Fiscal Policy: The Fed, Romer, And A Path Forward


This amused…..

“I believe that monetary accommodation alone cannot buy happiness,” Fisher said in the text of remarks to the Greater Houston Partnership.

What if it fails to buy anything at all?

It might not, you know.  Just like drugs always feel good when you first do them, monetary distortions – negative real interest rates, which The Fed freely admits are occurring – always lead to hangovers.

We had a housing bubble because of The Fed’s actions in 2001-2003.  It wasn’t an accident.  It was an easily-foreseen result.  Now we’re going to do the dumb again, because, well, we need to be dumb I guess.

The problem with negative real borrowing costs is that they destroy capital formation over time.  It’s like taking steroids.  At first they make you bulk up fast, and are “easier” than working out harder and longer.  But their impact is insidious – at the same time they damage the rest of the body’s systems.

They also encourage you to do other dumb things at the same time.  Maybe you “roid-rage” out.  Or maybe you just get a wild hair up your butt, buoyed by testosterone, and do something stupid.  In the intermediate term ZIRP leads to dumb investments, like it did in 2003-2005 with houses.

But the long-term damage is where the real problem is.  With ZIRP that damage comes from encouragement of structural deficits and destruction of the incentives for capital formation.  We had the light version of that in 2003-2003, as this chart shows, but now we’ve got the turbocharged, Cat-5 hurricane style:

So where does it end?  Well Dallas Fed President Fisher says it doesn’t.  He says it’s now up to the “government” to do the rest with fiscal policy.

And what policy might that be?

Why crank that graph up even further.  Tax less and spend more.  After all, we have ZIRP to protect us.  And what does he think of the cost-benefit analysis of further Fed action?

“For me, the ball is in the fiscal court for now,” he said. “Any further action by the Fed must be subject to the kind of rigorous cost-benefit analysis that Ben Bernanke cited in Jackson Hole. One of the variables that must be taken into account is whether fiscal and regulatory policies are conducive to growth.”

Let me see – rising entitlement spending, new programs that must lead to either higher structural deficits or higher taxes, and more regulations such as the EPA trying to regulate CO2 emissions.  This is all “good for business”, right?

Christina Romer, who is leaving Obama’s administration tomorrow, incidentally, thinks so:

Congress is divided over further action. “Concern about the deficit cannot be an excuse for leaving unemployed workers to suffer,” Ms. Romer said. “We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wisdom to use them.”

What would those tools be Christina?

“The only surefire ways for policy makers to substantially increase aggregate demand in the short run are for the government to spend more and tax less,” Christina Romer, the departing White House chief economist, said in a speech in Washington yesterday. “We should be moving forward on both fronts.”

Really?  How much more would you spend?  We’re $1.6 trillion in the hole on an annualized basis, or about 12% of GDP, and we have been for the last three years.  Has this worked?

How much less would you like to tax?  Tax receipts are down tremendously since 2006.  Again, has this worked?

The problem is this – nobody believes you can keep doing that sort of thing indefinitely.  Yet if you can’t convince people you are able to they don’t alter behavior.  The Bush Tax Cuts were “successful” in altering behavior because they were “date certain” things over an intermediate time period.  They thus had the desire effect, but at what cost?  We took a structural balance in our budget and trashed it to the tune of $600 billion a year.  That would have been ok if it was temporary, but it clearly was not, as it continued right up until we threw the engine into “full power plus maximum afterburner” in 2007.

The practice of spending more than you make, whether by a person, a corporation or a government cannot continue forever.  It can, and has, gone on for a while.  It might even go on for quite a while – witness all the people who pulled billions collectively out of houses in the 2000s and blew it on anything from Hummers to boats to vacation spots and expensive trips along with baubles of all sorts.

But ultimately the check you write has to be backed up with the production you emit from your fingers or mind if you’re a person, or with the funds you tax if you’re a government.  It cannot be otherwise.

So how do we get out of this pattern of “spend more and tax less”?

I’ve yet to see any credible suggestion for doing so.  We have not forced the banks to take their writedowns, houses are still too expensive (proved by the fact that they’re not selling without $8,000 tax credits) and now automobile sales are in the toilet on top of it, right after everyone said – just a month earlier – that we were “recovering.”

Inventory builds are happening, but are they voluntary or are we (again) building inventory into flagging demand?  If the latter, we’re in for an ugly surprise in a few months, and I think that’s exactly what’s coming.  Anecdotal evidence is that the Christmas shipping season is off to a crap start, truckload backlogs are soft (and that’s being generous) and we have warnings from the likes of Intel on processor demand, which strongly implies that PC sales are going to bite this holiday season.

The problem with the government was always on the spending side of the ledger.  The solution is for government to bugger off about all the things it really has no Constitutional basis for doing in the first place, and to “bugger on” about those which it does.  We do neither.

For example, Social Security and Medicare are a mess largely because there is no accountability for either.  If the States ran them there would be.  Why?  Because you’d insist on it – you might want to move.  Without accountability and transferability, that is, honest fiscal accounting under your own name, you couldn’t get that.  This you would not accept, ergo, it would happen.  But as long as it’s “off budget” then it’s just a worm hole that emits “magic benefits” for people – or at least that’s the appearance that Washington has managed to foist off on you.

Likewise, if Washington was to “bugger on” about those nations that have slave-labor conditions and environmental poisoning as their raison-d’etre of being “more competitive” in the labor force, we would enact Wage Parity and Environmental Parity tariffs.  Labor arbitrage for the purpose of tossing your spare arsenic into the local river would go away.  Many jobs now overseas would come home.  Not all, but some.

Everyone wants to claim that unemployment compensation for 99 weeks is “compassionate.”  But is it really?  Or is it just a sop that keeps people from being entrepreneurs?  We all have skills.  Some are of more value in the marketplace than others, but we all have some.  So why do we subsidize people not employing those skills? 

And incidentally, why is it that three years into this mess we still have people on unemployment who are laid off and don’t ditch their $100 monthly cell phone and $400 A/C bills immediately?  Is that not proof positive that it’s become too easy to simply suckle off that government tit?

The fiscal and economic imbalances we put in place through intentional policy acts over the last 20 years are not going to go away easily, or without pain.  Those who made bad loans and took bad loans are going to have to suffer the consequences eventually.  We are only arguing over when, and how much more damage we are willing to inflict on our economy and citizens before we cut this crap out.

Our nation desperately needs an army of prosecutors to start at the top of every large financial institution and start issuing indictments.  We need to close damn near all of them and toss their management out on their respective ears.  We need to nationalize all the state and local pensions, turning them over to the PBGC, ridding state and local governments of this burden while at the same time cutting back those benefits, including for current retirees, to that which the funds in those pension plans will support.

We must immediately stop with the ZIRP crap and allow rates to rise so that short rates are at least at 3%, and longer-term rates commensurately higher.  30 year mortgage money should be at 6-7% in a balanced economy and financial system, 30 year government bonds 100-150 bps lower.  That’s with 20% down.  Yes, I know that crushes existing home values.  That’s the point.  You want people to be able to own homes, you make them cheaper – just like a DVD player or flat-screen TV.

Mandate that The Fed actually follow the Federal Reserve Act.  Systemic Debt must be reduced to 1960s historical percentage levels (150% of GDP, total public and private, including Social Security and Medicare) within three years, and liquidity must be pulled until it is.  Financial engineering doesn’t make more debt able to be “safely” carried, it just enables people to temporarily lie about solvency and create Ponzi Schemes through obfuscation.  Add a clause to The Federal Reserve Act mandating zero inflation on a five-year rolling basis, proved up with an actual basket of goods and services with no adjustments, hedonic or otherwise, beginning when system debt reaches 150% of GDP, and all data collection to be published and publicly verifiable.  Allow zero tolerance for deviation except in time of declared war.

If the current board of governors refuse then they are replaced with new governors who will, or The Fed is replaced wholesale.  The very threat of taking currency issuance into Treasury and telling the entire primary dealer network to bugger off should be sufficient to convince the current board that we, not they, are in charge.

The Debt Ponzi has to be deflated.  We have 50-60% more debt in the system than we can productively carry.  The excess has to go.  I recognize this will bankrupt a LOT of powerful people who are paper rich and reality poor and for this reason it’s unpopular.  The math doesn’t care if it’s popular.  Set up special bankruptcy courts – everyone can access them.  In and out in 90 days or less.  Come in, forfeit your assets save your retirement accounts (IRAs and 401ks), walk clean.  Yes, this includes student loans.  The assets get washed through public sale and we find out what they’re really worth.  If the banks are busted by this, they go through it too.  We now have “resolution authority” in theory – let’s put it into practice.

The student loan ponzi gets busted.  Most public colleges and nearly all private ones go bankrupt.  Fine – they’re not closed, they get reorganized – and the debt they were carrying is gone.  So too are the gold-plated BS games.  College becomes affordable again – I should be able to attend full-time for $6,000 a year all-in tuition and fees at any good state school, and half that in a community college.  Do that and anyone can work their way through.  That’s how it was in the 1980s, and that’s how it can be again.

Get rid of the gargantuan tax code and replace it with the Fair Tax.  Simple, elegant, everyone knows exactly what they have to pay and how much they’re funding government with.  Best of all, it’s voluntary.

Finally, reinstate Glass-Steagall.  All 17 pages of it, unedited.  No more gambling with the government purse. Break the repo market – if you need to use it, you’re not a government-secured enterprise.  Period.  Now “trust” by the market in your institution no longer determines whether you live or die on a daily basis for those that hold the public’s deposits.  Just like it used to be.  Commercial banks go back to having $10/share stock prices and paying 7% dividends that are both stable over decades.

GDP falls by 40% if we do this and unemployment goes to 20%.

But not for long. 

When the Humongoous Bank on the corner closes, the next morning some enterprising guy or gal decides to open a new one.  Ditto for the other institutions that don’t make it.  Entrepreneurship roars.  So does repatriation of jobs.  Those who can’t find “high paying” work right now go to school and learn a new trade, working at McDonalds’ if they have to in order to meet the tuition (Note: you can do it now for $3 of your hourly wage, assuming a 2,000 hour man-year.)  The in-shoring of businesses would become an instantaneous flood, and with them come jobs – and CapEx.

If we do this within two years we would surpass our current $14 trillion GDP.  Government funding would be inextricably tied to private production, and as such the idea of doing things that are unfriendly to production would be a thing of the past.

Every person in America would contribute to the government’s funding, and see exactly how much they paid on every receipt.  More citizen involvement in exactly where our money goes is good, and can only happen when you see every dime leave your hand.

All of the “I can’t” nonsense of today would be cast aside.

America would be the place to do business.  The place to be headquartered.  The place to employ people. The place to go to school.  The place to start a company.  The place to innovate.

We can do it.

To begin we have to stop protecting those who have bankrupted this nation, and force them to face the music, while at the same time giving the common man and woman a dignified way to walk through the door, throw off all their overburdened trash (yes, including their house), and walk free of the millstone of debt they cannot possibly pay, while at the same time changing the laws so that nobody can play this exploitation game again.  We have to lock up the crooks and purge the corruption and grift. 

But we need to start now, because the longer we wait the worse the damage we must suffer on our journey of clearing the debris, both human and systemic, that is clogging the arteries of commerce, innovation, and our national spirit.

Are we up for it as Americans, and will we insist on it – starting right here and now?

That’s the only remaining question.

The Market-Ticker

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