global financial crash yay!

R

rumble

Well-known member
My take on this stuff is that there are 3 basic sources of demand: Private spending (consumption & investment), public spending and exports. The three are governed by monetary policy, fiscal policy and exchange rate policy.

You can boost demand through any of them, but my sense is that for a healthy economy you need to have all three in balance.

If you try to do too much with monetary policy you end up with dangerous levels of leverage, asset bubbles etc.
If you try to do too much with fiscal policy you end up with huge debt servicing payments (requiring monetary policy to monetize them)
If you try to do too much via the exchange rate, you end up with cost inflation, low productivity and/or serious trade disputes

My ideal state would be: an inflation target at 4%, a modest deficit with debt growing in constant proportion to RGDP, and a floating exchange rate that keeps trade in balance.

I wouldn't mind experimenting with more radical ideas, but in terms of something that can actually be implemented now, that's what I favor.
 
vimothy

vimothy

yurp
What about:

This paper deploys a simple stock-flow consistent (SFC) model in order to examine
various contentions regarding fiscal and monetary policy. It follows from the model
that if the fiscal stance is not set in the appropriate fashion that is, at a well-defined
level and growth rate—then full employment and low inflation will not be achieved in
a sustainable way. We also show that fiscal policy on its own could achieve both full
employment and a target rate of inflation. Finally, we arrive at two unconventional
conclusions: first, that an economy (described within an SFC framework) with a real
rate of interest net of taxes that exceeds the real growth rate will not generate
explosive interest flows, even when the government is not targeting primary
surpluses; and, second, that it cannot be assumed that a debtor country requires a trade
surplus if interest payments on debt are not to explode.
Click to expand...

http://www.levy.org/pubs/wp_494.pdf
 
R

rumble

Well-known member
So I've read over the article a couple times. I'm still not sure about going full on with just a fiscal policy reaction function and no monetary reaction functions at all (something that normally leads to price indeterminacy - extreme inflation or deflation)

I guess it could work in theory, but I think the qualifying words "tentatively", "not necessarily" and "it cannot be assumed" are there for a reason.

The main thing I wonder about is this:

"second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode."

I guess it "cannot be assumed" since the debt could be held domestically, but I don't really see any strong evidence that massive debt-to-GDP ratios, and large interest payments abroad are not a problem. It may not be an "explosive" problem, in the same say that inflation is rarely "explosive" but I don't really get how it would be an improvement on splitting the load with monetary policy and a floating exchange rate
 
R

rumble

Well-known member
Niall Ferguson is a complete jackass. He knows absolutely nothing about economics (isn't he a history prof?) yet somehow sees fit to offer his idiotic opinions as if he were an expert. I hope that Krugman sees this and starts tearing him apart again
 
vimothy

vimothy

yurp
Martin Wolf's response is hilarious:

Niall Ferguson is not given to understatement. So I was not surprised by the claim last week that the US will face a Greek crisis. I promptly dismissed this as hysteria.
Click to expand...
 
vimothy

vimothy

yurp
Via Krugman:

Abstract: Using a VAR model of the American economy from 1984 to 2003 we find that,
contrary to official claims, the Federal Reserve does not target inflation or react to
“inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment;
in a way that suggests that a baseless fear of full employment is a principal force behind
monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy
variable regressions, on data going back to 1969 suggest that after 1983 the Federal
Reserve largely ceased reacting to inflation or high unemployment, but continued to react
when unemployment fell “too low.” We further find that monetary policy (measured by the
yield curve) has significant causal impact on pay inequality–a domain where the Federal
Reserve refuses responsibility. Finally, we test whether Federal Reserve policy has
exhibited a pattern of partisan bias in presidential election years, with results that suggest
the presence of such bias, after controlling for the effects of inflation and unemployment.
Click to expand...

http://utip.gov.utexas.edu/papers/utip_42.pdf
 
vimothy

vimothy

yurp
Ferguson has a lead article in the new Foreign Affairs where he is predicting the imminent demise of the American Empire off the back of Obama's deficit...
 
vimothy

vimothy

yurp
financialsectorbalanceseu.gif
 
hucks

hucks

Your Message Here
Without wishing to sound really, really lazy, can I ask for a synopsis? That's over 200 pages of pdf right there...

Also, in your graphs, the columns add to zero by definition, right?
 
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vimothy

vimothy

yurp
Yeah, that's exactly right. The three balances (private, public, foreign) sum to zero. You can clearly see the shift in private net saving vs fiscal policy over the period. Plus the large current account surpluses (capital account deficits) in Austria, the Netherlands & Germany offset by current account deficits (capital account surpluses) on the right hand side of the graph. The obvious conundrum is thus WTF can the countries on the right hand side of the 09 graph do to reign in their public sector deficits given the fact of their trade deficits? Germany can't run trade surpluses without trading parters somewhere taking the deficit position.

I haven't read much of the LEH bankruptcy report. I just read the summary of the "Repo 105" and "Repo 108" deals whereby they arranged repo (short term sale and repurchase agreements for securities) for toxic assets for the purposes of serious accounting fraud all under the supervision of the NY Fed.

Plenty of commentary all over the place--here, for example: http://www.nakedcapitalism.com/

http://www.nakedcapitalism.com/2010/03/wray-timmy-gate-did-geithner-help-hide-lehman-fraud.html

http://www.nakedcapitalism.com/2010/03/frank-partnoy-lehman-examiner-punted-on-valuation.html

http://www.nakedcapitalism.com/2010...er-implicated-in-lehman-accounting-fraud.html

From the report:

a) Repo 105 – Executive Summary
Lehman employed off‐balance sheet devices, known within Lehman as “Repo
105” and “Repo 108” transactions, to temporarily remove securities inventory from its
balance sheet, usually for a period of seven to ten days, and to create a materially
misleading picture of the firm’s financial condition in late 2007 and 2008.2847 Repo 105
transactions were nearly identical to standard repurchase and resale (“repo”)
transactions that Lehman (and other investment banks) used to secure short‐term
financing, with a critical difference: Lehman accounted for Repo 105 transactions as
“sales” as opposed to financing transactions based upon the overcollateralization or
higher than normal haircut in a Repo 105 transaction.2848 By recharacterizing the Repo
105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.
Lehman regularly increased its use of Repo 105 transactions in the days prior to
reporting periods to reduce its publicly reported net leverage and balance sheet.2850
Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105
transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in
these transactions, Lehman did not disclose the known obligation to repay the debt.2851
Lehman used the cash from the Repo 105 transaction to pay down other liabilities,
thereby reducing both the total liabilities and the total assets reported on its balance
sheet and lowering its leverage ratios.2852 Thus, Lehman’s Repo 105 practice consisted of
a two‐step process: (1) undertaking Repo 105 transactions followed by (2) the use of
Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few
days after the new quarter began, Lehman would borrow the necessary funds to repay
the cash borrowing plus interest, repurchase the securities, and restore the assets to its
balance sheet.2853
Lehman never publicly disclosed its use of Repo 105 transactions, its accounting
treatment for these transactions, the considerable escalation of its total Repo 105 usage
in late 2007 and into 2008, or the material impact these transactions had on the firm’s
publicly reported net leverage ratio.2854 According to former Global Financial Controller
Martin Kelly, a careful review of Lehman’s Forms 10‐K and 10‐Q would not reveal
Lehman’s use of Repo 105 transactions.2855 Lehman failed to disclose its Repo 105
practice even though Kelly believed “that the only purpose or motive for the
transactions was reduction in balance sheet;” felt that “there was no substance to the
transactions;” and expressed concerns with Lehman’s Repo 105 program to two
consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising
them that the lack of economic substance to Repo 105 transactions meant “reputational
risk” to Lehman if the firm’s use of the transactions became known to the public.2856 In
addition to its material omissions, Lehman affirmatively misrepresented in its financial
statements that the firm treated all repo transactions as financing transactions – i.e., not
sales – for financial reporting purposes.
Click to expand...
 
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hucks

hucks

Your Message Here
vimothy said:
The obvious conundrum is thus WTF can the countries on the right hand side of the 09 graph do to reign in their public sector deficits given the fact of their trade deficits? Germany can't run trade surpluses without trading parters somewhere taking the deficit position.
Click to expand...

The answer is nothing, right? And in such a position, and assuming the UK is towards the right of the graph, the private sector is in no position to spend, so the public sector has to. So it becomes more important that the public sector spend is spent on assets, rather than revenue expenditure. High speed rail, anyone?

vimothy said:
I haven't read much of the LEH bankruptcy report. I just read the summary of the "Repo 105" and "Repo 108" deals whereby they arranged repo (short term sale and repurchase agreements for securities) for toxic assets for the purposes of serious accounting fraud all under the supervision of the NY Fed.
Click to expand...

Blimey

Edit: Holy shit I just read that first naked capitalist bit.
vimothy said:
Geithner's got to go
Click to expand...

Oh yeah
 
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