Obama Administration Considering Giving in to Deficit-Mania
TARP, the much-derided Troubled Asset Relief Program, has an odd structure. $700 billion in expenditures were authorized, but the program was structured such that much of the money would be paid back—some with profit—and indeed a lot has been paid back. Consequently, the executive branch has the ability to either make the net cost of the program much less than $700 billion or else to in effect spend the same money twice. In principle, this could have been a good way to get additional stimulus into the economy without additional legislation. Leftover TARP money and TARP repayments could be used, for example, for small business loans to support entrepreneurs looking to expand their operations.
Instead, Deborah Soloman and Jonathan Weisman report that the White House is considering letting short-term political optics dictate policy:
The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.
The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.
They say that the idea “is still a matter of debate within the administration.” Let’s hope they reject it. There is one and only one good reason to prioritize short-term deficit reduction, and that’s if you believe that prioritizing short-term deficit reduction will improve economic growth. We know from previous reporting that nobody on the White House economic team believes that this is the case. The pressure to look at deficit reduction is political pressure, “pressure to show it is serious about tackling the budget deficit.” In brass tacks political terms, however, a substantial deficit in 2010 is inevitable either way. The question is whether it’s a substantial deficit that voters will find forgivable thanks to the robust economic recovery and falling unemployment, or if it’s a substantial deficit that voters deem intolerable thanks to an anemic recovery and high, flat unemployment. The politics here are all about getting the policy right.
Nicholas Poussin, The Adoration of the Golden Calf
Realistically the best use of these funds might be semi-corrupt pork barrel projects designed to persuade key legislators to stop threatening the country with a debt default and start voting “yes” on key legislation. We could build a giant golden calf in Indiana in place of the false God of fiscal austerity. And as I’ve had occasion to note in the past, the administration has arguably been too eager to ask what substantive policy concessions Olympia Snowe wants and unduly reluctant to ask what our country can do for the lobster industry. Contractionary fiscal policy would be an extremely costly way of buying congressional breathing room.
60 Responses to “Obama Administration Considering Giving in to Deficit-Mania”
Register
RSSLogin
Yglesias Tweets
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
November 12th, 2009 at 10:17 am
The deficit WILL have to be reduced some time. But for now the focus should almost exclusively remain on unemployment, and getting the economy growing as fast as possible. I would like to see Obama make a real effort to reduce the deficit, but better to do that in his second term.
November 12th, 2009 at 10:30 am
The economy is going to be Obama’s undoing. I really get the impression he is out of his depth on this.
November 12th, 2009 at 10:30 am
Why not just raise taxes on the Rich to reduce the deficit?
Oh, I see the problem:
Campaign donations.
November 12th, 2009 at 10:34 am
Re: Why not just raise taxes on the Rich to reduce the deficit?
Because the President’s economic advisers are a bunch of gutless wonders who don’t want to do anything unpopular (as raising taxes will inevitably be).
November 12th, 2009 at 10:34 am
I know that TARP has in the past been used as something of a $700 billion slush fund for whatever projects are deemed politically helpful (e.g., bailout of the UAW, er, I mean, Crysler and GM). But But I don’t think it could be used as pure stimulus – you couldn’t just “build a giant golden calf in Indiana”. There’s got to be some minimally plausible relationship between the expenditure of the TARP funds and the financial system, no?
Now, maybe it would provide additional stimulus to further bail out some banks or other financial institutions. But is that really what the Obama Administration wants to do?
November 12th, 2009 at 10:41 am
Note that the administration mentioned DEBT reduction, not DEFICIT reduction. But you’re talking about DEFICIT reduction.
I’d agree with you on most of your post – misplaced fiscal austerity would threaten the recovery because the deficit – a “flow variable” – is what’s ensuring a strong recovery. But why not use it for debt reduction – a “stock variable”. What possible harm could debt reduction do to a recession caused by over-leveraging? They’re essentially proposing swapping existing debt for the cheaper debt we can incur now, right? That seems pretty smart to me.
November 12th, 2009 at 10:57 am
If the funds were used for small business loans, they would be paid back with interest as well. That wouldn’t have much effect on debt in the longer term.
Another option would be to offer the money up to municipalities and states as low-interest loans for infrastructure and other capital projects. This would be government to government, would spur some spending and jobs(the government bond market is not good right now), would improve infrastructure and would lead to the money being paid back as well.
November 12th, 2009 at 11:00 am
I could not disagree more wit this post. The government as it is now is not capable of spending its way out of this prolonged recession. This is not the government of the 1930’s. This is a bloated inefficient behemoth. When the government of the 30’s spent mountains of money, the country got the TVA and hydro-power dams. When the government spends mountains of money nowadays, we get a few office jobs here and there. The banks aren’t lending money like they’re supposed to and the market fundamentals aren’t there for a quick, sustainable recovery. This recovery is going to take time.
It’s not about saving congressmen’s asses. It’s about doing what is right. The stimulus was worth a shot but it didn’t do much. Another big round of stimulus money is not the answer. The government needs to tighten its belt and restore balance to the budget. The people aren’t stupid. They know Obama inherited this mess. They’ll give him time and the benefit of the doubt if he pursues wise policies. Caving into panicked demands for free money is bad politically and a disaster economically.
November 12th, 2009 at 11:16 am
Oh no, you mean the government might give banks less money to pay for bonuses that are roughly twice the median income! How awful!
Dumping TARP money into the deficit makes them look responsible and it disassociates them from the Wall Street assholes who have been totally enriched by this financial catastrophe. People are mad about big banks right now, the banks are obviously not appreciative of these funds, and the Obama Admin has taken a lot of political hits for that industry. Time to cut them loose.
November 12th, 2009 at 11:17 am
Depending on the conditions attached to the spending of TARP funds, you really could do a lot of good here. Small business loans would be great, as would direct aid to states to avoid job/service cuts. You don’t even have to get too esoteric about it, just put the money back into the system.
November 12th, 2009 at 11:25 am
The public might finally be catching on to the Keynesian Hoax. Never before did the Keynesians dare be so explicit about their noodle-brained fraudulent debt schemes by trumpeting the word “stimulus” for the entire nation to see. Generally, the Keynesians got away with their nonsense by convincing everyone that “managing” the economy was complicated, obscure and boring. It’s not. It’s simple and exciting. It’s always exciting to learn how you are being robbed and impoverished by bankster thugs. Monetary dilution is simple to understand. Money is created out of thin air and people receiving the new money are essentially robbing persons holding the existing money of their purchasing power. There’s your stimulus. “Fiscal policy” is to hide pork.
If Obama is going to go through the motions of suggesting he’s for debt and/or deficit reduction, it’s only because he’s reading polls that tell him that the usually somnolent public is finally catching on to the Keynesian Hoax.
November 12th, 2009 at 11:31 am
Goooooold, dagnabbit!
November 12th, 2009 at 11:32 am
There isn’t going to be an deficit reduction without a growing economy.
November 12th, 2009 at 11:34 am
There’s got to be some minimally plausible relationship between the expenditure of the TARP funds and the financial system, no?
No.
November 12th, 2009 at 11:38 am
Monetary dilution is simple to understand. Money is created out of thin air and people receiving the new money are essentially robbing persons holding the existing money of their purchasing power. There’s your stimulus. “Fiscal policy” is to hide pork.
Roddis is apparently unaware that $13 trillion disappeared last fall. Just vanished.
Nor does he appear to draw a distinction between the government’s effort and the Federal Reserve.
Quack much?
November 12th, 2009 at 11:39 am
Joe from Lowell:
Your substanceless “critiques” warm my heart. If you had something substantive to say, I suspect you might say it.
November 12th, 2009 at 11:41 am
Generally, when people bother to write an angry retort, it’s because of how little they care.
November 12th, 2009 at 11:56 am
Not to mention that there have been countless critiques of your arguments in previous posts, Roddis. All you ever argue is ‘inflationary monetary/fiscal policy is equivalent to theft’. Until you begin to substantively respond to the many and varied criticisms of this inane claim I don’t think you can continue to expect reasoned responses when you are just making the same point over and over again.
November 12th, 2009 at 11:56 am
It’s all about hiding under the bed. I note that the “critics” of Ron Paul’s Audit-the-Fed bill NEVER mention or analyze the underlying Austrian analysis of why the Fed should be abolished. No. It’s always “EEK A MOUSE*, we can’t let Congress politicize the Fed!” Like here.
They don’t analyze the underlying anti-Fed argument because they can’t.
*Keynesian Dean Baker thinks the “Eek a mouse” argument is nonsense.
November 12th, 2009 at 12:01 pm
Barney Frank’s “Audit the Fed” bill, and the motivations of the liberals responsible for it, has nothing whatsoever to do with abolishing the Fed, not Austrian dogma.
November 12th, 2009 at 12:03 pm
We should audit the Fed…with property rights! And goooooooold!
November 12th, 2009 at 12:09 pm
joe from Lowell -
The Atlantic had a story the other day about rising gold prices, and how it is likely to be a classic bubble.
Wouldn’t that be sweet justice? The Austrians that drone on and on about how central banking causes bubbles might actually be creating one themselves – and a gold bubble of all things. Gold, which is supposed to be this magical bastian of stability!
November 12th, 2009 at 12:12 pm
The Gold Bubble.
Sweet.
Reminds me of the confrontation scene in Marathon Man.
November 12th, 2009 at 12:44 pm
Jim Hamilton is respected all around, especially by DeLong. Yet, Jim doubts the stimulus and hints that more stimulus is just making energy unaffordable for the middle class. (See Economobrowser)
In other words, the Yglesias argument starts with the premise that he is right and some actions therefore follow. But there is a real possibility that Yglesias and company are wrong and current stimulus dollars come right out of the household energy budget, causing more hardship.
November 12th, 2009 at 12:51 pm
Daniel K,
That would be awesome.
I like the ads with the narrator saying, “Gold’s value has risen a zillion percent annually for six years in a row. It’s at record highs. So…buy now!”
Gee, I’ve never heard that before.
November 12th, 2009 at 12:59 pm
Bye-bye Democratic party. Couldn’t have happened to a more worthless bunch of assholes.
November 12th, 2009 at 1:06 pm
There may very well be a bubble in gold. So what? There has been before. There are bubbles in houses. Does that mean houses don’t serve a useful purpose? Personally, I’d like to see gold drop to $800 before it starts going up again.
Economic calculation becomes very difficult when the funny money is constantly being diluted. It creates bubbles potentially in everything. I don’t see how the fact that there have been and can be bubbles in precious metals during a fiat money regime is a substantive critique of using gold and silver as money and fiat money being abolished.
Indeed, much of what happens in short term depends on what the Fed does. I would suspect that gold would drop if Democrat Volker takes over and raises rates to 21% like he did in 1980. Much of this gold speculation is based simply upon an educated guess that Bernanke is going to have to keep increasing the money supply to avoid a further deepening depression. But you never know.
November 12th, 2009 at 1:20 pm
They need to save it to prevent default in case the holdouts really are serious.
November 12th, 2009 at 1:48 pm
Bob Roddis -
My view of the world is very comfortable with bubbles happening all the time – some because of central banks, some not.
The gold bubble is especially satisfying, though, because of the way it is worshipped by some in the Austrian/libertarian crowd – SOME of whom (and I emphasize some) think that all of our economic woes come from central banks, and that gold is somehow an insurance against that.
Bubbles don’t bother or surprise me. I’m a Keynesian. I’d be surprised if human being didn’t create bubbles. I’m just tickled that there might be a gold bubble, and that the first major bubble of the post-crisis era may have been inflated in part thanks to blowhards like Peter Schiff, Ron Paul, and Glenn Beck.
Why in God’s name would Volcker raise rates right now????
November 12th, 2009 at 2:22 pm
Some day the market will raise rates far higher than anyone can imagine. It is taking stupendous amounts of manipulation, money printing and what amounts to a Godfather protection racket keeping demand from foreign central banks for Treasuries strong which is keeping the lid on longer term rates now, sort of. 10year and longer Treasury rates have been rising all year even after the Feds monetization orgy.
Yes, from a Keynsian perspective more borrowing and spending is good for GDP. If we could just snap our fingers and borrow an infinite amount of money to spend then fine. This is not the way the world works. The sovereign debt of the US, the rest of Western world and Japan will find a limit. It may be next month or in 2020 but it will come if the borrowing doesnt stop. When that happens Goldman Sachs et. al. will determine what the government can and cannot do.
My very abstract argument is that it is in the interests of corporations and corporate elites, who really have no national loyalty, for national Treasuries around the globe to default. When that happens it will be their assets, real and financial, not the central banks, which will define money. That they have gotten trillions of dollars from those treasuries and central banks is a beautiful thing then. They are bankrupting themselves in the service of their successors.
(Virtually every dystopian movie of the 70s and 80s had a dysfunctional government which was in some ways totally co opted or controlled by private corporate interests. I wonder why that is not seen much anymore)
November 12th, 2009 at 2:27 pm
addendum to #30
In my scenario corporate debt will begin to trade below US Treasury and other sovereign debt. We are very very close to this already in a few places. Few grasp what a monumental thing this will be.
November 12th, 2009 at 3:15 pm
Why in God’s name would Volker raise rates right now????
Because, as Scott Sumner notes:
Of course, it probably won’t be done because it would cause a temporary deeper depression (probably much deeper).
My previous long version history of what’s wrong with Keynes is here:
Hayek explains that Keynesianism is simply a method of disguising a surreptitious forced drop in real wage rates by the central bank.
November 12th, 2009 at 3:20 pm
Obviously it’s important on some level to counter Bob Roddis-style pseudo-Austrian nonsense. But what of the in my view much more dangerous muddle-headed thinking of poster “N?”
No one responds to N, I imagine, because for the most part the myths that undergird his post are accepted and propagated by most of the posters on this blog (including the proprietor.)
The reason the government spends at a deficit during a finance crisis is to inject dollars into the economy. Government deficit spending creates net financial assets in a way that nothing else does.
The financial advantage of this spending is totally disconnected from the question of the usefulness of the projects that the deficit spending finances. OF COURSE it’s better if government spending serves a legitimate public purpose. But that has no bearing on the effectiveness of the stimulus.
Modern economies operate on a fiat currency model. If, like Bob Roddis, you believe that fiat currency is a sham that will one day collapse, that’s certainly a legitimate view (though one begins to wonder, more than a generation after the collapse of Bretton Woods, exactly WHEN this calamity is supposed to occur).
If, however, you aren’t an Austrian, you need to accept the premises of the system. The key premise of a fiat currency model is that federal deficits are the rule rather than the exception. It is possible to imagine an economy that is growing so robustly that FedGov would want to allow the budget to balance. But in practice this almost never happens.
THE NATIONAL DEBT NEED NOT EVER BE PAID BACK. Future taxpayers will not have to pay it off. Until you understand that you can’t understand fiscal policy.
November 12th, 2009 at 3:26 pm
# 32 – But 1983-84 was CAUSED by Volcker’s rate hike, it wasn’t solved by it. Yes, if you have out-of-control inflation, a rate hike will fix things nicely with a quick recession as the cost. It’s what happened in 1920 too. But neither of those episodes bear any resemblance to the near-deflationary conditions we’re experiencing today.
Not all recessions are the same. Scott Sumner knows this which is EXACTLY why Scott Sumner has been advocating the same expansionary policies that I do (indeed, if you actually read what he’s been writing, he’s blamed this recession on the Fed’s failure not to adopt expansionary policy earlier in 2008).
November 12th, 2009 at 3:30 pm
Can someone provide some insight into my first question?
Yglesias laments the administration’s announcement, suggesting (and I agree with him here) that we need strong deficit spending to weather this crisis. Fair enough.
But that’s not REALLY what the administration said. The quote from the administration said they would use the money to pay off debt, not to reduce deficits. That seems fundamentally different to me. Is there any Keynesian argument against paying off debt with the TARP money? I can’t think of why there would be. It’s not our debt that’s encouraged by Keynesian theory – it’s our deficits. It seems to me if the TARP money was payed for with recently issued bonds at very low interest rates, why wouldn’t we want to use it to pay off our debt? What’s wrong with that?
November 12th, 2009 at 3:31 pm
FWIW, Public Citizen’s Robert Weissman:
November 12th, 2009 at 3:37 pm
The financial advantage of this spending is totally disconnected from the question of the usefulness of the projects that the deficit spending finances. OF COURSE it’s better if government spending serves a legitimate public purpose. But that has no bearing on the effectiveness of the stimulus.
With all due respect, I submit that the above statement is preposterous and without any historical, logical and/or evidentiary basis. Since you have proposed a counter-intuitive proposition that government finance creates a quasi-magical world divorced from normal everyday micro-human endeavor, please prove your point. Facts, logic and evidence would be helpful. Calling me a “Paultard” for the 5031st time (not by you, but by others) probably wouldn’t be helpful in resolving our impasse.
November 12th, 2009 at 3:38 pm
Ape Man:
Amen! In my view, it’s not the Austrian goldbug morons who are dangerous, since nobody listens to then anyway. It’s the pseudo “Keynesians” like Delong and Krugman who, even though they argue for a stimulus now, are completely in the dark about the real nature of the monetary system and in some ways just as captured by outmoded gold standard thinking as the worst Austrian. In fact, the Austrians are better: they at least have a consistent (if wrong) economic worldview…
November 12th, 2009 at 3:43 pm
“the above statement is preposterous and without any historical, logical and/or evidentiary basis.”
Three words: World War Two.
November 12th, 2009 at 3:55 pm
WWII didn’t do it. Prosperity only returned after FDR died and Congress cut spending by 2/3.
See also Tom Woods on the neglected leftist Seymour Melman.
I have seen substantial disputing from other anti-war progressives of the alleged effect of military Keynesianism. I’m too busy to hunt for more links at this time.
November 12th, 2009 at 4:03 pm
Bob:
We are not, in fact, at an impasse. In fact we are engaged in parallel efforts and should not be wasting our energy arguing with each other.
Both of us are convinced that mainstream macroeconomic thinking (particularly regarding monetary theory) is badly flawed, and are engaged in an effort to reform it through raising awareness of ideas from the past which have fallen out of favor.
Our two worldviews are incompatible, but that has very little bearing on our relationship with one another. It seems unlikely, at least to me, that we will ever be in any significant sense competitors. We may, for practical purposes, be allies. I withdraw my previous lukewarm attack. My advice is, fight on!
If you really want to have an argument about a specific point of disagreement, I’m willing, but I need a more specific idea of what aspect of my statement you object to, and why.
The process by which deficit spending creates net financial assets is not “quasi-magical.” In fact it’s quite simple! Treasury writes a check, drawn on Treasury’s account at the Fed which is operationally limitless (though nominally limited by statute). That check is deposited in the US banking system and becomes a financial asset.
A dollar that did not exist before now exists! In fact you seem to agree; otherwise how can the existing stock of funds become “diluted?”
November 12th, 2009 at 4:17 pm
Apeman @33:
“THE NATIONAL DEBT NEED NOT EVER BE PAID BACK. Future taxpayers will not have to pay it off. Until you understand that you can’t understand fiscal policy.”
Jackass, current account deficits have to be covered by someone. The Fed, through a complicated process essentially borrows this money squeezing out credit for developing countries. From a simple moral perspective, running large deficits is a travesty.
Further, ever heard of interest payments on the debt? Currently its the third largest expenditure for our yearly budget. Running large current account deficits will and are strangling the long term health of our economy. The deficit situation is even worse than it appears because the payroll tax increases passed in 1986 were supposed to extend Social Security’s solvency but instead are being used to make unbalanced budgets look less unbalanced. And for the record, retard government hacks punching a clock is not worth a dime’s worth of ’stimulus’ dollars.
Goddamn liberal armchair economists. Where’s Clintonian rationalism when you need it?
November 12th, 2009 at 4:24 pm
Good point. Some of the largest holders of Federal government debt are state governments. Obama could negotiate “buy back” agreements with the states, sending them cash for their US Govt. securities. This way, cash gets to the states, and Obama can sell it politically as paying down the debt. Paying off debt to bondholders who live in the US, and will spend the money in the US is just fine stimulus-wise.
November 12th, 2009 at 4:34 pm
WWII didn’t do it. Prosperity only returned after FDR died and Congress cut spending by 2/3.
I’m guessing that “post hoc, ergo propter hoc” is not a big problem for you.
November 12th, 2009 at 4:46 pm
Jeffrey Davis:
No. The idea that war causes prosperity is absurd.
Someone needs to write a happy little pro-war song about this.
While on the topic, how about a little anti-war hippy-trippy song from Donovan (who may have invented “hippy-trippy”).
Or a nice Country Joe and the Fish anthem.
I love the fact that “progressives” propose that WAR causes prosperity.
November 12th, 2009 at 4:55 pm
“Prosperity only returned after FDR died and Congress cut spending by 2/3.”
I guess it depends on what you define as “prosperity”. Most people, not being all Austrian and sophisticated, define it as “having a job and making money”. True, private investment was low during the war. Because, ahem, there was a war on. But the point Ape Man was making (that you were trying to refute) was that government deficits can lead to full employment and increased private savings (indeed, they MUST, as a point of accounting logic), even if the stuff it is spent on is useless stuff like rifles and tanks that end up getting blown up.
For the average person working in a factory making some of those tanks (who perhaps had been un- or under- employed for the previous 10 years), it must have seemed pretty prosperous to take home a paycheck and build up a bunch of savings in the form of war bonds, even if there weren’t a whole lot of consumer goods to spend it on due to rationing. And when hostilities ended, he could finally go out and buy that new car with all that savings – and it was that demand that led to increase in private investment.
November 12th, 2009 at 5:05 pm
N:
“current account deficits have to be covered by someone.”
I can’t tell what you mean by this, or what connection you think the current account deficit has to the budget deficit. Can you elaborate?
In the meantime I will say that I definitely agree that the currect account deficit must be “covered by someone” in that if one country is net exporting its sovereign currency, some other country must be net importing it.
What that has to do with the budget deficit, I’m not sure.
November 12th, 2009 at 5:11 pm
N,
If government can borrow at interest rates below nominal (not real) growth rates, and such borrowing does not crowd out private borrowing/investing, and govenment has useful avenues in which to spend the money, then it is more fiscally responsible to borrow and spend than to not borrow and spend.
November 12th, 2009 at 5:20 pm
“The Fed, through a complicated process essentially borrows this money squeezing out credit for developing countries.”
The process is not, at the macro level, all that complicated. The nuts and bolts are complicated, but the big picture is rather simple.
Other countries (China is the one everyone always talks about, but of course it’s lots of other countries as well) export good to the US. We export dollars to China.
Dollars are “debt.” There is no functional difference between a hundred dollar bill and a zero-interest hundred dollar bearer bond. US dollars are US government liabilities – debt.
Since dollars bear no interest, though, it makes sense for financial institutions (foreign and domestic) to convert them into Treasury notes at some nonzero interest rate set by the Fed.
This “borrowing” does not finance the deficit. It doesn’t finance anything. It’s a technical function of the Fed having to do with interest rate policy. If the Fed did not “borrow” this money, there would be consequences, but default is not among them. There is no operational constraint on US government spending.
November 12th, 2009 at 5:22 pm
If government can borrow [from whom???] at interest rates below nominal (not real) growth rates, and such borrowing does not crowd out private borrowing/investing, and govenment has useful avenues [whatever that means] in which to spend the money, then it is more fiscally responsible to borrow and spend than to not borrow and spend.
How is this possible? Facts, logic and evidence, please. Micro-mechanics, if possible.
November 12th, 2009 at 10:21 pm
The Treasury may have no choice but to return that unused TARP money. October Federal tax receipts plunged 18% for a year earlier. This means one thing, the already huge borrowing demands of the Treasury are going to be worse in coming months and Bernanke’s printing press is slowing down.
Then too, what $200 billion? The amount they say is excess TARP money? Is it really there? The Treasury in October did not roll over the Treasury bills that funded the SFP fund used to manage the Feds special programs and I think the TARP. These T bills $185 billion worth, were thus returned to the buyers who had to find another home for it, in Treasuries most likely but that was $185 billion less Treasury supply for the month. A nice little boots for the capital markets but that is over. I get this information from secondary sources but the point is nobody knows where these supposed excess TARP funds are.
Everyone just assumes the Treasury can borrow any amount it needs to at low rates. Well rates are trending higher, because of the supply. The Treasury market is a market. A very heavily distorted and manipulated one but still it is a market. The Treasury is desperately trying to lengthen the maturity of their debt since it is at a near record short duration. Yet they are having trouble as the long end keeps creeping up. Throw in every month the will need perhaps another $150 billion in new money, sheesh.
November 13th, 2009 at 6:16 am
[...] looks at the proposal that some leftover TARP money should go to reduce the budget deficit.Close Forward this [...]
November 13th, 2009 at 9:28 am
It has been empirically demonstrated.
At the start of this crisis, people nearly ceased lending money. It wasn’t that there were no good investment opportunities; the problem was that lenders did not have faith that the borrowers could stay solvent long enough for good investments to pay off.
Those lenders did have confidence that the federal government would pay back any money it borrowed. Interest rates for the government were extremely low while interest rates for private borrowers were high.
The government could invest this money back into the economy with less risk than private lenders. The government does not need to make money directly on their loans. Because the federal government collects taxes, they can afford to invest at a small loss to create growth, and recoup the shortfall and more by collecting taxes on the increased productivity.
November 13th, 2009 at 10:27 am
“Everyone just assumes the Treasury can borrow any amount it needs to at low rates.”
They assume it because it’s true. In fact, the Treasury does not “borrow” in any conventional sense of the word. The funds to buy treasury securities are created by the treasury’s own spending. The only way the new reserves can be drained from the system is for either the Fed or the Treasury to sell securities (or for the Treasury to tax it). Otherwise they build up as excess reserves.
As Ape Man said above, the issuance of T-bills and bonds is not a “funding” operation, it’s an interest rate maintainence operation. If the Treasury ceased issuing bonds tomorrow, interest rates would drop to zero, permanently (as excess reserves in the system cause bids to cry up) (This is, in fact, why the Fed sought an got authority to pay interest on reserves last year when it decided to engage in “quantitative easing” – it allows them to support a non-zero rate even with excess reserves in the system.)
November 13th, 2009 at 10:47 am
Njorl:
Your example assumes person A who foolishly invests in a strip mall that only appears to make financial sense because the Fed has diluted the currency by creating new money out of thin air, thereby distorting the investment and capital structure. Once the inevitable non-viability of the project becomes apparent, A is going to find that his investment is worth a whole lot less than what he and the bank thought it was. They deserve to take the loss (and ASAP).
B on the other hand has invested wisely. To bail out A, the government taxes B to subsidize A, or borrows money to subsidize A or creates new money out of thin air, in effect stealing B’s purchasing power to give to A.
A has received an immoral subsidy, which, of course, makes HIM better off, but nothing structural has changed and his strip mall is still as worthless as before. And now B is poorer as well.
There’s no magic in Keynes, only fraud, deceit and theft.
November 13th, 2009 at 12:22 pm
N wrote:
“When the government spends mountains of money nowadays, we get”
TWO WARS
Look at the numbers folks — the mountains of money keep on going to the “defense department” (war department). 600 BILLION to 800 BILLION every year.
The government is just blowing money up. OF course, nobody has proposed “deficit reduction” by stopping this wasteful practice.
(And yes, studies show that military spending has very little economic benefit compared to practically any other type of spending.)
November 13th, 2009 at 1:49 pm
“The government is just blowing money up.”
This is crucially wrong. The government is blowing REAL RESOURCES up – much worse!
The money is still here, floating around in the US banking system. That’s good! That money supports the proper functioning of the price system (which at the moment is in a crisis as a result of there being too little money.) The resources are gone forever. That’s bad! We could have used those metals, etc. to build useful things in this country.
In the short run, the federal government can do some good for the real economy through well-planned public works projects, but it’s controversial (obviously) which projects those are, and how much good they actually do.
Just about the only way the government can actually help the real economy over the long term is by investing in the education of its population. If you build a bridge or a building today, it will be useless in 50 years without further investment. If I had my way we would stimulate the economy by making it free to attend college, and by paying out-of-work people minimum wage to rebuild crumbling cities, especially schools.
However, I’d really support ANY stimulus plan that seemed to reflect a coherent view of how the finance system actually operates, even one that conflicted with my liberal politics by offering the entirety of the stimulus in the form of tax cuts.
I’d likely have something to say about which taxes we ought to be cutting (the payroll tax, for example, is idiotic as it discourages businesses from hiring people), but tax cuts create money just as well as new spending does.
This really isn’t a political issue. Being a neo-chartalist (which is what I am and what jimbo seems to be) doesn’t make you a liberal or a conservative – it has to do with a technical model of how the finance system works. You could have completely reactionary politics and still support a reasonable approach to regulating aggregate demand.
November 13th, 2009 at 3:11 pm
This thread seems to have stalled, but I wanted to highlight a point jimbo made that’s really not very well understood.
It’s true what Bob said, that it’s absurd to argue that war causes prosperity. War causes hardship!
However, there’s something else that causes hardship – finance crises. The way out of a finance crisis is to run a large deficit.
Unfortunately it’s always been politically problematic to run large deficits. People are told that they are stealing money from their children (another absurdity, BTW, you can’t steal money from the future) and other such nonsense.
The one thing that quiets people’s objections to running big deficits is war. Especially war to save the entire goddamn world from annihilation by a crazed little asshole with the world’s strongest military.
So while the real economy was being used to fight hitler, the monetary economy was getting fixed. Then when the real economy went back to its regularly scheduled programming, suddenly everyone was able to buy things and invest in stuff. Good deal!
Obviously the war didn’t fix the real economy – it wrecked it! Of course, if the world had understood how to manage the finance system, WWII needn’t have happened. Alas…
November 13th, 2009 at 4:30 pm
“Being a neo-chartalist (which is what I am and what jimbo seems to be) doesn’t make you a liberal or a conservative”
This is absolutely true. I’m mostly a conservative – when I post here on virtually any other topic, I’m considered to be a right-wing looney. But understanding how the monetary system works is neither liberal nor conservative, any more than physics is. Once you understand how it works, you can apply your own values to determine what should be done. But until you do, you are doomed to talk nonsense.
November 13th, 2009 at 8:19 pm
That’s funny, I’m way to the left of the median MY poster. The only forum I’ve ever been considered right-of-center of was a Maoist listserv I was invited on once as sort of a token pacifist for the Maoists to assault with their weird zombie rhetoric about the tyranny of idealism.
Not sure why I just remembered that, but it takes me back. Good times! I’m not a committed pacifist, BTW, but I was WAY too pacifistic for the Maoists.