Spoiler Alert: Krugman Tips His Hand on His Pick For Next Fed Chairman

    Who is Krugman's choice? He sure is making it hard. I mean who could he possibly have in mind?

     He writes a piece where he chides the Fed for its 'taper talk.' While the Fed complains that the market is misinterpreting it, Krugman argues that it's the Fed that doesn't get it-it's not about the exact numbers or words, but the correct impression:

     "The key point you always have to remember (but which the Fed somehow forgot) is that there is no way to lock in future monetary policy. Whatever the Federal Open Market Committee may say now about its plans for 2014 or 2015, it can always do something different when the future turns into the present."

     "So what’s the point of Fed communication? Mainly it’s not about the specific numbers; it’s about conveying what kind of central bankers we’re dealing with, and hence what they’re likely to do in the future. Talk of extended easy money can help the economy now precisely because it makes the Fed sound like it’s not a conventionally-minded central bank, eager to snatch away the punch bowl; even asset purchases work mainly because they reinforce that impression of unconventionality."

      "But when the Fed starts talking about tapering at a time when unemployment is still very high and inflation below target, it undoes all of that good work; suddenly the FOMC starts sounding once again like a group whose fingers are already twitching as they fight the urge to grab that punch bowl."

       http://krugman.blogs.nytimes.com/2013/06/30/historic-mistake-watch/?_r=0&gwh=617F1652A30D193CB962F735AD0774E9

    Krugman then tips his hand on who Bernanke's successor should be:

    "Undoing this damage is going to be very hard. One thing that will matter a lot, however, is the choice of Bernanke’s successor. If she’s a well-known dove, that could help a lot. If he’s, say, someone known for saying things like “stimulus is sugar“, look out below."

      Actually, for a split second I thought he meant Janet Yellen-who my impression was that she was the most likely. Perhaps she'd be the mean between the two extremes of Geithner and Christina Romer.

     Geithner doesn't sound like the right choice based on this piece:

      "From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

      http://www.washingtonpost.com/blogs/wonkblog/post/geithner-stimulus-is-sugar-for-the-economy/2011/05/19/AGz9JvLH_blog.html

       I'll tell you what: if Geithner is seriously campaigning for Bernanke's job, this article hurts him after the White House reads Krugman's piece. This also provides shot in the arm to Romer. It also establishes her as the choice of the hawks and Geithner of the doves. So it may reinforce the idea that Yellen is the best-Centrist-choice, the mean between the two extremes.

       UPDATE: Marco points out that I got the hawk-dove division wrong. Obviously I meant that Romer is the dove, Geithner the hawk.

More on Obama''s Green Policy Speech and the Fracking Wars

     As we saw in previous posts, while the President's speech on climate change was widely praised, he was criticized by some environmental activists for the positive things he said about natural gas-and the assumption he will approve the Keystone pipeline. 

     http://diaryofarepublicanhater.blogspot.com/2013/06/the-yves-smith-rule-if-you-have.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

     http://diaryofarepublicanhater.blogspot.com/2013/06/on-obamas-climate-change-push-al-gore.html

     Some feel that any good his proposals might do in undone by 'fracking.' 

     "If Obama approves the Keystone Pipeline, he’s Climate Criminal #1 — the first face of the Climate Crisis. More on that if he doesn’t step away from the pipe. And if he denies Keystone, he’s on his way to being the hero he clearly wants to be."

      In fact, many environmental advocates and scientists see natural gas as part of a solution to carbons. True, natural gas has carbon in it as well. However, it a much lower level than say coal. 

      Consider what Al Gore said after being questioned on his investment in a natural gas company earlier this year:

      " isn't natural gas a whole heck of a lot better than coal? I mean what are we really complaining about here? If we want to reduce carbon emissions, we need lower carbon forms of energy. Here it is!?

   

      "Solar? Wind? You can't get baseline power with that. And nuclear is expensive and decades away! Natural gas is the best hope we have of reducing carbon emissions now."

       Gore is not alone in believing that natural gas can at least be part of a solution:

       Some environmental groups agree with Obama's position that switching from coal-fired power to natural gas has helped reduce emissions and protect the environment.

       "The Breakthrough Institute, an Oakland, Calif., think tank, said in a report released Wednesday that despite problems and legitimate concerns over fracking, the gas industry has "a far smaller impact on mortality and disease, landscapes, waterways, air pollution, and local communities than coal mining and coal burning."

       "Natural gas is a net environmental benefit at local, regional, national, and global levels," the Breakthrough report said.

     http://www.huffingtonpost.com/2013/06/27/obama-fracking-support_n_3510651.html

     What it comes down to is this. Some environmental groups favor a policy of nothing but renewables. Others like those quoted above, accept some nonrenewable sources. Even Germany's goal for it's green economy only seeks to have an 80% renewable economy by 2050. 

     http://thinkprogress.org/climate/2013/03/27/1781671/learning-from-the-german-transition-to-renewable-energy/

     There also has been some debate in Germany recently thanks the our natural gas boom here in the states. 

     http://articles.washingtonpost.com/2013-04-24/world/38773548_1_gas-production-greenhouse-gas-russian-gas

      These kind of issues are not that easy to decide in the political process. Yes, you can argue that nothing matters more than dealing with climate control before we really are sunk. Yet concerns over consumer prices and jobs can't simply be banished from the discussion. Natural gas is a grey enough area that you can at least have an honest argument for being part of a carbon reduction strategy. 

      

    

     

     

Hank Paulson's On the Brink: the Anatomy of a Bailout, American vs. British Version

     I've been reading Paulson's On the Brink the story of his tenure as Treasury Secretary during the financial crisis of 2008 and all the tough calls and decisions he faced.

     http://www.amazon.com/Brink-Inside-Collapse-Global-Financial/dp/B006CDD6K0/ref=sr_1_1?s=books&ie=UTF8&qid=1372556590&sr=1-1&keywords=hank+paulson+on+the+brink

    According to him, he never really wanted the Treasury job in 2006 initially. He was persuaded by friends who argued that you don't tell the President of the United State no, and after all, who knew the next time a Republican would get into the White House? He had wondered what he could possibly get done in the last 2 years of a lame duck White House.

   Turns out he didn't need to worry about it being anti-climatic or being bored with nothing to do. It's a fascinating story and sure, much of what he, Bernanke, and Tim Geithner-who was of course NY Fed President at the time and would be Paulson's successor at Treasury in the Obama Administration-can, and has been endlessly dissected and second guessed.

  I think that he did a good job on balance-I've always been impressed with him for his intelligence and the way he conducted himself during the crisis-which is not to say that I affirm his every move. If anything I think it's very interesting now to look back on it at this point and reconsider-what exactly he and the rest of the team got right and wrong.

  A criticism you hear a lot of is that the banks were bailed out with terms way too generous and that no one has ever had to pay for all the suffering the country went through. I think a very interesting question is specifically the capital infusions that Paulson instituted in early October.

  Recall that initially the TARP wasn't about capital infusions and equity stakes but rather the idea was to use the funds to buy troubled assets from the banks balance sheets-to create a 'good bank-bad bank' scenario; hence TARP-Troubled Asset Relief Program. However, it soon became clear that this would take way too long and what they didn't have was time.

   So the decision was to use the first $250 billion dollar 'tranche' into systemically vital banks; $125 billion dollars went to the biggest commercial banks and the new holding company banks-Goldman Sachs and Morgan Stanley.

   What I find interesting is to compare the terms of the U.S. infusion to the British capital infusion in it's banks. There's no question that the U.S. version was much more generous.

    The U.S. infusion did prohibit 'golden parachutes'-even on previous contracts, with clawbacks for any bank with discovered fraud on their balance sheets, and limited tax deductions to $500,000 of income in the member banks. Still the British terms were much less generous. The British effectively nationalized the Royal Bank of Scotland and HBOS. They took seats on the firms' boards, fired the top executives, froze executive bonuses and leveled 12% dividend on preferred stock.

     Paulson's argument was that he wanted healthy banks to take the capital infusion as well-or the weak banks-the weak ones were Citi, Morgan Stanley, and Bank of America-would lose investor confidence. So what can we say about this 'natural experiment' 5 years later? I don't know if there is any attempted analysis of this question but it would be a great 'white paper.'

     It seems to me that while many in the U.S. have felt that we were much too easy on the banks, when the dust settles, which economy has done better since? Don't get me wrong, I don't think you can in anyway say 'We didn't nationalize our banks and drive such a hard bargain and yet our economy is doing better so our approach was superior'-my only point though is that it shows you how tough it is to evaluate.

     I don't think the reason that the U.K. has lagged us has anything to do with the relative terms of the bank bailouts. I would say the reason the U.K. has lagged is because of it's ill advised fiscal austerity since Cameron came in.

    Still, this would suggest that the case for or against the different treatments may not be in who's economy did better. For all those who think that we should have had tougher terms in what way has it benefited Britain and disbenefiited us? I think there can still be a good case. For one thing, a sense of social fairness cannot be ignored. You can also argue that while Paulson thought the British approach was wrong, is there anything that can be pointed to where the British financial system suffered because the healthier British banks stayed away from the bailout?

    We're in the wild world of couterfactuals. It may also be that the U.K. and U.S. positions were not apples to apples as the financial system is so much bigger in Britian relative to GDP-3 times as large in Britain. While the U.S. financial industry is very large compared with GDP it's 'only' 50%.

     P.S. Here is an interesting argument for nationalization of banks during a crisis.The blogger 'Symmetry Breaks' doesn't think even Britain did nationalization right as it made no effort to change the overall 'culture' of the banks even if the  top executives were fired. He also thinks that the British government was way too eager to prematurely re-privatize.

    http://symmetrybreaks.wordpress.com/2012/07/10/the-case-for-a-nationalised-bank/

The Yves Smith Rule: If You have Anything Nice to Say Keep it to Yourself

     At least when discussing President Obama. If you scroll down her Naked Capitalism site today you start off with a post titled Advocates Oppose Senate Immigration Bill Over Escalation of Border Escalation.

     The title largely says it all: it gives the impression that most immigration advocates now oppose the Senate bill in its current form. Yves has this to say about the current bill:

       "At the 50,000 foot level, the various immigration bills represent a major shift in philosophy, away from immigration rules having keeping families together as a significant focus, to one far more oriented towards giving business “needs” much higher priority. One of these “needs” is the claim that there aren’t enough STEM graduates, ergo, the US must issue more HB-1 visas. The reality is, if you are even a casual reader of Slashdot, is that we haven’t had much in the way ofentry level jobs in IT for ten years. Engineering grads at NC will similarly tell you that engineering salaries are on the whole so low as to not make it viable to be an engineer (the most attractive use of an engineering degree seems to be to next get a law degree and do IP related law)."

      "This segment focuses on some elements of the Senate bill that appear to be under the radar as far as media coverage is concerned. First is that the bill does not provide a path to citizenship for a significant portion of the current illegal immigrant population (frankly that’s been a feature of past immigrant “reform” bills too; the Hispanic community may have been promised more than it was ever going to have delivered on this front). Second is that is includes a large budget to militarize the border with Mexico."

       http://www.nakedcapitalism.com/2013/06/advocates-oppose-senate-immigration-bill-over-escalation-of-border-militarization.html

        She left the video of an interview on the Real News Network (RNN) where Arturo Carmona, the director of presente.org says his group can no longer support the bill the Senate passed. He has some decent criticisms. He doesn't like the fact that border security almost doubles to 40,000. There's no question that this is excessive-as he notes even GOP leaders like McCain have pointed out. In addition, there's the totally unnecessary wasteful requirement to build a fence along the border. 

       Arturo says this is the last straw, his group no longer support a bill that he said was already quite conservative-he points out that even before this poison pill demand for more security about one third of the 11 million undocumented immigrants would be denied a path to citizenship. At this point, he complains this is not what Latinos voted for in 2012. 

      He is demanding that the bill get 'back on track' but it's not clear where he thinks the votes for that are going to come. He's demanding that the bill be more liberal as it goes to the considerably more conservative House; like many activists it's easy for him, perhaps, to dismiss politics as he doesn't operate under its pressures As we're debating  whether the Senate bill is allowed to even get a vote in the House, does he think Boehner is going to put up the Senate bill without the extra border security?

     I don't like the Corker-Hoeven amendment either but how else is it going to get passed? As for a third of the undocumented not getting citizenship, that is not ideal. If it were up to me-or Obama for that matter-all would qualify right away. Still does it make sense to deny the path to citizenship for 2/3 for the sake of the 1/3 that don't?

      This is like during the passing of Obamacare and some like Yves-and Jane Hamsher at Firedoglake-were complaining that only 30 out of the 53 billion uninsured got coverage. Of course we would rather have gotten the full 53 million but failing that would it have been preferable to get it for zero of the uninsured rather than $30 billion?

        Yves title might make you think that en masse no immigration or Hispanic groups support the bill, but that's far from the case-a large number do. 

         She has another post about Obama's climate change speech:

         Gaius Publius: Obama's New Climate Plan: Less Coal More Fracking

         You see the principle-say nothing nice or certainly don't focus on it. I mean there was a lot for green activists to like-Al Gore referred to it as by far the best speech any President has ever made on climate change.

         http://diaryofarepublicanhater.blogspot.com/2013/06/on-obamas-climate-change-push-al-gore.htm

          Instead he's just knocked for supporting fracking, as Publius assumes he will allow the Keystone pipeline. Yet if you read the piece, Publius like Gore agrees that there's much in the speech to like:

           "There’s much to like in Obama’s energy plan (pdf), but one piece stuck out very much — if you listened to the speech, you have to know the fracking industry must be delighted. If “natural gas” = “fracking” (and it does), the poison-your-ground-water-for-profit industry will see a big boost in income. Will there be a finder’s fee?"

           Still with this title of Yves you'd never get there is anything in the speech to like. As far as fracking goes, there is a legitimate debate. Natural gas is much cheaper than oil-and as someone who knows all too well, with my time trying to set up appointments for people to consider buying oil-more and more people are going to natural gas for their home heating needs. It's inexpensive and there is at least some debate that it is in some ways at least an improvement over oil. 

            Natural gas has these two very attractive features:

            1. It's much cheaper than oil

            2. It creates lots of jobs

            Now the question is its environmental effect. Some like Publius think that it can't be done in an environmentally safe way. There is disagreement. Indeed, Publius sees the question over Keystone as the 'key' as it were to Obama's legacy. He's willing to declare Obama a good guy if he denies Keystone. If not, he's the 'number one climate criminal.'

           "If Obama approves the Keystone Pipeline, he’s Climate Criminal #1 — the first face of the Climate Crisis. More on that if he doesn’t step away from the pipe. And if he denies Keystone, he’s on his way to being the hero he clearly wants to be."

           I doubt it's that simple. I can't imagine judging him a terrible human being or a pretty good president on just this one decision-even assuming he gets it wrong. Interestingly, Al Gore got a lot of flack earlier this year for investing in a natural gas company:

          "You've asked people to cut their own carbon footprint by driving less, buying new light bulbs, insulating their houses, carpooling, et cetera. All of these things require sacrifice. Isn't it hypocritical to ask others to sacrifice financially, if you can't seem to make similar sacrifices yourself?"

       "Well, no, I don't think it's hypocritical at all," Gore said. "You see what I am doing, I'm recycling this money. I'm taking this dirty, polluting cash made from fossil fuels and putting it into my company.

       "From there I plan to reuse it to fund new documentaries about the threat of global climate change. This isn't some Gordon Gekko thing. I consider myself to be a sort of Robin Hood."

      "A Robin Hood?" McAvoy replied. "Does that mean you're committing to give all the money made from of this investment to environmental causes?

    "Well, not quite all of the money," Gore responded. "We do have expenses, after all. But I can promise to give away a decent amount, once my costs have been covered.

    "And besides isn't natural gas a whole heck of a lot better than coal? I mean what are we really complaining about here? If we want to reduce carbon emissions, we need lower carbon forms of energy. Here it is!

   "Solar? Wind? You can't get baseline power with that. And nuclear is expensive and decades away! Natural gas is the best hope we have of reducing carbon emissions now."

     http://dailycurrant.com/2013/02/25/al-gore-invests-fracking-company/

     So one defense natural gas, despite having carbon content, is that this content is nevertheless considerably lower than in coal. 

      In U.S. history most of our great Presidents-Lincoln, FDR-were at bottom when you look at them closely, pragmatists. Left wing critics usually blow up one issue that they say is more important than any other one. We get the logic here: if climate change is coming then nothing matters more than stopping or slowing it and every other concern must take a backseat: if natural gas gives consumers lower prices and gets us more jobs, none of this can even factor in 

     It was the same thing regarding slavery in 1860: it would have been impossible to argue that there was any greater moral imperative than ending slavery then. Yet Lincoln's chief focus was the Union-and he would be the guy to issue the Emancipation Proclamation. It's what Garry Wills wrote about: the difference between activists and politicians. The two are a different skill set 

      BTW. Publius may well be right about Obama ultimately supporting Keystone. 

      http://www.winnipegfreepress.com/business/obama-climate-change-speech-rejected-key-arguments-made-by-critics-of-fracking-213366201.html

      My point though is that even if he does that's not going to in my eyes make him any kind of 'criminal' or anything but a good guy that does his best for what he thinks is good for the country. That doesn't preclude him being wrong on this issue or that one. It's like those who say if he does chained CPI, he's a goat. Such categorical judgments make no sense to me. 

     Finally, Yves has as piece where she talks about how Bernanke has destroyed the mortgage market-rates are coming up and he's the proximate cause:

     "Yves here. So what is the Fed going to do, now that it has delivered a big blow to the nascent housing recovery? Risk its credibility by beating a serious retreat on taper talk, or keep whistling in the dark and wait and see what happens to July and August home sales (and remember, most housing market data is reported with a nearly two month lag…)?"

    http://www.nakedcapitalism.com/2013/06/us-mortgage-rates-skyrocket.html

    Again, this just feeds my perception of her as a naysayer. Basically Bernanke is a loser whether he 'retreats or doesn't retreat.' Don't get me wrong, I'd rather see him retreat. I don't get this need to start discussing tightening already. Why is the Fed so afraid of an increase in nominal spending as Sumner puts it?

   " the problem is not fiscal austerity, it’s austerity more broadly defined, an irrational fear of rising nominal spending."

   http://www.themoneyillusion.com/?paged=3

   He also argues that the Fed's inflation target is 1% it just doesn't know it yet which is hard to argue with based on performance. 

   http://www.themoneyillusion.com/?p=21974

   Still, Yves is being just a little hyperbolic in saying that mortgage rates have 'skyrocketed.'  They have risen considerably very quickly: The following quotes by the way are not Yves herself, she's quoting from a Bloomberg article:

    "Mortgage rates for 30-year U.S. loans surged to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening and prices are jumping."

    "The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012. The average 15-year rate climbed to 3.5 percent from 3.04 percent."

    "In short, the Fed has just tightened by five rate rises in two months. Why so fast? Well, as we know, central banks did blow a little bond bubble and deflating it is hard to control. For instance, foreign investors are fleeing the 30 year Treasuries that determine mortgage rates:"

     A bond bubble?! What is this-shades of Bill Gross? I don't know that the Fed created a bond bubble-or that there was one. It's natural in a depressed economy to have a flight to quality and safety. 

     The mortgage rates may be the highest since March 2012, but they're still not very high. There rise could even be a good thing. It depends on their fundamental cause. 

     I don;t like the 'taper talk' from the Fed either but it's certainly not established beyond a shadow of a doubt that this is the cause of the rise in mortgage rates. 

     That's Yves Smith and Naked Capitalism for you: always assume the worst assumption is the truth.

     

Steve Keen: Krugman vs. Richard Koo on Bank Lending

     I'm glad to see that Keen has a piece on Koo and Krugman. Richard Koo is one of those economists that many other economists don't seem to get. Krugman doesn't, but of course, Sumner doesn't either and probably few mainstream-Neoclassical-economists would get him. The differences between he and Krugman go back to the start of Japan's stagnation. 

    Koo's explained this as being a 'balance sheet recession' and this is an idea that Krugman, Sumner, and the Neoclassical school more broadly doesn't put any stock in. 

   Keen begins his analysis by saying, regarding Krugman-Koo-that the 'failure to communicate' a la Cool Hand Luke-is that 'birds got to fly, but fish got to swim.' Keen thinks Krugman is just a bird who can't get how a fish like Koo can swim. 

    "The extent to which this time really is different appears to be causing some thawing in the extreme hostility between economists of different ilks. But there’s still incomprehension because, when economists of different ilks argue, they try to understand their rivals’ perspectives from their own point of view. This is a bit like a bird trying to comprehend how a fish can live in the ocean – “OK, I have to admit that they exist, but why don’t they drown instead, since their lungs must fill up with water?”

This duality – acknowledgement that positions you don’t understand still deserve to be taken seriously, combined with incredulity about those positions – turns up in Paul Krugman’s recent comments on Richard Koo. In a New York Times article earlier this month, he firstly acknowledges that Koo’s analysis has to be considered, even if he doesn’t understand it."

Read more: http://www.businessspectator.com.au/article/2013/6/24/economy/gasping-krugman%E2%80%99s-ocean-theory#ixzz2XbWmywqI

     Of course, we could play around with this analogy. I mean isn't the bird as big a mystery to the fish as vice versa? Because the fish lacks wings he might think the bird should fall. Then again, considered from the perspective of evolution itself, didn't fish come first? Ergo, we could say that the fish is the 'flat earther' rather than the bird? Yet Keen argues that he understands both the bird and the fish-and presumably he's a fish as well. So he credits the fish with being 'more evolved.'

      I'm having a little fun. I get Keen's point of course. His point is that Krugman and Koo have two very different models of the economy. Actually, I was never sure what Koo's model was-not to say I thought he was wrong, I haven't really seen enough of him to really be sure I take his fundamental point. Keen here speaks as if Koo accepts the same endogenous money model of the economy he does-and he may well be right, I wasn't aware of that until now. My main impression of Koo is that he might be Sumner's middle image, if he truly claims that the Fed and BOJ shouldn't try to 

     So according to Keen there are two models in question: Krugman's Loanable Funds model and Koo's Endogenous money model. 

     The big difference rests on what happens to the economy when there is an increase-or decrease-in lending? In the Loanable Funds model, changes in the rate of lending don't effect the overall economy. Krugman clearly doesn't see why a change in lending should-necessarily-have any net effect on spending in the economy. 

     "Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand."

      http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/?_r=1

     Keen argues that the Endogenous Money model does show that creating money=creating demand. 

     "So it comes down to which world do we actually inhabit? Are we airborne with the birds in a loanable funds world, where banks, debt and money are macroeconomic irrelevances, or are we underwater with the fish in an endogenous money one where banks are – like gills on a fish – crucial? No prizes for guessing my answer. Glug glug."

     It is clearly true that most of the money supply is created through bank lending. As this is true, doesn't this  mean that most of what happens to the money supply is outside the province of the Fed?

     I'm reading Hank Paulson's On the Brink right now. It's all about the 2008 crisis and his fight to save the banking system. He and Bernanke believed that if the banking system collapsed it would be the end our economy. Isn't this more plausible in the endogenous money model? The reason that it would be cataclysmic for the banking system to blow up is that it would lead to a huge contraction of business investment and consumer spending. 

     Indeed, Schumpeter was one of the early ones to show that an economy can't grow if businesses and consumers only can spend the money they already have on hand. Keynesians-including Krugman-have rightly heaped scorn on the idea that the government must 'live within its means during a recession' and that since individuals are having to cut back, shouldn't the government cut back too? This, of course, is terrible reasoning. When private spending contracts, we want the government to pick up the slack. If the government cuts back along with the private sector we get a deep contraction. 

     Yet, fundamentally, the very premise of 'we must live within our means' is wrong. Our economy can grow as it has done only when financing-lending-is available to fund business investment and projects beyond what businesses have in hand. If they could only spend the money they already have, we'd have a huge contraction in investment, and many, many worthwhile projects wouldn't get done and there would be no hiring-and lots of layoffs. 

     Krugman agrees that lending can increase aggregate demand:

     "Keen says that it’s because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can’t increase unless the money supply rises, but that’s only true if the velocity of money is fixed; so have we suddenly become strict monetarists while I wasn’t looking? In the kind of model Gauti and I use, lending very much can and does increase aggregate demand, so what is the problem?"

    So he agrees that it can but through an increase of velocity-the number of times the money stock turns over.  While Krugman claims that Keen only thinks changes in the money supply can increase AD, Keen suggests that Krugman thinks only change in velocity can alter it:

   "The reason for this drastic change in behaviour is that in both these models – and roughly speaking, in the real world too – money is the sum of the banking sector’s liabilities to the rest of society. In loanable funds, lending simply changes who holds these liabilities, and the level of debt doesn’t matter at all in macroeconomics – just as Krugman says. Only changes in the velocity of circulation can affect aggregate economic activity. But in endogenous money, lending increases the sum of liabilities in circulation, and repayment of debt reduces them, so that changing the sum in circulation can and does alter aggregate economic activity. So while we haven’t “suddenly become strict monetarists while [Paul] wasn’t looking?”, changing the volume of money in circulation by bank lending and repayment is a significant aspect of lending that the loanable funds model ignores."

   As Keen says, because this downturn really has been different there has been a thaw in relations between different types of economists-with some willingness to listen to some heterdox economists even, though only some. It seems to me that on balance Keen and company is right-lending does increase AD, not just through velocity but also through an increase or decrease of the money supply. 

   However, these debates are good. Time will tell who is judged right in many of these debates but I think economics will certainly be the richer for them. 

     "

     

     

Conservatives: Damn the Fact Checkers

     What matters isn't the facts but what people say are the facts. Romney and company led a crusade against the fact checkers during the campaign. Conservatives continue the fight. The latest is talk about the rising price of food and gas. Now, sure, pointy headed liberals might point out that these things haven't actually risen, but who care's about facts?

    "OK, this is awesome. Dylan Byers at Politico gets Erick son of Erick to respond to my observation that, although he rants about the rising prices of milk and bread — which somehow has something to do with pundits riding the Acela — the truth is that milk and bread prices have been flat for about five years, and in particular have gone nowhere despite all that money the Fed has printed. And Erickson’s response is, hey, it isn’t true, but people feel that it’s true:

Not everything is academic or chartable and sometimes the accuracy of the chart isn’t as real to people as the perception they have that their grocery store bills are getting more expensive though their shopping habits haven’t changed.

…

Seriously, Paul’s point is correct, but it is an issue of perception of people versus the reality of his chart. He can certainly go tell people milk prices haven’t gone up, but good luck getting them to believe him.

     "Notice, by the way, the implication that I don’t appreciate the problems real people (who don’t eat quiche or ride the Acela) are facing; actually, I do, but those problems are lack of jobs and stagnant wages, not rising prices. And if you want to solve problems, getting the nature of those problems right matters."

     "But then, only elitists want to solve problems; true men of the people just vent, and what matters is perception, not truth."

     http://krugman.blogs.nytimes.com/2013/06/28/the-truthiness-is-out-there/?gwh=AC1B2C535336F79FE98CB5115B86F41F

     Josh Barro also has a good piece on Erickson's 'derp.' I like that Krugman formulation: elitists just want to solve problems, but men of the people just vent. If this is true then conservatives are true men of the people. Take another example: the deficit. 

    The GOP claims to care about few things more than the deficit-unless we're talking about cutting the capital gains or top income tax rate. Yet they oppose Obamacare fanatically-though it's their bill originally. 

   Robert Reich has a good piece that shows that immigration doesn't harm the economy-despite populist scare mongering about Hispanics taking American jobs. To the contrary it's net a big plus for the economy"

    "MYTH ONE: Immigration reform will strain already overburdened government safety net programs like Social Security and Medicare."

    "Wrong."

     "The nonpartisan Congressional Budget Office finds that immigration reform will actually reduce the budget deficit by hundreds of billions of dollars."

     "MYTH TWO: New immigrants take away jobs from native-born Americans."

     "Wrong again."

     "The economy doesn't contain a fixed number of jobs to be divided up among people who need them. As an economy grows, it creates more jobs. And what we've seen over the last 200 years is that new immigrants to America fuel that growth, and thereby create more jobs for everyone."

     "We've also learned that new immigrants are by definition ambitious. They wouldn't have borne all the risks and hardships of immigrating to the United States if they weren't. And that ambition and hard work help the economy grow even faster."

     "We don't need new immigrants."

     "Wrong again."

     "The American population is aging rapidly. Forty years ago there were five workers for every retiree. Now there are three. If present trends continue, there will be only two workers for every retiree by the year 2030."

      "No economy can survive on a ratio of 2 workers per retiree."

     http://www.huffingtonpost.com/robert-reich/immigration-reform-and-the-economy_b_3517558.html

     Actually, our much higher immigration rates are on big advantage we have over immigrant phobic Europe and Japan. Yet conservatives don't let these facts concern them-after all who cares that immigrants don't take American jobs? A lot of people think they do. 

    Finally abortion. Turns out the anti abortion bill that the House GOP passed actually raises the deficit. Yet they still consider themselves deficit hawks. 

    "The bill from Rep. Trent Franks (R-Ariz.), received a lot of media attention and angered some House Republicans, who had no idea why the party was voting on abortion restrictions when it is trying to make inroads with female voters. Six Democrats joined 222 House Republicans to pass the bill."

     "The Congressional Budget Office, which judges the budgetary impact of all legislation, says “Depending on the number of additional births under H.R. 1797, such Medicaid costs could range from about $75 million over the next 10 years to more than $400 million over that period.”

     "CBO officially estimates that the bill increases federal deficits by $75 million between 2014 and 2018, and $225 million between 2014 and 2023."

     Read more: http://www.politico.com/story/2013/06/abortion-bill-deficit-93574.html#ixzz2XZU6FXJJ

     It's just like how conservative draft dodgers like Rush Limbaugh and George W.Bush think they're great foreign policy hawks.  

     

If Wendy Davis is a Terrorist What is Mitch McConnell?

     It's quite amazing to hear the overheated rhetoric about Wendy Davis' 'terrorism' and how 'outrageous' it was for her to stop something that the majority of a congressional body wanted.


      "This is straight out of an anarchist playbook,” Charmaine Yoest, president and CEO of Americans United for Life, told POLITICO about the Texas standoff. “I think we all need to duly note this [filibuster] is the only way they could win. That actual vote on the bill did pass.”

     The only way they could win. Yet I never hear Mitch McConnell worrying that this is the only way he can win. 

     "Yoest says the pro-abortion rights groups and the noisy protesters at the Texas Capitol are fooling themselves if they think the public wants unfettered access to late-term abortions."

    “What happened [Tuesday] night was really outrageous,” Yoest said. “What you’re seeing is a political position, not shared by the majority of the American people, becoming increasingly desperate as they lose through democratic processes. So they created absolute chaos [Tuesday] night. It’s the only way they could win."

    http://diaryofarepublicanhater.blogspot.com/2013/06/standing-with-wendy-davis.html

    A Texas state GOPer felt she was a terrorist.   

     http://thinkprogress.org/health/2013/06/26/2221271/reaction-wendy-davis-terrorist/

     Rick Perry wondered why she hadn't learned from her own example-being born to a single mother and being a teenage mother herself? She should realize from that experience that abortion is wrong in all cases, I guess. Yet, even his fellow Texas GOPer sees that this was very clumsy of Perry. 

  

    "Perry subsequently claimed that he was actually offering praise of the Democrat, but Republican state House Speaker Joe Straus evidently doesn't have the governor's back on the matter. Straus said Friday that Perry's remarks undermine the GOP's effort to pass what would be one of the most restrictive abortion measures in the country."

    “Disagreements over policy are important and they’re healthy, but when he crosses the line into the personal, then he damages himself and he damages the Republican Party,” Straus told The Texas Tribune.

     http://livewire.talkingpointsmemo.com/entry/gov-perry-davis-hasnt-learned-from-own-example?ref=fpa

     Overall, Ms. Davis' one courageous act may well be the spark to galvanize women, liberals, all supports of women's rights. As a Politico piece noted today, this has been a pretty good week for Democrats:

     "This is what Democrats hoped it would feel like to be back on the right side of history.

Over the last week, four foundational aspirations of the modern Democratic Party converged in four days of unexpected triumph"

     "The Supreme Court struck down a law barring federal recognition of same-sex marriages. President Barack Obama announced aggressive new emissions regulations to fight climate change. The Senate passed a dramatic immigration reform plan with a supermajority vote. And a Texas legislator’s filibuster over abortion access turned into a national media sensation, energizing the left."

      "In every instance, Democrats feel they carried the day on an issue essential to the progressive identity – equal rights for gay couples, protecting the environment from global warming, tolerance of immigrants in general and Latinos in particular, and forceful commitment to women’s abortion rights."

      Read more: http://www.politico.com/story/2013/06/democrats-week-of-living-confidently-93570.html#ixzz2XYcehC00

     The fact is that in significant ways the country is more liberal, certainly on social issues than 20 years ago.Then on economic issues we have the Great Recession thanks to the 'revolution' of Reagan and friends.  Abortion is the one area that we're told the country is not getting more liberal, but rather more conservative, more 'prolife.'

     True there was one big disappointment-Section 4 of the Voting Rights Act being struck down. Yet, this too, can really only hurt the GOP more with minorities. While my prediction is that they will pass immigration-Boehner, no matter how much theatrics or even if he has to first try another Plan B-will ultimately let it come for a vote, and all it needs is to come up: it has the votes. 

    http://diaryofarepublicanhater.blogspot.com/2013/06/louie-gohmerts-complaint-about.html

    However, now what's going to be done about writing a new Section 4-as this is what SCOTUS Chief Justice John Roberts and friends says is needed? Are we going to have the specter of Mitch McConnell filibustering the Voting Rights Act? As Josh Marshall suggests the historical images may be too much.     

    On the assumption that the Voting Rights Act process will follow the same path other legislation has traveled this Congress, the Senate will act first, and the House will have to decide whether or not to follow suit. Democrats can exert pressure, but they’re effectively cut out of the decision.

    “I would like to see something called — well, I haven’t even discussed this with my caucus, but — the John Lewis Voting Rights Act, which would address the concerns that the Court put in its decision about Section 4,” House Minority Leader Nancy Pelosi told reporters Wednesday. “It’s really a step backward and it’s not a reflection of what is happening in our country in some of these places. And when we put that bill together, when it was passed last time, it passed overwhelming, overwhelming 98 to nothing in the Senate and 390-something to almost nothing in the House. And it was bipartisan and we came to terms on it, in a way that we were all jubilant about the passage of it, Democrats and Republicans alike.”

     "House Speaker John Boehner’s office has referred questions about Voting Rights Act to the House Judiciary Committee, and its chairman, Bob Goodlatte (R-VA) intends to hold a hearing on the issue in July, to examine the implications of the Court’s decision, according to a committee aide."

     "But what legislative steps the committee will take remains a mystery."

     “The 2006 reauthorization of the Voting Rights Act did not change the criteria that determines which jurisdictions are subject to the special rules that require them to get advance pre-clearance from the Department of Justice or a federal court before they can change their voting rules,” Goodlatte said in response to this week’s decision. “The Supreme Court has now decided that original coverage formula does not meet constitutional requirements. This decision in no way affects the permanent, nationwide ban on racial discrimination in voting found in Section 2 of the Voting Rights Act, which remains in place.”

      http://tpmdc.talkingpointsmemo.com/2013/06/congressional-democrats-set-voting-rights-act-wheels-in-motion.php

     It's good to know that racial discrimination is still banned! Thanks a lot for that, Senator Goodlatte! Meanwhile, I really like the optics of forcing McConnell and friends to veto something called the Voting Rights Act. If they do, they'll be out of the frying pan by passing immigration reform but now into the fire. The justiied outrage of the American people might become so great that 2014 will be that rare off year election where the Dems pick up seats. Meanwhile the GOP's House majority may not be quite as safe as we're always told. 

     http://www.washingtonpost.com/blogs/plum-line/wp/2013/06/28/is-the-gop-house-majority-as-safe-as-it-looks/

     By all means, I like Speaker Pelosi's idea to call it the John Lewis Voting Rights Act. I just want to see McConnell filibuster this, I really do. I think the Dems should dare him to do it. 

     That this is just the worst kind of corner for McConnell, Boehner and friends to be put in is underscored by the fact that they just can't answer the question even. Boehner doesn't trust himself to say anything about it, he has to delegate this to Goodlatte. 

      P.S. Call Mitch McConnell's office and ask if he will.

      http://www.congressmerge.com/onlinedb/cgi-bin/newmemberbio.cgi?member=KYSR&site=congressmerge

      Ask Boehner if he'll allow a vote on it.

      http://www.speaker.gov/contact