Brian27

Macroeconomic Policy for a Stronger Recovery, Part 2

Friedman Schwartz in 1963 presented evidence that declines in money supply preceded declines in nominal GDP. M1 defined as monetary base (M0) and checking accounts declined 30% by 1933 but increased 33% by 1939. Some of the decline in M1 can be explained by reduced checking accounts caused by falling output. The M0 declined 3% by 1933 but had doubled by 1939.

If negative M1 growth caused the depression why didn’t the economy return to normal growth as M1 was expanding during the 1933-39 period. Secondly, the M0 only declined in 1930 and increased thereafter so it was not a negative factor in the depression.

Lastly, it is a generally subscribed theory that money shocks affect the economy through Keynes nominal wage rigidity. However, despite Hoovers 1929 attempt to stop industrial nominal wages from being cut they were actually quite flexible after 1930.

Another problem with rigid wage explanation is that as employees are laid off the remaining employees become more productive. This is counter factual, labour productivity actually fell by 15% form 1930 to 1933 and real wages were below normal.

Banking failures and the M1 contraction had a role in the Great Depression but the explanations of their roles are weak

Macroeconomic Policy for a Stronger Recovery, Part 2

It was called the Great Depression because after 10 years GDP was 85% of the 1929 level. That is why it was called the Great Depression and the unconstitutional policies after 1933 were as much to blame as Hoover's market interference policies.

On Oct 01 12:46 PM chap08 wrote:

> Err, no. The major falls in GDP occurred in the years 30 to 33. After
> that, due to policy changes, real GDP grew by:
> 34: 11%
> 35: 9%
> 36: 13%
>
> Policy was disastrously reversed again in 37 causing the second slump.
>
>
> On Oct 01 12:04 PM Brian27 wrote:

Macroeconomic Policy for a Stronger Recovery, Part 2

The Great Depression became the great depression because of the policies followed from 1933 to 1939.


On Oct 01 08:43 AM chap08 wrote:

> Brad, your article is just not going to be popular with SA's collection
> of cowboys and Austrians. I, on the other hand, would have some sympathy
> with your view, if we had not had such bad government for many years.
> Unfortunately though, we have had bad government for many years and
> that has left us with a massive national debt. Without the debt,
> I would be supportive of more counter-cyclical spending. Sadly though,
> we can't afford it. We spent it all in the good times, in a stupid
> pro-cyclical way. Now we're close to bust.
>
> So instead, I advocate another approach. This approach is even less
> popular on SA if you can believe that! My approach is to let the
> dollar devalue - to get it down to something approaching fair value
> - where it would be without currency intervention.
>
> Currently the dollar is propped up by the mercantilists. If they
> stepped back, then the dollar would fall. The Chinese and others
> keep the dollar up so that they can keep domestic unemployment low.
> The other side of that coin is that our unemployment stays high.
> The reality of our trade deficit and high unemployment will not change
> without a lower dollar. To believe otherwise is a fantasy. You can
> talk about fiscal stimulus, trade barriers and other sticking plasters,
> but the only real solution is a lower dollar.
>
> In 33/34, they used the gold standard to devalue the dollar by over
> 65%. That was a key part of the medicine that cured the Great Depression.
> We don't need anything on that scale or at that speed, but we need
> some of the same medicine. History and international experience shows
> that currency devaluation is just as effective as fiscal stimulus
> in creating growth.
>
> You can throw more taxpayers money at it. You can throw more future
> taxpayers money at it. You can stimulate and stimulate. But, we live
> in a globalized world now, and until we are internationally competitive
> again, we will never properly recover.

Macroeconomic Policy for a Stronger Recovery, Part 2

We all know that cutting marginal tax rates grows the economy. In theory and practice. Government spending is wasteful, inefficient and unresponsive to changing market conditions. Only liberal idealogue's call for more government spending after 6 years of spending growth.

Cramer's Mad Money - 5 Mistakes Amateur Investors Make (7/31/09)

Number one reminds me of the Mayor of a small town who complained that there was never a cab at the train station late at night when he arrived into town. So he legislated that there be at least one cab at the train station at night.

When he arrived the next night he hopped in the cab and exclaimed take me home. To which the cab driver said, I can't there has to be at least one cab at the train station.

Moral: A cash cushion constraint of 10% is silly if you have to sell to remain at 10%. If the constraint is 0% or 30% it makes no difference because you still have to sell to maintain your cash position.

Bonds: Dropping Real Yields Indicate Inflation on Horizon

These are ex-post real yields which differ from expected real yields. Expected real yields, nominal yields minus expected inflation are the variables investors and monetary authorities base decisions upon. To get a measure of expected inflation use the yield on indexed bonds and subtract nominal yields. Then construct an expected real yield curve. The difference between the expected and ex-post real yields will measure inflationary expectations mistakes.

Bond Expert: Thursday Outlook

When supply of medical services is fixed and demand expands medical care will be rationed. Unless of course you pay doctors and nurses alot more money to work harder. Then costs increase. But why work harder when your income taxes are going up?

Auto MPG: The Economics of CAFE, Part One

Right on point. The CAFE standards and the EPA are unconstitutional. Of course the proponents of CAFE standards and the EPA can offer up a constitutional amendment to make the standards legal. That means confronting the legislative branches with a public vote. This of course is the way laws are to be passed in a constitutional republic. Not ordained by a King or President and blessed by the supreme court. Let the people speak on CAFE standards.

On May 21 11:10 AM quickZ wrote:

> Of course, your entire argument dies on a threshold quesiton: Under
> what Consitutional rubric is our federal government supposed to be
> regulating fleet gas mileage and limiting our freedom to drive the
> vehicle we choose? The only argument for any of the CAFE mess is
> the "necessary and proper" clause in Art. I, Sec. 8, and under any
> reasonable reading of it, CAFE and indeed the EPA is unconstitutional.
> If we want to do these things, then let's amend our Constitution
> to permit the EPA, which will require building a concensus on this
> kind of regulation.
>
> In lieu of that, give me freedom--to drive what I want to drive.
>
>
> If you must regulate me, then tax the gasoline (a much more Constitutional
> approach, as at least the Const contemplates taxes and excises) so
> at least we can drive what we want if we are willing to pay the freight.
> Otherwise, we'll have lots of unsold little cars on car lots. <br/>
>
> When gas was 4.00 per gallon, Priuses were flying off the lots; when
> gas came back down, sales of P-cars dropped about 40%. Gas taxes
> make much more sense than CAFE standards--it is how the Europeans
> handle this issue, and it will generate more money for the govt as
> a bonus. It is simple, and it works.

High U.S. Corporate Taxes Are a Myth

Obviously the writer is oblivious to the fact that corporations do not pay taxes but collect taxes from its workers, investors and consumers.

In a competitive world economy investment goes to were it receives the highest return. Hence, very little of the corporate income tax is collected from investors.

In a competitive world economy corporations cannot pass on the cost of the corporate taxes to consumers because they can buy a foreign substitute product with the lowest price.

So who is left holding the bag and paying for corporate taxes? Employees of the corporation of course. They can't move their labour services between countries to avoid paying the corporate tax. So employees end up paying the cost of corporate taxes. Some studies show up to 90% of the tax incidence falls on labour.

Republicans Running Out of Arguments

Lowering capital gains today will increase the expected future return on equities making them a more attractive investment.

Obama called for renegotiating NAFTA. Since when are dry freight shipping rates important to North America trade?

Since when has a government bureaucracy run anything well?

Finally you forgot the best policy that will put an end to the stock crash. Eliminating corporate taxes automatically increases net income of all companies by 35%. Putting money in the hands of those who know how to invest is the quickest and most efficient way of improving markets.

New Bank Data: Latest Lending

The basic problem is that banks are under capitalized because the value of MBS have fallen, in varying amounts. This has lead to an adverse selection problem that if banks attempt to raise equity, cut dividends or borrow from other banks it is believed that they are a bad bank and lending is refused. So no firm tainted by MBS can raise capital. Good banks are driven out of the loan market by bad banks.

Banks, of course, know this and attempt to move MBS off their balance sheets. But the problem of asymmetric information, where sellers have more information on the MBS than buyers causes the prices on MBS to implode. Buyers believe the securities offered for sale are low quality and offer prices that are below the true value or the ‘hold to maturity price’.

The obvious solution is to independently verify the value of MBS, but this is costly, tedious and time consuming. So what can the government do?

The Paulson plan is for the government take on the bad MBS. This saddles the government with the mortgage problems but does not convey any information to distinguish between the good banks and the bad banks. The same problem that good banks are indistinguishable from bad banks remains. Plus does anyone think the government can fix the mortgages underlying MBS? Those issues are best solved by the firms who created the mortgages.

The solution is for the government is to impose rules on firms that eliminate the adverse selection problem that only bad banks raise capital. 1) All banks must suspend dividends. 2) All banks must raise equity capital. 3) Improve FDIC insurance to prevent bank runs. 4) Allow hold to maturity rules. Require MBS holders to provide the data and model used to value MSB to maturity so that investors can compare prices using various models. This will increase transparency for investors who can run the data through their own models to estimate prices.

To directly improve liquidity to banking the government can take preferred equity stakes to improve banks balance sheets. Preferred stock becomes part of the company’s capital stock which increases the company’s capitalization. Also capital gains taxes on MBS can be eliminated so that investors are encouraged to take more risk in the MBS markets and corporate taxes can be reduced to encourage investment.

Why Not a Transaction Tax?

From the same paragraph

" On the one hand, often the motivation for such proposals is to reduce short-term speculative turnover (a tax of 0.1% means nothing to a long-term investor, but is a strong disincentive to those who trade hold their positions for only minutes or hours), with the idea that this will reduce volatility."

"The historical experience with small taxes seems to be that there is no discernible effect on volatility. "

Will Paulson's Bailout Be the Last Request for Money?

"Prior to the establishment of the Federal Reserve in 1913, the United States would periodically experience events that are often referred to as "financial panics"."

And since 1913 the United States has not periodically experienced events that are often referred to as "financial panics"?

Maybe disbanding the fed and following a money growth rule would be a better policy.

Let the treasury deal with the asset swaps of government treasuries for cash flow impaired mortgage assets. Holding treasuries will improve tier 1& 2 capital ratios of banks immediately and reduce the yield spreads on 3 month CD’s and treasuries. What is important is the price paid for the impaired assets. A fair price can be constructed from expected loss and known loss ratios. If priced correctly the treasury department should have an expected loss of zero on the impaired assets (some may want to set prices that generate and expected profit.)

As for regulator’s they are like traffic cops. They always show up after the accident has happened. I do not believe any new regulatory regime will change this fact.

Fed Is Likely to Make Money from Its Bank Buyouts

Government administered prices? This policy has failed every time it has been tried starting with FDR’s completely disastrous 1933 Industrial Recovery Act that extended the Great Depression and Nixon’s wage and price control policy.

Let’s substitute the collective judgment of hundreds of millions of Americans for a bureaucrat in the setting of prices. And what happens when the bureaucrat makes a mistake or foreign markets disagree with the set prices? How is the government going to stem domestic and foreign capital flows that are going to take advantage of mistakes and force changes in prices?

On matching assets and liabilities wouldn’t it be sensible if the government actually matched social security liabilities with assets? Even a couple of dollars worth.

Long-Term Capital Gains Tax Expectations

The wealthy don't pay capital gains taxes. They just borrow and hold on to their shares. It is the small investor who pays the capital gains tax because they are credit constrained. Their borrowing power is limited so they must sell shares if they need cash.

It is a common story that Warren Buffet has never sold a share of Berkshire stock. If true, he has never paid a dime of capital gains tax and never will. He can just borrow against his stock to raise cash.

Not surprisingly when capital gains taxes are raised tax revenues actually fall. The truly rich don't care what about the capital gains tax rate because they don't pay it.