-up will cost arguably as much as a rogue nuclear explosion. Can you imagine the uproar if one of our nukes exploded by accident due to incompetence?!
At the least those responsible would be drummed out of the service.
So how come we don't get the same response this time?
Personally, yeah, I want blood, which is probably an overreaction, so OK, I'll settle for a full apology. Where is it?
The closest I've seen is, as alex pointed out, from Greenspan, where in his dry indirect way he hinted that he had been a fool. I don't want indirect hints. I want the real admission of guilt.
A full apology needs a sincere expression of fault and remorse and ALSO a vow to never do it again.
I want a full apology.
some?!