Former Secretary of Labor Robert Reich quite succinctly outlines the differences between the two major party candidates’ economic views.
McCain’s top-down approach:
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Worried that the carnage in the financial markets is not over, that is. Today he sees that two bellwether interest rate ratios are ratcheting up again.
The TED spread is up again. So is the LIBOR-OIS spread. . . . All of this involves fear of defaults by banks — despite what look from here (central New Jersey) like utterly clear signals from the Fed that bank debts will be socialized if necessary. I’m puzzled, and worried.
Why the financial system needs saving, that is, and “Why . . mild-mannered economists have to become superheroes.”
Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom — access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.
Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank’s care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises.
But sometimes — often based on nothing more than a rumor — banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false.
Worse yet, bank runs can be contagious. . .
As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.
In fact, however, we were partying like it was 1929 — and now it’s 1930.
Let us all hope that the mild-mannered Ben Bernanke is wearing the right cape.
Late this afternoon (Sunday, March 16), it was announced that J. P. Morgan had bought Bear Stearns for $2.00 per share, after closing this past Friday at $30. A year ago it was selling for $170 per share, and as recently as February 27 the price was $85. Also, the Federal Reserve has taken several steps to stem an incipient panic including, in a step highly unusual for a Sunday afternoon, lowering the prime rate another quarter of a percent. As of this writing, at about 8:00 pm CDT, the Dow Industrial futures for tomorrow’s opening are down about 300 points. By tomorrow evening this time there may very well be a lot of drunken people staggering around whose intoxication has nothing to do with the wearing of the green. The question is when are some prominent Democrats going to start calling bullshit on the voodoo economics and foreign policy disasters that have led us into what’s looking more and more like the country’s biggest economic meltdown since the Great Depression. Or, god forbid, a reprise of it.
Update: Oops! Just noticed I hadn’t changed the GMT time offset since we switched to CDT.
George Soros has a sobering piece in today’s Financial Times that closes thusly:
Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.
When it comes to matters of international economics, Soros is not one to be ignored.
There’s been a public pissing match of late between Princeton economist, NY Times columnist and early George W. Bush years liberal-voice-crying-in-the-wilderness Paul Krugman and Senator and Democratic Presidential candidate Barrack Obama. What it’s really all about is nothing less than the soul of the Democratic Party, and whether the early 21st century version of the Progressive Movement has a significant place within it.
Lambert, at Corrente, comes down strongly on the Krugman side, while in the process providing the historical background of the dispute. The only argument I have with him is that, in saying
All progressives—and most Democrats—agree on the opportunity and the stakes. That’s not the issue. The issue is: What kind of politics can turn the opportunity into permanent, progressive change? What kind of politics can drive economics?
he doesn’t emphasize how fundamental the conflict is. Here’s more from Lambert: (more…)
Writing in the December issue of Vanity Fair, the Nobel Prize-winning economist has this to say about the damage done to the US economy by Bush and Cheney:
After almost seven years of this president, the United States is less prepared than ever to face the future. We have not been educating enough engineers and scientists, people with the skills we will need to compete with China and India. We have not been investing in the kinds of basic research that made us the technological powerhouse of the late 20th century. And although the president now understands—or so he says—that we must begin to wean ourselves from oil and coal, we have on his watch become more deeply dependent on both.
Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president†when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.
And that’s not the half of it.
From an ex-Republican friend of Brad DeLong:
” . . the left-wing Democrats are the party of Jefferson and Roosevelt, the right-wing Democrats are the party of Lincoln and Eisenhower, and today’s Republicans are the party of Bozo.”
Here’s UC Berkeley Econ Prof Brad DeLong’s definition:
I think a bank is something [that] (a) takes deposits, (b) provides loans, (c) pretends to its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time.
For those times when it looks like they might not get away with it, we have reserve requirements, capital standards, central banks, and other lenders of last resort.
Brad forgot the extortionary fees that banks have been hitting their customers with in recent years.
Stephen Dubner at Freakonomics asks a provocative question: If libraries didn’t exist in today’s environment, could they be started?
But here’s the point I’m (finally) getting to: if there was no such thing today as the public library and someone like Bill Gates proposed to establish them in cities and towns across the U.S. (much like Andrew Carnegie once did), what would happen?
I am guessing there would be a huge pushback from book publishers. Given the current state of debate about intellectual property, can you imagine modern publishers being willing to sell one copy of a book and then have the owner let an unlimited number of strangers borrow it?
I don’t think so. Perhaps they’d come up with a licensing agreement: the book costs $20 to own, with an additional $2 per year for every year beyond Year 1 it’s in circulation. I’m sure there would be a lot of other potential arrangements. And I am just as sure that, like a lot of systems that evolve over time, the library system is one that, if it were being built from scratch today, would have a very different set of dynamics and economics.