Warren B. Mosler

Mid-Year Macroeconomic Review: History Repeating Itself

my first proposal for the financial crisis back in July/August was a full payroll tax holiday where the tsy makes all the soc sec and med payments for us.

once incomes are restored to the extent borrowers can afford their payments the toxic asset issues fades rapidly.

And car sales pick up as well, etc.

Mid-Year Macroeconomic Review: History Repeating Itself

The funds to pay taxes come (only) from govt spending and or govt lending

If the govt doesn't spend enough to cover the tax bill and any residual savings desires for financial assets the evidence is excess capacity/unemployment.

see 'Soft Currency Economics' at
moslereconomic.com

and mosler2012.com


On May 10 05:05 PM Market Sniper wrote:

> Same argument. That you can borrow your way to wealth and print your
> way to prosperity. These are recipes for disaster and will accomplish
> neither. Read some history. Old road, well traveled, ending in a
> bad place.

Mid-Year Macroeconomic Review: History Repeating Itself

The funds to pay taxes come (only) from govt spending and/or govt lending with a non convertible currency.

If govt doesn't spend enough to cover the tax liability and any residual 'savings desires' the evidence is excess capacity/unemployment.

see 'Soft Currency Economics' at
moslereconomics.com


On May 10 05:05 PM Market Sniper wrote:

> Same argument. That you can borrow your way to wealth and print your
> way to prosperity. These are recipes for disaster and will accomplish
> neither. Read some history. Old road, well traveled, ending in a
> bad place.

Mid-Year Macroeconomic Review: History Repeating Itself

On May 10 03:48 PM Cetin Hakimoglu wrote:

> Buying toxic financial assets improves investor & business confidence.
> The banking system was seizing, and the efforts of Bernanke, Geithner,
> Palson, Geroge W. bush, and Obama fixed it by bailing out the too
> big to fail.

They didn't fix it by doing that, as in any case the FDIC was there to support continued operations.

The performed an alternative 'fix' to the normal FDIC channel which could have done what functionally would have been nearly identical.

Now the stock market is surging and the economy is turning
> around. It seems the bailouts and stimulus accomplished their intended
> goals.

As per my article, the turn came after the deficit poked through 5% of gdp and got large enough to support income and 'savings' of financial assets.

>
> --------------------
> Rather than something like my 'bottom up' approach to restoring aggregate
> demand and restoring the ability to make mortgage and car payments,
> our government instead took a 'top down' approach, with both the
> Treasury and the Fed buying only financial assets - a policy that
> does nothing for aggregate demand, and only prolongs the agony of
> waiting for the automatic stabilizers work to restore aggregate demand
> through the most ugly process of rising unemployment and falling
> tax revenues.

Why the Fed's Interventions Aren't Working

the govt already let's the banks fund with insured deposits, and in our 'loans create deposits' world for all practical purposes, directly or indirectly, most bank funding winds up to be from these insured deposits. (the indirect path is via interbank lending, and yes, many depositors elect to hold deposits larger than the 100,000 insured max)

The TAF is just another insured deposit.

Also note that funds received via the taf are credits to bank reserve accounts at the fed, which means the fed immediately has to offer 'interest bearing alternatives' to these non interest bearing reserve accounts or the ff rate falls towards 0 very quickly. this is called 'offsetting operating factors' by the NY fed, and all they do is let repo run off or do actually matched sales, which allows banks to move non interest bearing reserve balances at the fed to interest bearing accounts at the fed (tsy secs are functionally interest bearing accounts at the fed) and the ff rate stays at the target rate.

bottom line, the fed lends to the banks via the taf and borrows from the banks via open market operations at the same time. as a matter of accounting logic it has no choice.

see 'soft currency ecnomics' at moslereconomics.com under 'mandatory readings'

it was written in 1993 and very little has changed since then.

March Market-to-Market Madness

Couldn't agree more. The US banking system was not meant to be a mark to market business model for public purpose, and trying to force it into that mold does not serve public purpose.

The banking model is individual underwriting of loans, internal credit analysis, and then lending based on a myriad of variables that go into determining 'credit worthiness' and ability to make the required loan payments.

Additionally, bank regulators regularly examine all the bank's loans for compliance, reveiw credit statements from borrowers to make sure their credit worthiness hasn't deteriorated, etc. If there are any problem loans found, they are classified as such and the bank takes a capital hit, which will increase as the loan quality deteriorates.

All this is to 'protect' the govt who insures bank liabilities. The liability side is not the place for market discipline. The asset side and capital requirements (shareholder risk), legal lending requirements, etc. provide the market disicpline.

This sytem is far from perfect, of course. Regulators make errors, incentives are sometimes put in the wrong places, etc. But it does work reasonably well over time, and the regulators constantly adjust to changing times, however late and slowly.

To try to suddenly apply market to market requirements on this system is at best inapplicable, and at worst a major contributor to the current financial crisis.

Nor is there any good reason, regarding public purpose, to impose mark to market on a system based on individual credit analysis. it comes from a lack of fundamental understanding of the US banking model.

That said, it also makes no sense to let banks get into businesses that are based on mark to market models. That was the regulatory mistake, and that's what should be reversed.

Let the banks fund their own sivs by taking them back on their balance sheets with capital charges based on risk determined by underwriting, but then take sivs and related vehicles off the list of approved bank activities. That way they all get funded at the ff rate and eventually mature their way away.