Fed Opened Discount Window During Crisis to Foreign Banks

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This article (via Manan Shukla) describes some of the loans made by the Fed to domestic and foreign banks at the peak of the financial crisis. The Fed is the lender of last resort to banks when they do not have enough cash on hand to meet their needs. Banks get cash through customer deposits (which are really short term loans) or by borrowing money from wholesalers, like money market funds short term. Usually when they borrow short term they keep rolling over the loans as they mature. During the crisis the wholesale market froze up and many banks were unable to roll over their short term loans. In order to satisfy their need for cash they can borrow from the Fed using less liquid assets as collateral. All of these loans were paid back with interest. The extent to which the Fed extended its Discount Window to foreign banks with domestic branches in the US was not public information before it was released by the Fed under a public interest request by Bloomberg News. Some politicians have raised questions about the Fed's role in providing liquidity to foreign banks. from my perspective, this only shows how interconnected the global banking system is. Problems in one part of the world create problems in other parts of the world. There was a lot of cooperation between the central banks during the crisis. Most of it occurred as problems arose. There are few formal agreements between the banks to deal with interbank systemic problems.

How a Conservative "Think Tank" Crony Explains Why Government Spending Does Not Stimulate the Economy

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I posted this article (via Manan Shukla) primarily to show how organizations like the Heartland Institute which employs this crony with tax exempt contributions as an educational institute, distort information to promote the right wing agenda.

We have large federal deficits as he indicates. He attempts to blame the deficits on the mistaken use of "outdated" Keynesian theory which has been proven to be a bad idea. The Obama stimulus ran out in 2010. The 2011 deficit and most of the previous deficits were the result of the recession. During a recession tax revenues fall and some areas of government spending increase as more people qualify for government benefits. The deficits had little to do with reliance on "outdated" Keynesian ideas. A good case can be made that the deficits would have been worse if some stimulus had not been used to reduce the impact of the recession.

This intellectual whore (I thought carefully before using this word) goes on to argue that government stimulus didn't work in the Great Depression either and that Keynesian theory has been proven to be invalid. Many ordinary citizens who know little about Keynes, and the history of the Great Depression, will read articles like this and come to the conclusion that our economic problem is the result of Obama's reliance on some clown named Keynes who believes that government should intervene in a depressed economy.

Alan Greenspan Explains Why Financial Reform Can't Work

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One of the criticisms of Alan Greenspan's role in the financial crisis is that he preferred to let the financial system regulate itself. In this article he gives his reasons for believing that government should not attempt to impose more regulatory controls on the financial system. He covers a wide range of proposed reforms but he believes that they will make the system worse rather than better. His critique of the Dodd, Frank reform bill differs dramatically from other those of other critics who believe that the bill does not go far enough.

In essence, Greenspan invokes the invisible hand of Adam Smith to defend his views. The financial system is guided by the invisible hand which makes the market work efficiently. The problem is that the invisible hand is, in fact, invisible. The system is too complex and opaque to be understood by government regulators. We are better off letting the invisible hand work its magic than to let regulators mess with what they do not understand. He predicts that regulatory reform will have unintended consequences because the system works so mysteriously. He describes some of the unintended consequences of reform in this article

He also defends the complexity of the financial system by linking it to economic growth and innovation. By tinkering with complexity, and the resultant growth of finance in the world economy, we may destroy the engine of economic growth.

I agree with Greenspan that what eventually comes out of Congress as financial reform may have unintended consequences and that reform may not prevent future crises. I disagree strongly, however, with his view that we are better off to let those who caused the financial system to collapse, and destroy the lives of millions of people, should be left totally in control of a system that they obviously do not understand well enough to manage in the public interest. Moreover, many of the problems that led up to our financial crisis were apparent to many people, and their consequences were understood. It was the failure of government to respond to the red flags that were raised that was the problem. Chief among those who preferred to ignore the red flags was Alan Greenspan.

Study by Atlanta Fed on New Firm Formation Worldwide

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This is a link to the study by the Atlanta Fed referred to in the article below.

The Big Reason for Low Growth in Jobs

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This study by the Cleveland Fed (Via Manan Shukla) shows that the number of firms as a percent of the population has dropped considerably. There was an increase in business failures but the real story was a decline in new firm formation. Young firms, not small business as our politicians keep telling us, are the engine of job growth. We no longer face layoffs but we wont get growth in employment without new business formation. In fact, a study by the Atlanta Fed showed that new firm formation is a problem in Europe as well.

Job Growth Was On Target in March but Little Growth in Wages

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The latest report on job growth met economist's forecast but wages hardly grew at all. In fact, wages grew more slowly than they did at the peak of the recession. This means that inflation is not a threat. We can't have inflation without growth in wages which are the largest cost of production. Moreover, low wage growth means that business cannot raise prices and still have consumers with the purchasing power to buy their products.

With almost no growth in wages the Fed will not have to worry about inflation and it will continue to keep interest rates low. The bad news is that we are a long way from an economic recovery and full employment.

The GOP Has Invoked The Ideas That Prolonged Great Depression

President Hoover offered an explanation for some of the problems that he had during the Great Depression. He blamed it on his Secretary of the Treasury Mellon who viewed depressions as a moral force. Depressions were a way to clear out all of the bad things that led to depression. In a sense they made us pay for our sins. The GOP is taking advantage of this recession by making similar arguments. They argue that creating more unemployment will help to create jobs. The unemployed government employees
will compete for jobs with private workers which will drive down the cost of labor. This will improve business confidence
and encourage it to employee more workers. It also has the unstated advantage of eliminating public employee unions which tend to vote for democrats. The price that we pay for this is deflation, which raises the real debt of households because they must pay back their debt with more valuable dollars.