Well then.  Apparently not everyone agrees that the Federal Reserve is having trouble balancing its dual mandate.  Rather, I should say that not everyone agrees about the nature of the imbalance.  From the Boston Globe‘s reporting of Ben Bernanke’s appearance in front of the Senate Budget Committee, we find this:

“It seems to me that you care more about unemployment than about inflation,’’ said Senator Charles E. Grassley, Republican of Iowa.

“I want to disabuse any notion that there is a priority for maximum employment,’’ Bernanke responded.

Bernanke deserves credit here for refraining from hitting himself over the head with a frying pan in response.  (Is this just a cynical form of “working the ref” or does the Senator really believe it?  If the latter, what more could possibly disabuse him of this notion?)  I suggested yesterday that you “don’t need to look very hard” to see that the Federal Reserve is doing much better at keeping inflation in check than at controlling unemployment—but you do need to look.

I’ll outsource the rest to the The Economist (where Ryan Avent performs the literary equivalent of hitting himself over the head with a frying pan):

During the second half of 2010, annual inflation stood at its lowest level in over half a century. Unemployment, by contrast, peaked at 10.0%. Only once in the post-war period did the jobless rate rise above that level. Only twice in the postwar period has the country experienced a recession that brought the unemployment rate above its current level, at 8.3% […] I’m left to muse that Mr Grassley must say good-bye when he enters a room and hello when he leaves, and wears his shoes on his head.

The latest chapter in the “why was the original stimulus so small?” story is a memo from December 2008 that reveals Larry Summers’ assessment as to why the stimulus (ARRA) had to be limited to around $800 billion—about half of what was necessary, in Summers’ estimation.  There are various conclusions you can draw from this memo, but the aspect I’d like to focus on is this:  Larry Summers’ suggestion that $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span (and so the rest had to be made up of tax cuts, aid to states, etc.).

Let’s grant for the sake of argument that Summers is correct about this “shovel ready” figure.  The question is:  what can we do about it?  If you’re looking for short-term results, the answer is probably “not much.”  Even things like speeding up environmental impact assessments for infrastructure projects wouldn’t have much effect (at the link, Brad Plumer tells us that only 4 percent of highway infrastructure projects even require such environmental reviews).

But looking ahead, there is more we could and should be doing.  Back in 2009 Martin Shubik sketched out a plan in a Levy Institute policy note for creating a “Federal Employment Reserve Authority“—a kind of Fed for employment (yes, I know:  the Federal Reserve is the “Fed for employment.”  But you don’t need to look very hard to see that the sides of the dual mandate aren’t equally weighted).  Among other things, the FERA would maintain state branches that are charged with keeping updated and prioritized lists of potential public works projects (with a preference for self-liquidating projects) and providing constant monitoring and evaluation so that financing can be put in place as soon as unemployment reaches a particular trigger level in that region.  Regional public investment would respond to objective employment conditions. continue reading…

“…while Europe’s leaders haven’t hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks.”  That’s Slate‘s Matthew Yglesias, who notes that this (seemingly exclusive) focus among European elites on saving their banks likely ends up protecting the US economy from eurozone contagion more effectively than would policies focused on growth and easing the plight of those whose wellbeing depends on the “real” economy.

The reason is that, as Gennaro Zezza points out here, the US economy is not overly exposed to a slowdown in European growth; not overly exposed, that is, compared to the fallout from a European financial panic.  As Dimitri Papadimitriou and Randall Wray indicate, US finance is still entwined with the fate of European finance; at least in part due to the roughly $1.5 trillion invested in European banks by US money market mutual funds.

In other words, comparatively speaking, the US economy will not suffer much from European policy elites’ apparent relative disinterest toward the fate of their people, but may dodge a bullet if current efforts to save the European banking system work out.  (At least in the short run.  In the longer run, Ryan Avent is probably right to worry that this LTRO stuff may just amount to sweeping serious problems under the rug:  “…when failure is never allowed the system becomes more brittle and the cost of a blow-up, which probably isn’t avoidable for ever, rises.”)

(click to enlarge)

Dimitri Papadimitriou and Randall Wray deliver a second installment of their joint assessment of the risks that a renewed global financial crisis might be triggered by events in Europe or the United States.  In their latest one-pager they move past disputes over etiology and lay out their solutions for both sides of the pond:  addressing the basic flaws in the setup of the European Monetary Union (“the EMU is like a United States without a Treasury or a fully functioning Federal Reserve”) and outlining how to place the US financial system and “real” economy on more solid foundations.

Read the newest one-pager here.

Their first one-pager focused on the reasons it is unhelpful to label the turbulence in Europe a “sovereign debt crisis.”  This way of framing the situation obscures more than it enlightens.  To recap:  prior to the crisis only a couple of countries had debt ratios that significantly exceeded Maastricht limits.  For most, the economic crisis was the cause of rising public debt ratios, rather than the other way round.  What we really need to look at, Papadimitriou and Wray suggest, are private debt ratios and current account imbalances within the eurozone.  And as for current public insolvency concerns, this has far more to do with the flaws in the institutional setup of the European Monetary Union than the particular size of a country’s debt ratio:  countries that control their own currencies aren’t experiencing comparable difficulties.

(For a more detailed investigation, Papadimitriou and Wray will be releasing a new public policy brief:  “Fiddling in Euroland as the Global Meltdown Nears.”)

Some indigestible food for thought:  there is not a single state in the Union—not one—in which the top 1% of income earners pay a higher rate of state taxes than the bottom 20%.  For the majority of states, it’s not even close:  the poorest 20% pay somewhere between double and six times the tax rate of the richest 1%.  In Florida, those who make the least pay 13.5% of their income in state taxes, while those who make the most pay 2.1%.

This comes to us from Mother Jones’ Kevin Drum, who dug into the comprehensive “Assets and Opportunity Scorecard” recently produced by the The Corporation for Enterprise Development.

Marshall Auerback appeared on the Business News Network to give his take on the latest developments in the eurozone crisis; specifically with respect to the ongoing negotiations over the proposed (now 70 percent) haircut on Greek debt.  Auerback also addressed the LTRO (noting the rather dramatic increase in the ECB’s balance sheet) and the credit default swaps on Greek debt (on this, see also Micah Hauptman’s take on the process for determining when these CDS payments are triggered:  “murky, unregulated, and replete with conflicts of interest“).

You can watch a clip of Auerback’s interview here.

(credit to Mitch Green at NEP)

Michael Hudson is giving a talk titled “The Road to Debt Deflation, Debt Peonage, and Neofeudalism” at the Levy Institute on Friday, February 10 at 2:00 p.m.

Hudson is a research associate at the Levy Institute and a financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and an honorary professor of economics at Huazhong University of Science and Technology, Wuhan, China.

The abstract for the presentation is below the fold. continue reading…

In his General Theory, J.M. Keynes argued that substandard growth, financial instability, and unemployment are caused by the fetish for liquidity. The desire for a liquid position is anti-social because there is no such thing as liquidity in the aggregate. The stock market makes ownership liquid for the individual “investor” but since all the equities must be held by someone, my decision to sell-out depends on your willingness to buy-in.

I can recall about 15 years ago when the data on the financial sector’s indebtedness began to show growth much faster than GDP, reading about 125% of national income by 2006—on a scale similar to nonfinancial private sector indebtedness (households plus nonfinancial sector firms). I must admit I focused on the latter while dismissing the leveraging in the financial sector. After all, that all nets to zero: it is just one financial institution owing another. Who cares?

Well, with the benefit of twenty-twenty hindsight, we all should have cared. Big time. There were many causes of the Global Financial Collapse that began in late 2007: rising inequality and stagnant wages, a real estate and commodities bubble, household indebtedness, and what Hyman Minsky called the rise of “money manager capitalism”. All of these matter—and I think Minsky’s analysis is by far the most cogent. Indeed, the financial layering and leveraging that helped to increase the financial sector’s indebtedness, as well as its share of value added and of corporate profits, is one element of Minsky’s focus on money managers. I don’t want to go into all of that right now. What I want to do instead is to focus quite narrowly on liquidity in the financial sector.

So here’s the deal. What happened is that the financial sector taken as a whole moved into extremely short-term finance of positions in assets. This is a huge topic and is related to the transformation of investment banking partnerships that had a long-term interest in the well-being of their clients to publicly-held, pump-and-dump enterprises whose only interest was the well-being of top management.

It also is related to the rise of shadow banks that appeared to offer deposit-like liabilities but without the protection of FDIC. And it is related to the Greenspan “put” and the Bernanke “great moderation” that appeared to guarantee that all financial practices—no matter how crazily risky—would be backstopped by Uncle Sam.

And it is related to very low overnight interest rate targets by the Fed (through to 2004) that made short-term finance extremely cheap relative to longer-term finance.

All of this encouraged financial institutions to rely on insanely short short-term finance.  Read the rest here.

The Bureau of Labor Statistics (BLS) noted on its website yesterday that in 2011, “annual totals for [layoff] events and initial claims were at their lowest levels since 2007.” Nonetheless, today’s report that the Fed open-market committee plans to keep short-term interest rates low until late 2014 reminds us of the obvious but unfortunate fact that the current slump in employment growth is continuing.

Appearing at the top of this post is a chart showing monthly Bureau of Labor Statistics (BLS) figures on new hiring, which remains very slow. Last week, in citing similar data, Ed Lazaer argued that “If jobs are scarce and wages are flat or falling, decent increases in the gross domestic product or the stock market are almost irrelevant” (WSJ link here). One should not forget that the last official recession began in December 2007—well over four years ago. (National Bureau of Economic Research recession dates are indicated with grey shading in the figure above.)  Such dates are somewhat arbitrary. To take another example, the BLS’s broadest labor underutilization rate still stood at 15.2 percent as of last month, down only modestly from 16.6 percent the previous December.