Federal Reserve

Monetary Policy and the Problem of Oligarchy

Cross-posted from Real Economics.

During negotiations over the federal government's debt limit this past week, President Obama appears to have achieved a major tactical victory over the Republican ideologues. I use the term "tactical" because in my view, the fundamental economic problem confronting the country remains not only unsolved, but entirely unheeded: after a half century of "neo-liberal" economic reforms, a.k.a., conservative economic deregulation, the economy is now structurally skewed to benefit a new financial and corporatist oligarchy, at the expense of everyone else. What I have striven to do, in posts such asWealth and Income Inequalities are Markers of Oligarchy, is to force the concept of oligarchy back into the national discourse. I cannot claim this as my idea: Simon Johnson's May 2009 article The Quiet Coup was a notable effort at forcing us to face up to the unpleasant fact of a new American oligarchy, and Michael Hudson has been ferocious in a number of recent posts: How Financial Oligarchy Replaces Democracy. So it was gratifying to read Mike Konczal's A Response to Corey Robin on The Political Idea of Monetary Policy:

Corey Robin has a negative response to Matt Yglesias’ argument that setting an inflation target is one of the most important goals progressives and liberals should push for, which lead to an email exchange and a second response.

The economics of monetary policy are one topic. In a balance sheet recession, with a zero-lower bound, a broken financial system and the various commitment problems the Fed faces in these moments, monetary policy is not easy. We discuss many of these economic issues here in an interview with Joe Gagnon, and that’s a debate that has been going on for a while.

Robin notes that fiscal policy is important: “The government hiring people, in other words, is a lot cheaper—and more economically beneficial—than tax cuts or employer tax credits or the stimulus bill.” I agree completely, but let’s say we get a dream infrastructure deal through Congress. If that helps the economy, and the economy starts to pick up, Bernanke and a conservative Fed could use that as an excuse to raise interest rates sooner, which would immediately cancel out that stimulus. Regardless of fiscal policy, monetary policy is never neutral in a moving economy, and thus progressives need an answer.

But Robin, a political theorist (whose book on political fear is fantastic and one of the better arguments for strong unionization that I’ve seen), is more interested in the political theory and ideas surrounding the issue, which I agree needs to be discussed more. Robin:

What both of these reasons [for monetary policy] have in common is that instead of putting money into the hands of people who not only need it but would spend it, thereby stimulating demand and more jobs, they keep (or put more) money into the hands of people who already have it and don’t need to spend it in economically beneficial ways. Presumably because they are, in Yglesias’ eyes, the real movers and shakers of the economy, as opposed to the vast majority of middle- and working-class people or the government that represents them…Share and spread the wealth, in other words, among the wealthy….

If you wanted a purer distillation of the Reaganite temper of our times, you’d be hard pressed to find it in any other notion than this: get more money into the hands of people with money, for they are the truly productive agents in our society, rather than into the hands of the people who might actually spend more money if they had more money to spend….

Bernanke Fed Bail Out Restructures World Finance Credit.

The Federal Reserve announced a $290 billion expansion of swap lines with foreign central banks today, adding facilities to acquire foreign currency in transactions with the British, European, Swiss and Japanese central banks. The move adds to the swap line of $300 billion created last fall to provide dollars to the same foreign central banks, and brings the total of such swaps run through the Federal Reserve to about $690 billion. I think there are some serious political questions related to these issues, but first I'd like to briefly discuss the recent developments and their context.

The move is another in the series since the spring and summer of 2007 when Bernanke began to use the Federal Reserve's capital accounts as a supplement to interest rate reduction in loosening credit. In the process Bernanke seems to be transforming the Federal Reserve system away from being a supplier of credit to the system and toward becoming the preferential supplier to a part of the system. This has been addressed byJames Hamilton, among others:

Freddie Mac hit the Brakes, on the Easy Credit Party

great collection of data, again, by jamess. Originally posted 2008-10-10 13:58:16 -bumped, cho

These guys were perfectly happy to get you into that New Home, "No Matter what it takes," during the hay-days of the Ownership Society.

Solving the Market Meltdown -- They Privatized Profits; now We Socialize Losses

Bumped by GH; well worth a second look. Originally posted 2008-09-19 13:18:23 -0500.

Back in July, I wrote a short commentary about how the 21st century robber barons, as if following the playbook from the Gilded Age, had managed to privatize for their own pocketbooks, the profits from selling off our national treasures, our forests, our airwaves, our oil, our minerals.

Think for two minutes about where the profits from the logging in the national forests go. Do you, as a taxpayer in this country, see any of that? Or grazing rights? Do you, as taxpayer, see any of the gains from the practice of allowing private individuals to graze their herds on national park lands? Do you see share in the profits -- as the Venezuleans certainly do in theirs, since the Venezulean Oil company is nationalized -- of the oil that underlies our country (well, excepting if you are a recipient of the $1200 check to Alaskan citizens)? Privizating profits loosely translates to take what is owned by everyone and give the revenue to only a few rich individuals.

That's the meaning of privatizing profits.

This week, we are learning painfully about the other half of the equation: Socialize losses.

If a company is badly managed, bail it out by having everyone pay for it. Let the owners walk away with their golden parachutes, and have the taxpayers pick up the tab. No, we don't have enough to get ice for the survivors of Hurricane Ike, nor can we repair our crumbling roads, or build mass transit, invest in clean energy... but we sure can rescue, with our tax dollars, the AIGs and Bear Stearns...

That's socializing losses... making the little guys pay for the mistakes of the uber class. Those guys in the upper atmosphere are sucking up all the oxygen. According to a WSJ article, entitled charmingly Richest See Income Share Rise by Jesse Drucker:

The richest 1% of Americans in 2006 garnered the highest share of the U.S. adjusted gross income in two decades as their average tax rate fell,the IRS said.

Oil Shocks and Greater Power for the Federal Reserve

How do you keep power when you cede the political ground?

By holding the financial controls over a country's economy.

Think it couldn't happen here? -- have you looked at what the Federal Reserve has been up to lately?

Naomi Klein gives one example of how it can happen when the population is not astute to financial shell game. In her Shock Doctrine, Klein tells the story of South Africa and how the ANC basically won the government but lost all power.


Bush Press Conference to address Concerns about the Economy - Updated

Actually, from the quick little blurb from the WSJ this morning, it sounds more like President Bush will use the opportunity of terrified markets to push for ...

more oil drilling.

The press conference will start at 10:20 a.m. Mr. Bush is expected to press Democrats in Congress hard on the need for more oil exploration, particularly in the Outer Continental Shelf. He's also likely to criticize Congress for failing to move on most annual spending bills.

Stay tuned. (and more updates below the fold)

Failed Bank and Subprime Mess Brine Pickles

So the Federal Reserve worked feverishly over the weekend to save Fannie and Freddie and take over Indy, or as the WSJ reports in Treasury and Fed Pledge Aid For Ailing Mortgage Giants this morning: The Fed "maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants."

Such a pickle.

Obviously, we need something to distract us while we watch the machinations and see the stock market's reactions after the ordinary citizens have had the weekend to mull over the news of the FED's late Friday take over of the thrift IndyMac. Today, the small investors may sit tight, buy more or they may rush the markets and pull retirement funds out of their 401s, SEPs, and IRAs. Early notice has the market bouncing miraculously back. So in the meantime, here's a brine pickle recipe -- usually made in a "crock" -- thus suitably apt for the times.

Gross Distortion of the CPI and the GDP

originally posted 2008-07-05 12:04:17 -0500. Bumped by Carol. Didn't want to loose this one just yet. A lively and informative discussion on the meltdown, with no bottom in sight as far as I can see. Kudos Cho for the post.

I have been reading Bad Money, the latest book by Kevin Phillips (Phillips, Kevin. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. New York, New York: Viking Press, 2008 ISBN 978-0-670-01907-6).

More about the entire book later, specifically about the Government's Plunge Protection Team (or more formally the President's Working Group) and how they rigged the casinos during the Savings and Loan bailout, the 1987 crash, and most recently the subprime August 2007 meltdown. For now, I want to share some quick notes about nine key pages.

The pages occur in “Chapter 3. Bullnomics: Its Favoritism and Fictions” -- the Bingo! Chapter outlining for me the whys and the hows of the deliberate ruining of the tools used to measure of our economic health. The nine pages in question (80 -89) are in the section subtitled “The Consumer Price Index and Statistical Debasement.”

As I have summarized elsewhere, it boils down to simply ….
If you can’t shave the silver coin, put your thumb on the scale.

A Trojan Horse brought to you by DailyKos

For the past few years, DailyKos is reportedly the most popularly read progressive political blog in the world. And on DailyKos, one “BondDad” has established a huge following for his posts on financial and economic matters, usually full of vivid graphs and concise explanations of events in the financial markets. Up until this past summer or autumn, “BondDad” presented his analysis from a perspective I fully agreed with: the U.S. economy was much weaker than it appeared to be because wages and earnings for the working and middle classes have stagnated since the 1970s, and a monstrous bubble of debt has been created to allow Americans to keep consuming despite their declining incomes.

But the past few months I have been increasingly distressed by BondDad’s postings, which have swung into alignment with Rubinomics – the Bill Clinton / Democratic Party version of “free trade’ “free market” economics which is unfortunately called “neo-liberalism.