Design A Country Rescue Package Here (Comment Competition) 29 comments
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By Simon Johnson
Here’s your Memorial Day assignment. You have been called to the table for top-level policy discussions in a large monetary union. One of the bigger countries in this union has a serious problem. Their exports are down slightly and there are some longer-run structural issues, but the immediate issue is (1) a housing bubble just burst, resulting in a big fall in tax revenue, (2) the political system seems paralysed, i.e., cannot raise other revenues or cut spending in any sensible fashion, and (3) the market for this government’s debt appears likely to turn very sour. Sounds like a classic fiscal crisis.
Here are your possible recommendations:
- Let them go bust. This is tempting, given the failure of the political class in this country to come to terms with its obvious problems. Also, this would presumably shake the rules of the system enough so they can finally raise revenue or cut spending sensibly. But this would also create dangers for other countries in your currency union, for example by increasing the risk premia on all debts. And a lot of poor people will get hit hard; you know that always happens in a free fall.
- Give them a big loan. This is, of course, what the political elite in this country would like - they are asking for money on easy terms, arguing that none of these current difficulties are really their fault. If you feel that at least some of their problems are temporary, a loan makes sense. But you’ll also want some conditions, meaning steps they should take to ensure you get paid back. If they don’t pay back (or can’t pay back for a long while), that creates costs for taxpayers in other (more fiscally responsible) parts of your union and what would be fair or politically sustainable about that? So what conditions do you want to
imposenegotiate towards?
- No conditions. You trust them and they are your friends. Hopefully, they will run things better in the future.
- Tell them to raise revenue and/or cut spending. They can decide; it is a sovereign country after all.
- Insist that they raise revenue. If doing so effectively is prevented by their constitution, they need to change the constitution.
- Tell them to cut spending any which way they can. This will hit the poor just like in the “go bust” scenario, but this way the country’s elite can blame you.
Underlying all this, of course, you have to take a view on the politics. What vested interests exactly have got them into this mess? Certainly, there was a big shock from circumstances outside their control, but this country’s policies were asking for trouble – any time you run a big housing boom, you are vulnerable to a dramatic slowdown (and loss of revenue). If you are going to lend money, don’t you want to feel that the loan will allow or even force the political equilibrium to shift ? Otherwise, won’t this country repeatedly run into the same kind of fiscal difficulties? This kind of fiscal crisis is always about powerful groups, but are we facing oligarchs or something else in this particular instance?
This missing option above, of course, is to give the country a loan at the same time as they restructure their debts, i.e., a form of debtor-in-possession bankruptcy financing. But the creditors to this country are also powerful at the level of the monetary union and perhaps in the more fiscally-responsible parts of that union – so count on these groups to oppose any debt write-downs. One argument they’ll use is that such restructuring will either trigger a panic or lead to higher borrowing costs for other member countries. So what are you going to do about that?
You can answer these questions either for Spain or California.
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This article has 29 comments:
meanwhile i will do whatever i can to isolate myself from the eventual failure of my economic partner.
1. Sell short the country's banks, homebuilders, and natural resources companies
2. Buy interests in credit default swaps, if any are available
3. Remind them that you're doing them a favor by providing liquidity in a market that's about to see it disappear
4. Enjoy the accolades of your investors, who are able to make money despite calamity
The problem with "big loans" is that it creates moral hazard- there is no penalty for not living within your means.
So the best solution is a combination of reform and bridge financing (sort of what the World Bank has been doing) that provides interim capital while the economy is restructured.
The main problem isn't the ability of the electorate to make value choices (more taxes or less services)- it's the ability of leaders to accurately present those choices to them. For once, it would be nice if they could tell the truth, underpromise, and overachieve.
As for California, their location, resources, connections, etc. would allow them to recover fairly quickly if they would reform their welfare and education spending. Raising taxes will only serve to chase additional earners and companies out of the state.
If they're unwilling to face these hard choices, then eventually they will have to face some very hard consequences with restructured pensions and eliminated services. The rest of this country will not want to bail them out.
Conversely, it is this 15% who became MUCH wealthier during the U.S. housing "bubble" and coordinated, Wall Street "Ponzi scheme".
It is the people who plundered ALL the wealth in your society who now want YOU to "sacrifice" so THEIR wealth and status is preserved.
The obvious solution is an immediate, "wealth excise tax" on all those with nine-figures of wealth. A modest amount (i.e. 50%) would provide you with the funds to make the U.S. solvent, once again.
stockology.blogspot.co...
Let me summarize here, taking California as an example:
1. Cut all capital gain, corporation profit and personal income tax to ZERO. Any money companies or individuals earn, is yours to keep. Not a penny will be taken away. This will encourage capitals to flow into the state and create new businesses and jobs.
2. Drastically reduce all welfare for the poor. Welfare is a charity, not an entitlement. The amount of welfare the society and the government can afford must depend on current state of the economy. If the economy is poor, then the welfare can not be too generous. The government shall provide free transportation of poor people out of the state/country, on a totally volunteer basis, if people do not like what the hand out they are given and want to move to a better place.
3.Massively increase the sales tax, and impose importation tax correspondingly. This will be the government's main source of revenue. As people consume, they need to give a portion to the government. If you don't consume, you don't pay tax. This will encourages savings and discourages spending.
I'm not worried about our public debt because a lot of it is held by nations that simply aren't consuming as much as they produce. That's their choice and so their government has in a sense, placed all revenues into an "accounts receivable" asset. The value of this is going to change until they redeem their dollars. If they choose not to and we see inflation, they did us a favor and sent us lots of goods and services.
Saving on an individual level is great, but if society as a whole is saving a lot, who the hell will consume? SOMEONE has to consume, otherwise everyone would save and the producers wouldn't have anyone to sell to.
We can't control other governments and so if other folks want to send the US money so we can carry debt, that's not an issue, but if the value of the debt changes in real terms, that's their issue if they don't claim their dollars. The household savings rate in China is almost 30% if I remember correctly, while the US is below 10%. If you live in a society where a willing and able person can get a job, savings rates don't need to be high, because we have social welfare programs. People feel confident in the society and don't worry about economic unrest. In other countries, like China, you can't count on the government to cut you a check if you're out of a job, and so that lack of a sense of security causes them to save a lot more.
In my opinion, we should do exactly what we are doing, because even if we experience inflation, it doesn't matter to us. If you only produce and don't consume, the value of what you do will change over time, that's not something you can control. Take your dollars and use them while you still can. No currency is going to protect you from losing value over time, because with economics growing as fast and as large as China, you will cause inflation in any country you produce for.
Thus, a procedure that would force suspension of the constitution would open up the possibilities of getting the state out of the obligations it is currently paying too much of, allowing a budget to be passed (rather than being held hostage by a minority), and freeing the LOCAL governments to raise the needed revenues according to the traditional method of democratically-enacted property taxes.
Another benefit of bankruptcy would be to cancel the state's debt to the Federal government. Californians have paid more than their share of income taxes for many years, getting much less in return as Federal services. Suspend this obligation, and the same income stream can be diverted to paying off state obligations. In just one year, this will balance the budget. Then, the shift in responsibilities from state to local level will keep it balanced easily.
FDIC-type organization (read- federal government) comes in and liquidates assets and guarantees payment of debt at 75 cents on the dollar. (If I owned CA GO bonds, I would take 75 cents all day)
Bond holders, who have the greatest legal title to assets are protected to an extent.
Process is quick, reducing impact on the truly essential services for responsible, tax paying members of the state.
California serves as an example to the rest of the country and reduces moral hazard. (I'm looking at you NJ and NY)
It will never happen, but this is a thought exercise, right?
Then slash corporate income taxes and place a flat consumption tax on individuals.
Economy would turn for the better
The emergency measures would require evaluating every state government program, to determine the extent to which services are duplicated by an existing federal agency. To the degree that state enforcement exceeds or duplicates that for clean water, air, etc. by the US EPA, regulatory enforcement of California state regulations would be suspended and the money not spent. The same measures would hold true for the US DEA, Immigration, Public Health Service, Veterans Affairs, Dept. of Transportation, Education, Agriculture, and the like. In essence, the California versions of these federal agencies, if they survived at all, would remain in a signifcantly reduced form.
To offset the expected rise in public sector unemployment, terminated state employees would be eligible for a lump sum payment equal to the amount of state unemployment benefits they would otherwise be eligible to receive. Instead of bi-weekly payments during the course of a several month job search, the lump sum would substitute for the standard unemployment benefits.
Since total government employment is likely to contract, their job search is unlikely to be fruitful. Instead, they would be encouraged to use the sum to consider relocating to other states where the employment outlook is considerably better.
Since the country forms a part of the monetary union, their fiscal stimulus is important to our overall recovery, and they will likely not be the only such country to need help. Willingness to help here, now, will help keep credit markets open for other members in the union; and that, in turn, will also promote a speedier recovery, at lower public cost.
Counter-intuitive, perhaps, but that's the nature of economics in a recession or depression. A long-term fix may be needed, but hammering a country in the middle of a recession is not a good way to obtain that fix---or have we truly learned nothing from the recent past?
I am sure that CalPERS and it managers will have no problem with this proposal, given that "investing" in Califonia's future is clearly the highest and best use of capital. Why let the taxpayers hog all of the action?
On May 25 09:14 PM Arete wrote:
> Give them a loan. The willingness to in effect guarantee their continued
> solvency will allow the country to engage in the type of fiscal stimulus
> necessary to prevent a more severe recession, and promote a faster
> recovery. The credit markets stay open to them, they are able to
> repay the loan in an expeditious manner in the future, and the union
> goes on with a minimized interruption to normal economic activity.
>
>
> Since the country forms a part of the monetary union, their fiscal
> stimulus is important to our overall recovery, and they will likely
> not be the only such country to need help. Willingness to help here,
> now, will help keep credit markets open for other members in the
> union; and that, in turn, will also promote a speedier recovery,
> at lower public cost.
>
> Counter-intuitive, perhaps, but that's the nature of economics in
> a recession or depression. A long-term fix may be needed, but hammering
> a country in the middle of a recession is not a good way to obtain
> that fix---or have we truly learned nothing from the recent past?
At the same time, it is essential that there be plans in place to pull back the levers of the throttles on the speed printer going on at the Fed. It will take higher taxes and cutting social security and other retirement plans and of course the medical programs. That is the only place where you can pick up the kind of money you need (hundreds of billions) in short order. Everything else in the Federal Budget (other than the pentagon which we will need and interest on the debt) is not worth the effort. It just simply does not get you the savings you need fast enough.
The people who argue that it can all be done with either tax increases or spending cuts simply do not understand the issues. As people say, "for every complex problem there is an easy and simple solution." It just happens to be wrong.
To the extent money is spent it has to be directed at high pay back areas. Education, R&D and infra-structure. As Jeremy Grantham says..real wealth is measured in the will of a nations people, the knowledge they hold and their resourcefulness. it also helps to have good land and water. We are still a rich nation.
On the Calif situation....I think they will need to make some major cuts to their budget. I think the number I heard is $23.0 billion short fall. Maybe some small "bridge loan" makes sense given how large a part of the national and international system it is. But, the people of that State have spoken. "No New Taxes." Ok...good on them. Time to cut the services...no more messing around. Once the pain becomes unbearable and it will.... it might be time to consider the loan. Until then....No.
The problem in the country has been that the demigods have told the public you can have it all. Huge tax cuts...all the services and wars you want..no problem.
This can be solved. It just takes reality...not slogans and the scapegoats like 'welfare." The idea you can cut taxes to ZERO as one commentator expresses and "solve" the problem shows you how far this kind of lack of thinking has gone.
I will admit that letting it all fail is an option. Let the real crisis begin. It is an intellectually defensible position. I just do not think the nation or the world for that matter would be a nice place for a long time if we go there.
Some of Krugman’s arguments about California are wrong “inability to raise taxes” – California already has the highest tax rates. People are simply fighting to prevent additional steep hikes. The problem with California is uncontrolled spending on - welfare, environment, illegal immigration promotion and such other wasteful activities.
Accountability and moral hazard must be brought back, if you screw up – off with your head – Geithner, Bernanke etc must go –they represent utter and complete failure. Message must be sent out to all, renew confidence; new blood must be brought in.
Econ 101: Savings -> Investment -> production -> Consumption. Have to get out of borrow and consume mode.
Easy cheap money got US in trouble, stop continuing those policies. Short term pain would ultimately lead to long term sustainable gains.
Let free markets prevail – stop handouts and bailouts. Let AIG, GM, Chrysler etc go – this is simply capitalism’s way to get rid of the weakest. Crony capitalism must stop, like of Goldman etc must be checked. Chrysler bankruptcy, cram down of secured bond holders is deep threat to capitalism.
It will not only fix Spains problem but also Californias and the United States.
I will use the United states treasury as the example wich could be and should be used in any free nation.
Very 1st thing is to shut down the Federal reserve (FED). The FED is not a part of the U.S. goverment, it is a private bank that creates money out of the thin air and loans it to the U.S. Treasury through bonds and goverment securities. It loans this money to the goverment with interest ( Debt money ).
Did you know that in 1991 the Fed's income was approximately $22.6 billion dollars. That was mainly derived from the loans it made to the U.S. goverment....and that $22.6 billion was just a partial of the interest owed on those loans. Of course that money was paid back by you and me on our federal income taxes.
So lets kick the FED to the curb and have the United States treasury start printing "our" money that we own. U.S. Constitution, Article 1, Section 8, clause 5 states: " The congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures."
We will call this the Treasury Credit Money system.
The goverment will create the money and spend it into the economy through public works bills passed by congress.
The Treasury will loan money to the state goverments @ 0% interest for there budgets and public works bills passed by state goverments. This in turn will be paid back through sales taxes, fines, fees and tariffs. Did you notice that there is no income taxes?
The national debt is gone under this system. Inflation will not and cannot exsist in this system. This system only promotes private and public systems, it does not deter and create inflation or create a national debt that can never be repaid.
I do not understand why any congress person or senator cannot see the absolutely criminal system that we have in place now.
Why we gave our money creation to a private bank in 1913 so that they could loan it back to this nation with interest is absolutely criminal.
" It is only in a debt money system that inflation has ever occured."
Inflation is characterized by the loss of purchasing power of the dollar. Steadily rising prices are a symptom of the loss of purchasing power. It is the devaluation of the dollar that forces general price increases.
The dollar's devaluation, in turn, is caused by the inherent flaw in the debt money system, namely, the creation of most money as debt. This locks the system into a vicious cycle of escalating borrowing in a futile effort to pay both interest and principal. A debt-money system is naturally inflationary, due to the built-in shortage of money to pay interest. The shortage forces continually increasing borrowing, which requires price increases to cover the cost of business borrowing.
In the debt money system, prices increase as a reflection of the escalating interest charges being incurred by producers. The term "price inflation" clearly identifies the process of rising prices. However, the term "inflation", when applied to the econonmy as a whole, fails to identify the "debt-generator" which causes prices to rise. The term is totally misleading. The more accurate and discriptive term for the mis-called "inflation" phenomenon is debt-induced monetary devaluation.
In a debt money system the money is never printed to pay the interest on the principal.
1 Federal income taxes are drastically reduced.
2 State and local taxes are slashed to less than half of their present levels.
3 Interest rates drop immediately and money is always avaiable to businesses and individuals.
4 Business activity increases, bringing with it expanding employment opportunities.
5 Inflation stops dead in its tracks.
6 Prices decline as the total debt in the economy declines.
7 Private debt can be paid off from the exsisting money supply.
8 The economy is protected aginst planned boom-and-bust business cycles.
9 Business bankruptcies are no longer necessary to balance successes.
10 Usury is scientifically removed from the banking system.
11 Federal goverment borrowing stops.
12 The Federal deficit is eliminated.
13 The multi-trillion national debt and its huge interest load are soon reduced to zero.
14 Working people at all levels can afford to own their own homes and enjoy comfortable, digified retirement.
15 Banking is relieved of day-to-day liquidity brinkmanship and scrambling for reserve funds.
16 The banking system is stabilized and the threat of economic collapse eliminated.
Call your congress and senators. We as a nation, as the United States of America demand that we create and own our own monetary system and to abolish the Federal reserve with its debt money system.
An amendment to the U.S. Constitution might help solve the issue. When a state defaults on a loan payment, the U.S. Treasury steps in to assume the obligation. In turn, the Treasury assesses a special tax on every citizen of that state proportionally according to recent tax returns.
If it works as you believe go it alone and show the World the benefits of your superior model. Of course you risk being humilated by the economies using a more flexible but properly regulated Fiat system. The Germans ran a successful Fiat system after WWII until the adpotion of the Euro which has continued on a simialr path. The failure of the US banking system should not be blamed on a Fiat system but on political corruption.
On May 26 08:18 AM DONE_SONZ wrote:
> "won’t this country repeatedly run into the same kind of fiscal difficulties"?
> Back currencies with prescious metals.Currencies would actually have
> value and people would have confidence in them.If prices didnt get
> so inflated in the first place,we wouldn't have such large boom and
> bust cycles like we are encountering yet again.
You do know that 80% of Fed income goes back to the Treasury, don't you? And that the other 20% is divied up amongst the banks, who own the shares in the Regional Fed banks?
Blaming our problems on the Fed is like people drowning in credit card debt blaming their mortgage company for giving them a 6% loan to refinance all their 18% credit card debt so they could load their credit cards up again.
The solution is not to limit credit availability for everyone. It is for free people to understand the consequences of their actions, and then live with them. Either live within your means, increase your means, or get ready to suffer a lower standard of living in the future. This really isn't that hard, but someone has to tell these people that something's got to give. And if the giving is more taxes from productive sectors of society to subsidize nonproductive sectors of society, we've seen the consequences of that system over the long term. It's so sad that there isn't universal recognition of the results of the great 20th century experiment involving the USSR, China, and the US- that capitalism works. Whining about the Fed further obfuscates this point.
good to see all the class-warfare fascists showed up. everyone in CA, rich and poor, has enjoyed the over-extended economy-- NO ONE forced them to spend and borrow more than they could afford. CA needs capital spending because it is the only thing that creates new jobs/wealth. new capital comes from middle-class savings, non-existent at the moment, and rich people. taxing rich people more will lead to less capital, thus jobs/wealth; very ignorant idea. CA has also been a great example of what government spending does to capital growth in the long run; since it seems to be obama's economic model, it is easy to see where we are all headed. CA needs change. pull the plug!
I do understand that a very large % of our federal income taxes go back to the treasury.
I don't see anywhere in my post that says anything about limiting credit to anyone nor taking from the rich and giving to the poor.
I do however ( If anyone read my 2 posts including yourself ) know that either no one cares or that no one understands anything about our debt-money system and how "we the people" do not own our legal tender ( except for U.S. mint coins ).
Do you not understand that are national debt is growing exponentially and can never be repaid under our current debt-monetary system?
That that debt-monetary system is what caused our national debt.
That the federal reserve sets the interest rates by secret policy decisions.
Do you understand what "usury" is concerning our monetary system?
Dang folks, its our debt-money that causes inflation (deflation is the real term), recession and depression.
Key Facts:
1 Approximately 25% of the money suppy is in cash.
2 Approximately 75% of the money supply is in bank deposit credits.
3 Money is not just federal reserve bank notes and Treasury coins.
Most of our nation's money supply ( M1) is in the form of numbers in depositors checking/savings accounts.
4 Under the present debt-money system, most money is created as debt by the commercial banks when they make loans.
5 Federal Reserve checks enter banks as deposit credits. These are then used by commercial banks to create more new money as deposit credits through the method called fractional reserve deposit expansion.
6 The federal debt was $4.4 trillion in 1993.
7 The interest plus usury on the federal debt was $202 billion in 1993.
8 The path of both the debt and the interest continue to rise almost straight up.
9 The total debt of the United States in 1993 was $ 15 trillion ($4.4 federal plus $10.6 trillion private)
10 Money created by a private lender ( the reserve and commercial banks ) when loaned, gives rise to primary debt and the fee for its use is usary.
11 Earned money when loaned gives rise to secondary debt and the fee for its use is interest.
12 Total debt in an all-debt monetary system equals usury plus the money supply : D=U+M ( The DUM equation )
13 The usury burden in a debt-money system consumes an ever-increasing share of the M1. This consumption of the money supply renders it impossible for a debt-money system to sustain stable economic growth without violent intervention at some point in the debt growth cycle.
Footnote
----------------------...
All this information is avaible from the Board of Govenors of the Federal Reserve. Free publications @ the information offices of the regional federal reserve banks.