de Long – so Wrong

If the solution to the fiscal and economic woes of the US could be found by simply adding more words of advice, then everything would be fine and dandy.

US academic economists have been having a field day providing us with their wisdom in terms of policy responses to the fiscal cliff.

I stumbled upon this one from Brad de Long, University of California, Berkeley.

First, Republicans and Democrats must negotiate a bipartisan agreement to stretch out the spending cuts and tax increases that take effect on January 1, 2013. That way, they will affect the economy gradually over five years, rather than all at once.

Second, the Federal Reserve should expand its quantitative easing and forward guidance programs. Consumers will be spending less in 2013, owing to higher taxes, as will government, which means that someone has to be spending more. Housing construction and exports are the obvious candidates, and both can be boosted somewhat by more aggressive balance-sheet operations by the Fed, together with promises of continued low nominal interest rates and higher inflation in the medium term.

Third, the large government-sponsored mortgage enterprises, Fannie Mae and Freddie Mac, should be used as macroeconomic-policy tools to restore housing construction to its long-term trend level. This should have been done five years ago, but better late than never.

Finally, and also five years too late, the US Treasury secretary should announce that while the strong-dollar doctrine was appropriate (and in America’s interest) during the dot-com boom, the country needs a weak dollar in the aftermath of the austerity bomb’s detonation.

Wow, I thought, particularly the idea of using Fannie and Freddie as macroeconomic policy tools.  Is he having a lend?

What ever happened to some straightforward common sense – aggressively restore fiscal balance, particularly through paring back unaffordable entitlement programs; start to pay back government debt; embark on a range of deregulatory microeconomic reforms which keeps the government out of private decision making; and ensure that the Federal Reserve independently targets low inflation and leave it at that.

The US – the land of free enterprise? What a joke.

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38 Responses to de Long – so Wrong

  1. MattR

    The US, the land of big government passing laws that entrench big business in the name of a big economy.

    Small government? Private sector competition? Free trade? Low taxes? No subsidies to uncompetetive businesses? De-regulation that makes starting a small business and growing it easier? Hah! Why do that?

  2. Steve of Ferny Hills

    De Long’s vision for the US?

  3. Grey

    Third, the large government-sponsored mortgage enterprises, Fannie Mae and Freddie Mac, should be used as macroeconomic-policy tools to restore housing construction to its long-term trend level.

    We should do that here too.
    If you compare the standard variable interest rates between NZ and Australia it becomes pretty obvious that government sponsored mortgage enterprises work.

    Cash rate Australia: 3.00
    Cash rate New Zealand: 2.50
    Standard variable rate main banks Australia: 6.4%
    Standard variable rate main banks NZ: 5.74%
    Standard variable rate Kiwibank: 5.65%

    Even if the cash rate was the same here as in NZ, the most we could expect the banks rate here to drop to would be 6.00%. That is clear endorsement of the utility of a low cost state owned bank driving competition to the benefit of consumers and taxpayers.

  4. Steve of Ferny Hills

    Standard variable rate UBank (NAB owned): 5.37% with no fees.

    Exposure for taxpayers? Nil.

  5. Grey

    Standard variable rate UBank (NAB owned): 5.37% with no fees.

    Exposure for taxpayers? Nil.

    All kinds of interest rates out there with different conditions. That is why I choose the standard variable rate in both countries so as to compare apples with apples.

    I realize making accurate comparisons drives libertarians wild. Presumably there are good reasons why most customers stick with the Big Four banks, so the best policy settings are those that drive down these rates, as these will provide the biggest benefit for the largest numbers and result in the biggest economic gains overall.

  6. Steve of Ferny Hills

    Even if the cash rate was the same here as in NZ, the most we could expect the banks rate here to drop to would be 6.00%

    No shame.

  7. Grey

    No shame.

    I make no apology for fighting for cheaper interest rates for the Aussie battler and I never will.

    Of course, I don’t own any bank shares. I imagine if you were getting big fat dividends your perspective might be different.

  8. Gab

    Hope you have shares in Kleenex, Grey.

  9. Gab

    the Aussie battler

    Mums and dads, the singletons, the retired – either own shares of the banks directly or have their superannuation funds invested on their behalf in banks, among other things. Why would you deny them income, Grey?

  10. Grey

    Why would you deny them income, Grey?

    Well lets follow what it pleases you to call your “idea” to its logical conclusion. Logically we should be demanding banks lift their interest rates in order to benefit the Mums and Dads, the singletons and the retired.
    Of course lets us also ignore the boost to economic activity that low interest rates provides.

    The fanaticism of libertarians – they would far rather everyone was poorer rather than admit the state a role in anything.

  11. Gab

    You’ve been into the sherry early, haven’t you Grey? You’re not making much sense.

  12. Grey

    You’ve been into the sherry early, haven’t you Grey? You’re not making much sense.

    You’re a very smart boy, I think you understand completely.

  13. JC

    Greys

    Do you even understand WTF you’re talking about you economic illiterate.

    Banks are basically margin makers.. all things being equal they don’t give shit about the absolute level of interest rates. They borrow at x and lend at x plus a margin.

    The term used to describe the margin in the trade is NIM or net interest margin. In countries like NZ, OZ and the US is at very low levels.

    Now if banks don’t earn a healthy margin they don’t make much profit and if they don’t earn profits economies have difficulty in growing because banks can only expand their balance sheets (loans) either through increased capital issuance or retained profits. Banks would have a difficult time diluting shareholders and raising equity if the NIM is under attack or pressured. You want healthy banks producing decent profits, Greys, you imbecile. Further impediments to that by having a government bank intervening distorts things and overall causes a net loss to our economic well being.

    The more leftwhiners I see arguing their points here, it seems to me that we are in vital need of imposing the Fisk Doctrine. Our civilization depends on it. These fucking morons would send us back to the stone age and then wonder what the hell happened…. they would be blaming it on George Bush 50 years from now.

    Fuck they’re stupid as a group.

  14. johno

    That is clear endorsement of the utility of a low cost state owned bank driving competition to the benefit of consumers and taxpayers.

    PURE CRAP

  15. JC

    Johno

    They have absolutely no fucking idea. Fisk is right.. Leftism is a mental illness and needs to be treated as such. It’s either a mental illness or serious retardation, so they need to be either in a mental asylum or a sheltered workshop. Either works for me.

  16. Judith Sloan

    Hmmm, I’m thinking State Bank of South Australia – a low cost state owned bank which ended up costing the taxpayers of South Australia well over a billion dollars when a billion dollars really meant something.

    I agree … we have well and truly moved on from the proposition that the state should intervene to provide cheap credit. It ALWAYS ends in tears.

  17. JC

    And then we have Brad de Short suggesting the very two entities at the centre of the crash causing something like 300 billion in losses to the US taxpayer ought to return and essentially do the same thing.

    That fucker ought to be fired from Berklely with maximum prejudice. He’s a fucking menace.

  18. JC

    Judith

    State sth Oz.. state bank of Vic, NSW, QLD.. they all ended up collapsing with serious hits to the states impairing some of them for years.

  19. Grey

    It is amazing that rage which libertarians greet straight forward evidence that a modest and well calibrated entry into the market by the state results in better competition and overall benefits all round.

    I wanna pay high mortgage rates, begs the Libertarian.
    Oh for days when they had read something other than Atlas Shrugged or the The Fountainhead. Adam Smith would not have been surprised

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”

    A government bank with a mandate to deliver modest profits and drive margins lower for all consumers – whatever their choice of bank – is a good defense against this inevitable trend to cartel and is delivering good results for the taxpayers of New Zealand.

  20. Grey

    Although I do remember Joe Hockey saying he was going to get very very angry if the banks didn’t deliver the entire Reserve Bank rate cut.

    Yeap, that ought to do it.

  21. Steve X

    The US mortgage market and Fannie and Freddie are very peculiar institutions.

    They have also caused blow ups twice in 30 years. The Savings and Loans Scandal of the 1980s and the GFC could not have happened without Fannie and Freddie.

  22. JC

    Stick to the point of the discussion, greys… Not sermonizing about da libertarians you fuckwit. Explain to us why you want to impair NIM and how that helps to raise overall living standards.

    Go!

    Sinc, if we get more sermons from this indolent mooching twerp then ban him and never let him back here. Thanks.

  23. JC

    Greys, you red nosed clown..

    If you want absolute rates to be lower try this then…

    run a surplus during and unprecedented mining boom and don’t crowd out the banks in the money markets by having to roll over $250 billion in bond issuance as government debt and have nothing to show for it.

    Now piss off.

  24. JC

    Yes Steve X… you’d think that Brad De short would have known about this, but apparently he doesn’t.

  25. Fisky

    Don’t worry JC, in about a decade or so these sorts of discussions with Leftists will be legally impossible, for another decade or so after that, and then there will be a cooling off period before they are allowed to post their ideas again. But if they start up with the crap, then the Doctrine is extended for a further 10 years.

  26. Dan

    Your fighting for lower interest rates hey Grey? WTF

    And yea, mortgage rates are so good in NZ that there are literally thousands of kiwis coming here every month

  27. Steve of Ferny Hills

    The fanaticism of libertarians – they would far rather everyone was poorer rather than admit the state a role in anything.

    Mmm, meat seems expensive these days. Maybe we should have government owned butcher shops.

  28. Grey

    And yea, mortgage rates are so good in NZ that there are literally thousands of kiwis coming here every month

    Someone has to operate our mines.
    No one said Australia doesn’t have a much stronger economy or Australians aren’t much wealthier. Just that New Zealand has more competition in the banking sector thanks to intelligent state intervention.

  29. Johno

    New Zealand has more competition in the banking sector thanks to intelligent state intervention.

    It is Labor Party policy to maintain the so called ‘four pillars’ policy that protects the big four Australian banks from competition. The trade-off is suppose to be greater stability of Australia’s banking system which some claim helped Australia get through the North Alantic banking crisis.

    Grey, could you explain whether you would like to dismantle the four pillars policy and what advantages you see in exposing the Australian banking sector to greater instability.

    Or would you prefer to admit that you are in over your head and are talking CRAP.

  30. mundi

    I have tried to look at how I can lend money at the cash rate. I gave up after I got past $100,000+ in licensing and registration costs and about 10,000 pages deep in acts.

    I would be very interested to see how many individual entities actually are able to trade with the RBA at the cash rate – its probably just the big 4 banks.

  31. sdfc

    If you have enough cash to place you can just trade with the banks at the cash rate.

  32. Skuter

    Fark me, this is basically the extended version of Krugman’s recommendation for Greenspan to inflate a housing bubble in the aftermath of the tech wreck.

    Grey, you are a cretin. Fighting for the battlers…give me a farkin’ break. Johno’s point about the ‘four pillars’ policy is spot on. Let’s not also forget about how Swanny allowed Westpac to gobble up St George and CBA to devour Bank west during the GFC.

  33. Skuter

    Sdfc, wouldn’t any ADI with an exchange settlement account be able to access the interbank market? Keep in mind that the banks lend those funds to each other overnight. The RBA just targets the overnight rate by adjusting exchange settlement balances through open market operations.

  34. Skuter

    Sorry, comment was directed at mundi. Sdfc’s gravatar looks similar…*adjusts glasses*

  35. PSC

    Standard variable rate UBank (NAB owned): 5.37% with no fees.

    Exposure for taxpayers? Nil.

    UBANK is NAB. A big implicit guarantee on deposit funding creates that rate.

    As a taxpayer I am outraged. (No-one else seems to be, but anyway…)

    But as a bank equity investor, I am all for it.

  36. Zatara

    “it becomes pretty obvious that government sponsored mortgage enterprises work”

    You do understand that the GFC(tm) was originated by the US government forcing banks to make mortgage loans they knew damned well couldn’t/wouldn’t be repaid right? You know that the banks recognized that and did the best they could for their shareholders by trying to package and sell off the crap loans? You know that the assumption behind the whole program was that when it failed, as it most certainly would and did, the taxpayers would bail it out?

    Govt failure due to cowtowing to racial crap yet again.

    Want to bag me on the race card? Take a look at who was going all out supporting the Act, and who was saying whoa there.

  37. Zatara

    “Of course, I don’t own any bank shares”

    .

    Allow me to correct you Grey, “Of course I don’t own any bank shares.”

    It rings so much more true without the comma.

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