Economics

Calculated Risk notes that the Obama administration is considering the elements of the next stimulus package. Unemployment is right around 10 percent and the 2010 elections are close.

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The economy needs more stimulus to help us out of the recession, says Nieman Watchdog in its latest project, Reporting on The Collapse. The stimulus effort helped us stave off worse disaster, and is helping us recover, and could do even better with even more. A time that calls for aggressive fiscal policy is not the time to worry about deficits, says Nieman.

I agree. I think anyone who’s watched impartially has seen the stimulus work – in fact we’re currently seeing states lay off workers now as the stimulus funds are used up.

We don’t need to suffer job losses during recesssions – it’s only through ignorance and uncaring that we do. During contractions we should retool our economy and most importantly retrain our workforce, and gladly use budget deficits if necessary for these ends.

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We’re seeing a lot of stories about big bonuses to the recipients of taxpayer bailouts. What’s odd is that the outrage we read doesn’t seem to penetrate into the financial industry. The moral voice doesn’t seem to carry through the insulations of layers of money.

As to why we coddle these giants of finance, apart from their having bought the political system with our money: our culture contains much forebearance for financiers, perhaps from the assumption – now proved obsolete – that what they do is both difficult, and incomprehensible to most of us.

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Paul Krugman published a great article in the New York Times last week, summarizing the history of economics since the Great Depression, and showing how economists forgot the lessons of Keynes, and started to believe again that markets are perfect. The article is called, How Did Economists Get It So Wrong?

I recommend the article as a cornerstone reference for you if you’d like to know how we could be so blind to the housing bubble, how the finance industry took over the economy, why the Federal Reserve System allowed it all to happen – and where we go from here.

I have to say I found it sad to see again that the discipline of economics doesn’t really understand how the economy works.

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Here in its entirety is the Frontline episode from Tuesday, June 16th, called Breaking the Bank. It’s a very clear exposition of the fundamental change that occurred in the collapse of Wall Street in late 2008. Essentially, the government is in charge.

The episode contains the usual wonderful stuff from Simon Johnson, to the effect that we really kind of went ahead and nationalized the banks back around the time of the Lehman bust, and the government-brokered acquisition of Merril by Bank of America.

Entertaining and enlightening. Below the fold is more from Simon Johnson, in the full transcript of his background interview the Frontline people did with him preparing the show. Johnson’s perspective really is valuable, and resonates quite soundly with me. I think he’s worth reading. Here’s the show:

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The New Yorker has an article on health care in America, and why it costs so much for so little extra benefit. This will be the best thing you read all year about our medical system. Written by a doctor who is also a very good writer – I envy his skill. It’s called:

The Cost Conundrum
What a Texas town can teach us about health care.
by Atul Gawande

When you look across the spectrum from Grand Junction to McAllen – and the almost threefold difference in the costs of care – you come to realize that we are witnessing a battle for the soul of American medicine.

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Here’s a comment left on a blog that I want to remember:

The subprime mortgages aren’t the real evil. They are like the kid who acts as a mule for a big-time drug dealer; involved but fungible. If it wasn’t subprime mortgages it could have been something else, such as tech stocks or tulips. Total subprime mortgages were worth less than 1 trillion, of those, a few hundred billion worth of defaults. That is a lot of money, but an amount that could have been absorbed by the economy without causing particular harm.

The real evil is unregulated derivatives. Credit default swaps alone are estimated at over $60 trillion. Those are all just side bets on the original 1 trillion of subprimes. It’s like a craps table. The guy holding the dice drops a $100 chip on the table. If he loses, he goes home $100 poorer. But the derivatives markets then bet the farm on that same roll of the dice. And I mean the whole farm. The entire world’s domestic gross product is estimated at about $60 trillion. Derivatives makers and dealers bet the equivalent of the world’s economy on whether some poor schlub would default on his mortgage.

Deal with everything else but not unregulated derivatives, and this will all happen again. Deal with the derivatives market, and everything else is just mopping up.

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Does our economic system require banks in order to function? Should banks exist?

The modern system of adjusting the money supply through interest-dependent banks is an inheritance from the centuries during which the only thing that could move money around was interest. Banks were the vaults that handled the stores of excess liquidity, paying less interest than they earned, and making their profits in the difference.

But given all the damage the current system has caused, don’t we have better ways of moving this money and credit around now?

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