Lines of the Day

Thanks to DeLong for this Keynes gem (1939):

"It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn't only the unemployed who will feel the difference. A great number besides will be taking home better money each week.

The Grand Experiment has begun. If it works--if expenditure on armament really does cure unemployment--I predict we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two which shall be useful when the day of peace comes.

If we can cure unemployment for the wasted purpose of armaments, we can cure it for the productive purposes of peace."

Well, we know what happened then...

Uncatchy cliques

I'll have to get back to this for want of time but I've thought all along that it's only a matter of time before such issues are brought to light. Gillian Tett from the FT has a good piece on russian-doll finance (isn't that exactly, in a way, what this is?). 

She credits Tucker with raising soft alarms back during the credit boom which would obviously lead you to question why it was only last week that the FSB released a report on the $67 trillion system that creates calamitous levels of systemic risk that barely anyone can measure? 

The main emphasis here is on the internal working of the BoE and how it seems to have finally transitioned from a hands-off approach (really?). As Tett writes:

"Some regulators on both sides of the Atlantic tried to bridge that mental gulf. When Mr Tucker, for example, became head of markets at the BoE a decade ago, he realised the operations of CDOs and SIVs were affecting the flow of credit. He even suggested an analysis of “vehicular finance” should be incorporated into discussions of monetary aggregates, such as M4.

But he faced at least two big obstacles in raising interest.

First, it was unclear who was responsible for analysing, let alone policing, this non-bank world. For while the FSA was watching the micro-level operations of banks, and the BoE was monitoring macro financial stability, CDOs and SIVs fell between the cracks.

Second – and more subtly – the silo mentality was so entrenched that Mr Tucker did not even have the words to communicate his fears. He knew the phrase “non-bank finance” sounded boring, so he tried to come up with alternatives. But they failed to grab attention."

More on shadow banking soon (hopefully). 

Inequal

Robert Skidelsky has a great condensed piece out at PS, on inequality and capitalism - what he's doing is making a common causal statement starting with why greed manifested itself so readily and focusing not on the supply of credit but the demand  for it instead. 

"And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt. In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies. And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt."

It's a bit narrow but it's a horribly valid point. What's more important though,is how the article ends.

"In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.

If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money themselves on public works and infrastructure projects. This is the only way to get the big economies of the West moving again."

A lot of people have been saying that. And a lot of people look upon such thoughts as blasphemy. That's why there's little hope for problems to be solved. Because a lot of people in power refuse to admit its very existence.

FUNY, not SUNY

I was browsing through the Atlantic on my phone and I came across a piece by Noah Smith from the ingenuous Noahpinion. It was about something I often wondered many times. Why are there no Federal universities in the United States of America? [which is (still is!) the beacon of higher education in the world?]

Is it because the state system works so well, is less complicated and functions without the hassles of bureaucracy? Probably, but what happens when there's a gradual crisis in tuition cost and overall quality?

Drastic measures = Drastic solutions; which is why the probability of something like this happening in such a politically united government (ahem!) is...well...almost zero.

Firstly, Noah says that the rise in tuition that is often talked about is misrepresented because the majority of it has been in the "display price" rather than the "actual cost" [factoring aid/scholarships etc].

Still, the rises are substantial enough to warrant concern and when one throws in the rapidly increasing burden of student debt you start to draw connecting lines by remembering just what household debt did to the economy.

It seems obvious to me that during a crisis period, and in an economy characterized by uncomfortably high unemployment, the increased costs wouldn't serve as a deterrent to one who decides that a college degree is his/her only hope to a secure job.

With a problem of rapidly rising demand, one would look at increasing supply (college seats). And here's where the private/public sector roles play out.

Smith labels the private sector participation (cue: University of Phoenix comparison) as a failure and reminds us of the crucial elements that will always be missing from an online education - human network, mentoring, personal growth etc.

The question then, is why federal instead of state and I think this is where there's a lot of room for constructive discussion. Essentially, Smith says that state spending will focus on the existing university systems and might simply displace funding (alumni or tuition) thereby having a restricted impact.

One need only look at other models of success such as the IITs and the Japanese universities which "annually produce superb graduates in technical fields". A national system would combat the tuition increases and also attract, as well as accommodate, highly skilled immigrant kids/parents. Furthermore, it would provide a way out in terms of research spending which is all too important to ignore.

There's a sense of reality here, however, that not even Smith can deny. A concept like this, which involves significant amounts of will, planning and money (and most importantly, a public good), will be shot down by the right faster than an injured moose on hunting day in Ohio.

But it's an intriguing thought nonetheless.

Balance Sheet Stuff

I'm continually puzzled as to why the fundamental concept of a balance-sheet problem hasn't filtered through the very-important-people-in-power. Is it really so difficult to look at the massive period of private sector deleveraging? If that's not the difficult part, is it difficult to draw a simple conclusion after that?

Goldman's US Chief Economist Jan Hatzius makes a visual point in a note which I've lifted of Business Insider. Essentially what he's stating unequivocally is the importance of monitoring the gaps between spending-income/saving-investment to see whether things are improving:

"...underneath the fiscal drag the fundamentals in the private sector of the US economy are improving. The key force behind this improvement is the gradual normalization in the private-sector financial balance, i.e., the gap between the total income and total spending--or alternatively, the total saving and the total investment--of all US households and businesses, from levels that remain very high. When the private sector balance is high, the level of spending is low relative to the level of income. A normalization then means that spending rises relative to income, providing a boost to demand, output, and ultimately employment and income. The induced improvement in 
income then has positive second-round effects into spending."

Krugman might be pleased. It is aggregate demand after all!

Ostriches vs Emus

Lisa Pollack at FT Alphaville has a gem of a summary on Super Mario in Milan. I'm not going to read the whole speech and the excerpts won't probably tell you all that much but it's still amusing to read. 

Now I don't quite know what Draghi really thinks. If he was fed a strong dose of veritaserum, what would he really say? That the traditional monetary transmission mechanism is broken? That we need a banking union (single supervisor); a fiscal union that can effectively prevent unsustainable budgets; an economic union that can guarantee sufficient competitiveness to sustain high unemployment; and a political union that can deeply engage euro area citizens? 

That's what Mr. Draghi did say (do keep in mind that he's addressing students after all!). But this is just politically correct stuff consistent with the kicking-can attitude that policy makers have had forever. After all, is a fiscal union just one that "prevents unsustainable budgets"? We might as endorse the austerity brigade then. What about effectively transferring resources, encouraging labor mobility and broader economic integration? 

Pooh, who cares. The goal of a fiscal union is to prevent unsustainable budgets. Gospel truth.

Here's the amusing thing (I have to copy and paste this in order to make you smile):

Background Blurb: If there's a father of the euro, it might well be Tomasso Pado-Schioppa who, in the early 80's recognized the inconsistency (much like the trinity) of free trade, a fixed exchange rate, independent monetary policies and free capital mobility. He also advocated eliminating the third to attain the other three.

"

All well and good. But, one more thing…As you know, in recent months I have repeatedly stressed the irreversibility of the euro. This was precisely the sentiment of one of Tommaso’s most noted quips. Speaking in 2004 about the “EMU”, an abbreviation for Economic and Monetary Union, he remarked that it was also the name of an Australian bird rather like an ostrich. And he added: “Neither of them can go backwards”.

Clever!

Know who’s also clever? That Gary Jenkins over at Swordfish Research: Yes Mr Draghi but a cynic might say that the real resemblance between Economic and Monetary Union and an Ostrich and Emu is that it sticks its head in the sand at the sign of trouble and in its current format has little chance of taking off…

                                                                                                                                                     "

EU-IP

Bleak, bleak, bleak. 

September's Industrial Production numbers (excluding construction) are worse for the Euro Area. One line is the EU 15 and the other is the broadest EU-27, both dropped a good couple of points from last month. The data is seasonally adjusted and a simple percentage corresponding to the IP index value the previous year.

It's only since the beginning of last year though, might this get even worse?