Home Prices Up 12% in US

Home prices in the US rose 12% versus the year ago prices in May.  This is good news for homeowners.  Investors are purchasing a lot of the underpriced existing homes which will be used for rentals.  The economy is more dependent upon the building of new homes.  That market is still depressed.  This is reflected in the stock prices of major home builders which have tumbled in recent months.

Jamie Galbriath Is Interviewed On Europe

This is an extensive interview, mostly about issues in Europe, that is well worth the effort.  Galbraith offers his views on the economics and politics of the eurozone.  He has spent quite a bit of time meeting with politicians in Europe and he has an unconventional approach to economics that is refreshing.  He does not believe that the eurozone can survive if Greece leaves the union.  History provides many examples that he uses to support this view.  He discusses the political and economic situation in Greece in some detail and he argues that European integration is dependent upon German leadership.  The politics in Germany stand in the way of the best solutions and the consequences of a eurozone break up will be severe for Germany, as well as it for the entire eurozone.

A Brief History Of Monetarism Versus Fiscal Policy

Milton Friedman claimed that the Great Depression could have been avoided if the Fed had not let the money supply shrink.  He did not believe that we needed a very active Fed since it was only necessary in his view to have the money supply grow at the same rate as the economy.  Even more importantly, according to Friedman and his conservative colleagues, we did not need a very active government using fiscal policy to moderate the business cycle.  Friedman, after all, was totally opposed to Keynesian theory which supported the use fiscal policy during the Great Depression.  Moreover, conservatives were generally opposed to many of the views expressed by Keynes in his General Theory which was a critique of classical economics.

The recovery of the US economy, that resulted from the military buildup before and during WW ll, provided empirical support for Keynesian theory.  The first battle in the war between monetarists and supporters of Keynes went to Keynes.  The war was not over, however.  Stagflation in the early 70's was difficult to explain with Keynesian theory.  We were not supposed to have inflation during periods of high unemployment.  This led to a compromise between monetarists and supporters of Keynes.  The so called New Keynesian's accepted classically inspired microeconomics as the foundation for macroeconomics, and they viewed monetary policy as the first line of defense against a bad business cycle.  Friedman's monetarism died a natural death but the Fed successfully employed the management of interest rates during the period of that has been called The Great Moderation that began in the 1980's and lasted until the Great Recession.  The management of interest rates replaced the management of the money supply.

The Fed has actively used monetary policy during the Great Recession to reduce interest rates.  Short term nominal interest rates are close to zero and real short term interest rates are negative.  We have reached the zero lower bound in which nominal interest rates cannot fall any further but the economy has been slow to recover.  This has led the Fed to use unconventional monetary policies to manage the economy.  They have not been terribly effective in stimulating the economy, but political resistance to the use of fiscal policy means that it is the only weapon available.  That is why many economists support the Fed's policies despite the arguments by conservatives that they will destroy the economy.  They believe that government policies are responsible for our slow recovery.  If the government would just get out the way, market forces would lead to a strong recovery.  Keynes is dead but Milton Friedman still lives in their economic philosophy.

The Psychology Of The Irish Meltdown

The Irish economy was sunk by real estate developers and the bankers who financed the real estate boom and bust.  The Irish government assumed the debt that was incurred by the banks. The taxpayers rescued the bankers.  The rest is history.  Taxes have been raised to finance the government debt, and essential government services have been cut.  The Celtic Tiger era is over.

For the last month the Irish public has been treated with tapes of the bankers discussing their problems and the government rescue they required.  The laughed about the issues and had no concern about how their actions were harmful to their fellow citizens.  Their amorality was palpable in the tapes.  This article, by and Irish novelist, attempts to explain the psychology of the bankers and those who were duped by the real estate developers into the Ponzi scheme.

The Speech On The Economy That Obama Did Not Make

Econospeak posted a response to a post by Krugman in reference to Obama's recent speech on the economy.  It was mainly about a distinction that Krugman made between the views of Stiglitz and Minsky.  Krugman, however, was less concerned about the distinction between Stiglitz and Minsky than he was about shifting their focus on structural issues in the economy back to the issue that he prefers to write about.  Krugman believes that it will take us a long time to fix the inequality issue raised by Stiglitz or the overuse of leverage by the banking system that Minsky wrote about.  He focuses his attention on stimulating aggregate demand in order to reduce unemployment.

Consequently, I have posted a quote from Econospeak which had little to do with the differences between Stiglitz, Minsky and Krugman.  It focuses attention on the connection between trade deficits, budget deficits, and income inequality.  This is a speech that no US president would dare to make.

If I were Obama’s speechwriter, I would say something like this: America’s economic pre-eminence and its key currency status has enabled it to become an unsustainable deficit country.  This has fed the inequality that has made our society so much coarser and unjust.  And this inequality, the ability of an economic elite to prosper while the rest of us languish, has undermined the political will to make the changes that need to be made if America is to prosper again.

And if I wrote that, I wouldn’t be Obama’s speechwriter much longer.

The US has been running trade deficits of around 5% of GDP for many years.  Those trade deficits led to lost jobs and lower incomes for many Americans.  Government borrowing and spending and consumer borrowing and spending has been necessary to compensate for large trade deficits.

Wall Street Banks Developed A New Way To Corner Commodity Markets

In the good old days of the "Gilded Age" Wall Street bankers did what they could to corner commodity markets through ownership.  That allowed them to set the prices for important commodities.  That inspired game makers to invent the game of monopoly which rewards the player who can establish monopolistic positions.  The game also included a card that would send a player to jail if she were unlucky.  That card has been removed from the modern version of the game.  It is more consistent with our new era of liberty.  Bankers and other monopolists seldom face the threat of imprisonment.  This article describes the new form of monopoly that enables the banks to profit from monopoly.  They no longer attempt to corner commodity markets through ownership.  Instead, they have purchased warehouses that store the commodities.  They earn a premium for storing a commodity and they have figured out how to increase the length of time that a commodity sits in one of their warehouses.  The average length of storage in one of Goldman Sachs's aluminum warehouses has increased from six weeks to 16 months since they cornered the storage market.  More importantly perhaps, Goldman also trades futures in the aluminum market.  The price of aluminum is determined in spot markets that are very sensitive to variations in supply and demand.  Ownership of the warehouses, and the ability to affect the supply of aluminum in the spot market, gives Goldman  an important advantage in the trading of aluminum future contracts.

Goldman is not alone in this game.  Other Wall Street banks have established positions in other commodity markets.  They have been assisted in their efforts by the Federal Reserve which is responsible for regulating them.  There are many holdovers in the Fed from the Greenspan era who share his anti-regulation philosophy.  The government agency that regulates the commodities futures market is taking a look at this practice.  It is more likely than to Fed to alter this arrangement. 

North Carolina Takes The Lead In Voter Repression

The Supreme Court decided that southern states had changed and that the voter rights law no longer required them to demonstrate compliance.  Meanwhile, states controlled by the GOP have been experimenting with a variety of methods of repressing the turnout of voters who are most likely to vote for Democrats.  North Carolina moved to the top of the class after the Supreme Court decision.  They are using all of the methods developed in other states to keep the wrong people from voting.  The Supreme Court, of course, will view this as a good example of states rights, and consistent with the original intent of our founding fathers who tolerated slavery and created the electoral college as hedge against populism.