Friday, July 15, 2011

More on Debt Ceiling Fight From MSNBC

MSNBC's First Read has this tonight:

"In addition, McConnell said the hope is to also include spending cuts agreed upon by the White House and House Republicans. He said that is the key. Will the White House agree to enough cuts to pass the House."

So this is the key bit I was mistaken about. In addition to creating another catfood commission, the plan will include actual spending cuts that have already been agreed to in principle by the White House and the House Republicans.

So the main questions are whether those cuts will in fact be included in the Senate bill, and if so whether it can pass the House. I'm still hoping No on the first and Doesn't Matter on the second, but it seems we just don't know yet.

Wait A Minute, Is This Thing Over?

Is this debt ceiling fight over and nobody told me?

I'm hearing from Republican contacts that the current state of play is that the GOP has essentially punted after a falling out between Boehner and Cantor about whether or not the GOP could marshal the votes in time for a passage of a Grand Bargain-type legislative package.

Harry Reid and Mitch McConnell then stepped in and fashioned a compromise, which compromise involves Obama submitting a bill full of cuts at some point in the future which will almost definitely not be passed by Congress. In exchange for this "concession" Obama gets control over the debt ceiling until the end of FY2012, a provision that will presumably be extended in an election year without much fuss.

Is that right? I don't get the sense at all from liberal blogs and commentators that the Democrats have won, but I get that sense from the Republicans I'm talking to. What gives?


So, here's the bare bones of the Reid/McConnell plan, via The Hill:

The proposal McConnell introduced would authorize President Obama to raise the debt limit by $2.5 trillion in three requests.

Under the plan, Obama would have to make three requests to Congress which lawmakers could block only through a resolution of disapproval. It gives Obama nearly unilateral authority to raise the debt limit because it would require only 34 votes in the Senate or 146 votes in the House to sustain a veto of a disapproval resolution.

Reid is talking with McConnell about adding $1 trillion to $1.5 trillion in spending cuts to the authorizing legislation.

Now what I heard, which I'm still trying to find evidence for, is that the cuts aren't even part of the actual legislation, that they are a sort of floater that requires an up or down vote on a slate of Obama cuts. That's not what this piece says so that bit may be wrong. I'll continue to update as I have more information.

Thursday, July 14, 2011

ECB Could Just Print the Money

I admit I got this via Atrios, but he didn't really add much so I'll just cheekily link to the original post at CEPR pointing out that the European Central Bank can solve the debt crisis any time it wants to by creating money and granting it to member states to pay their bills.

The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.

If this were done as a per capita grant to all Eurozone members, it wouldn't cause a race to the bottom - in fact it could be contingent upon following certain budgeting guidelines, if you're into that sort of thing.

There's no technical reason it can't happen, only political reasons.

Wednesday, July 13, 2011

Yglesias At It Again

After I praise a post of Matt's he usually turns around and posts something that's wildly mistaken. Today is no exception":

Banks penalized for holding excess reserves will presumably lend to someone. Make the penalty large enough, and banks may even lend money at negative rates. Alternatively, they’ll just go out and get fancier office furniture. Either way, money gets spent.

This exposes Matt's fundamental misunderstanding of how banking works. Banks cannot use their reserve accounts to go out and buy office furniture. They park those dollars in Fed deposits, Treasury securities, and other more complicated financial instruments as a way of maximizing their interest income. They cannot spend it on office furniture or ANY real goods and services.


And of course Sweden did not do what Matt says they did. I really wish I could get him to pay attention on this, it's just really embarrassing.

Balance Sheet Recession

Everybody's talking about the balance sheet recession today, as we find Paul Krugman, Brad DeLong and Matthew Yglesias discussing William Galston's piece for The New Republic.

Delong and Krugman are both ticked off that Galston seems to have called out liberal economists for not saying something that both of them in fact said several times, starting a good while ago - that the US and the world are suffering from a "Balance Sheet Recession."

So what is a balance sheet recession? In plain English, a balance sheet recession is when households suddenly become unable to continue spending money because they owe too much money against too few assets.

The reason I want to highlight this is because this is intimately connected with the discussion we've been having at Yglesias' place about monetary policy. As I've noted before, banks always lend when they can find creditworthy borrowers at prevailing interest rates and never otherwise. You can increase the supply of creditworthy borrowers by lowering the interest rate, but you can't increase it beyond a certain point because households that have strained balance sheets aren't creditworthy at ANY positive interest rate.

To fix a balance sheet recesssion, you have to fix household balance sheets. You can do that in a lot of ways. One way is directly, via mortgage modification which would work immediately, another is by deficit spending which operates on a bit of a lag.

At current rates, as Galston notes, at the current rate of deleveraging it's going to be a LONG time before we're back to normal levels of household indebtedness. That means a long recession. If you want to jumpstart the recovery you have to repair those balance sheets faster. Regardless of who said what when, maybe now we can all agree that this is the current situation and start discussing how to approach it.

Matt actually gets us started:

[T]he best resolution would be to set a higher Nominal GDP growth target and clarify that the Fed is willing to accommodate Reagan-era levels of inflation if that’s what’s necessary to achieve it.

I don't actually think that would work (the Fed can set whatever target inflation rate it wants, but it can't actually cause that inflation to happen), but bravo to Matt for pointing us in the right direction - toward solving the problem instead of arguing over who diagnosed it first.

In my view the best resolution would be to send everyone a $500 check every month until we get back to a normal level of household indebtedness. This program would cost 150 billion dollars a month. That's a lot! It wouldn't pay for itself. It would increase the deficit! It might even cause INFLATION!!!!!!one!1! It would also repair the balance sheets, and the economy.

Not the best sales pitch, I know. But it has the advantage of being completely accurate.

Tuesday, July 12, 2011

Sweden Again

So, the otherwise good Matt Yglesias is at it again, hyping Sweden's famous "negative interest rate" experiment.

As I've noted before, this entire story is the result of a misunderstanding and nothing that Matt has said on the subject is true.

To recap:

1) Sweden never paid a negative interest rate on overnight reserves, and in fact they never stopped paying positive interest rates on overnight reserves.

2) Paying interest on reserves does not cause banks to "hoard reserves" and refuse to loan them out because banks do not loan their reserves to the public. Ever.