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The Missing Fiscal Policy: Austerity Now?

Paul Krugman writes:

A few years ago Gauti Eggertsson published a a persuasive analysis (pdf) of the big economic recovery of 1933-37; he argued that it had a lot to do with changed expectations of future monetary policy. Specifically, by taking America off the gold standard — a shocking move at the time — and explicitly calling for a return to pre-Depression price levels, FDR created an expectation of rising prices that had a salutary effect on demand.

The paper explains that FDR did more than that:

What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make his policy objective credible. The key to the recovery was the successful management of expectations about future policy. [MORE . . .]

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Occupy Together: The Kids are Alright

At Daily Kos, Big Tent Democrat interviews his 17 year old daughter about why she joined Occupy Wall Street. What a smart, articulate young woman.

Q: What do you think the goals of Occupy Are?

A: To help wake America up to the fact that the country can't go on focused on the needs of the few over the needs of the many.

The movement has passed its one month anniversary, raised $300,000.00 and grown globally into Occupy Together. Reuters reports a new poll shows most New Yorkers support the protest. [More...]

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Why Not HOLC?

Martin Feldstein writes:

To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are “underwater” are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Here’s how such a policy might work:

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddie Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home. This would all be voluntary.

This won't work. The reason is the banks can not recognize these losses. The lack of clothing for the emperor would become apparent. Without a stick, the banks won't do it. There were sticks available in early 2009, but Geithner protected his Wall Street buddies. In any event, why not HOLC?

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Income Inequality And Secular Stagnation Revisited

Krugman yesterday:

I’ve written a lot about the evils of soaring inequality. But I have not gone that route. I’m not ruling out a connection between inequality and the mess we’re in, but for now I don’t see a clear mechanism, and I often annoy liberal audiences by saying that it’s probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent. More equality would be good, but not, as far as I can tell, because it would restore full employment.

I still think Krugman is utterly wrong here. Take for instance the issue of homeowner debt, which everyone seems to agree is the major drag on our economy now.. Certainly it is possible to ignore income inequality as a major reason for this problem, but it would be foolhardy in my opinion. I just don't understand Krugman on this issue. See my previous posts on this here and here.

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Punishing Banks For Debit Card Fees

Years ago, the banks have with the ideas of debit cards, advertised and marketed them to death, and finally got us all using them. I was perfectly fine writing a check. Now, so few people write checks, most places won't take them. And if we use credit cards, instead of debit cards, we run the risk of buying more than we can afford and getting into debit.

So along comes the big banks with more than $10 million in assets, and since they are being told they can't charge retailers more for the new debit card fees they provide customers, the banks have decided to stick their own customers with the $5.00 fee.

Fortunatley, leaving a bank, even one you've been at 30 years, is easier than leaving a lot of other companies-- like your favorite grocery store, dry cleaner, health club, etc.

So what happens to these banks when new banks pop up who aren't subject to the big boy fees, and start offering us what our banks gave us to get our initial business (perks now long gone for many of us except those with significant amounts of cash to lay dormant in their accounts) -- like free checking accounts, no fees for the bill-pay, no checking fees or fees for electronic banking and free checks with images, etc.?

We'll leave the Big Boys in droves. I sure hope they thought it through and crunched the numbers on how many of us they can afford to lose< [More....]/p>

Next time you are standing in line behind someone writing a paper check, be patient. This could be you next month. I'm never happy about change in my personal life, and much less so about change for the worse. I'll be reading those mail offers much more closely now.

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Worst "Elites" Since The Great Depression

NYTimes Editorial:

The world has barely dug out of recession and the global economy is again slowing dangerously. Most leaders seem eager to make things even worse.

Instead of looking for ways to reignite growth, Europe’s leaders — and Republicans on Capitol Hill — are determined to slash public spending. Europe’s fixation on austerity is also compounding its debt crisis, bringing the Continent even closer to the brink. Meanwhile, China’s government, which is struggling to contain inflation without letting its currency rise, has been trying to slow domestic demand, allowing its trade surplus to balloon.

Each of these policies is wrong. In combination, they are likely to tip the world into a deep recession.

Bush 43 levels of incompetence.

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Senate Passes Stopgap Spending Bill

The Senate tonight passed a stopgap budget bill to keep the government funded through November 18.

The new pact, which the Senate approved 79 to 12 and the House is expected to ratify next week, will keep federal agencies open until Nov. 18 at a level of spending that represents a 1.5 percent cut from this year’s levels.

After FEMA said it had enough funds to last through Friday, Senators dropped a billion dollars for disaster relief from the bill:

Democrats and Republicans have agreed to drop $1 billion in disaster relief funding that had been thought to be necessary to replenish FEMA’s coffers before the week ended.

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Navy Offers $3 Mil Contract for Updating Guantanamo Bowling Alley

This has been the worst week for the stock market since 2008.

The Dow lost 6.4 percent for the week, its biggest drop since the week that ended Oct. 10, 2008, when it fell 18 percent. That was at the height of the financial crisis.

Investors fear a recession or worse. The Administration is out pushing its deficit/jobs plan and telling us there are hard choices to make.

Yesterday, the Navy published a notice seeking a contractor to repair the bowling alley, youth center and Liberty Center at Guantanamo, at a cost of $3 million. (Note, this is not for the detainees, but the military employees.) [More...]

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On the Math

Charlie Sheen is getting a $100 million payout from Warner Brothers, in settlement of his lawsuit over his television show (that I've never seen), Two and a Half Men. $25 million will be paid in two weeks, the rest over time.

Apple stock prices closed at an all-time high today, $411 a share, with a new record-high market valuation of $381.62 billion, which even beats Exxon Mobile.

Let the mega-rich pay more in taxes. Leave Medicare alone. They may have more money, but there's millions more of us and we vote. Our votes can lead to electoral victory. Who cares if they pout?

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Arguments for More, Not Less, Government Spending

John Judis, a visiting scholar at the Carnegie Endowment for International Peace. writes the cover story for the October 6, 2011 New Republic on the economy and President Obama. It's called Doom: Our Economic Nightmare is Just Beginning. TNR has provided me with this pass-through link so non-subscribers may read it. It's long, but very interesting, particularly from a historical point of view. (Although the parts about the world monetary system were way over my comprehension abilities.)

It starts out by saying our current recession is not just similar to the 1929 depression, it is the 1929 depression redux. It then recaps economic history since then and politicians and nations' responses. Shorter version: Obama shouldn't fall prey to Republicans clamoring for deficit cuts and decreased Government spending. Austerity is not the answer and to recover, we need more, not less, Government spending. [More...]

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Obama's Deficit Cutting Plan: No Raise in Medicare Eligibility Age

President Obama took a stand for Democrats and seniors today. I'm canceling his pink slip notice.

Obama's plan to cut the nation's deficit is already being attacked by Republicans. The plan is in line with Democratic values. Why should those who make more than a million dollars a year pay tax only at the rate of 15%, when so many of us who earn far less are taxed at 35%? The Bush tax cuts should have been repealed a long time ago.

The plan also calls for $1 trillion in cuts for withdrawing troops from Afghanistan and Iraq. Most importantly:

The plan doesn't touch Social Security, and there is no proposed increase in the Medicare eligibility age -- a cost-saving plan the president was willing to agree to earlier in the year, to the dismay of liberals.


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Report: Obama Won't Seek to Raise Medicare Eligibility Age

I so hope this is true:

The plan includes no changes in Social Security and does not include an increase in the Medicare eligibility age, which the president had considered this summer.

If it's accurate, I'm withdrawing my pink slip to President Obama. I'll even thank him.

Update: Obama Deficit Plan Aimed at Democratic Base.

Stay tuned.

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Obama's New Economic Plan: "Buffet's Rule"

The New York Times has the details of the economic plan President Obama will introduce on Monday. It's mostly about taxes -- a minimum tax for millionaires. But then there's this:

Mr. Obama, in his plan, will call for more than $300 billion in 10-year savings from Medicare and Medicaid but not for changes in Social Security.

The increased taxes may not pass be accepted by Republicans. So what's the point?

The Obama proposal has little chance of becoming law unless Republican lawmakers bend. But by focusing on the wealthiest Americans, the president is sharpening the contrast between Republicans and Democrats with a theme he can carry into his bid for re-election in 2012.

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New Jobless Claims: 428K

Bad news:

Applications for unemployment benefits climbed to 428,000 in the week ended Sept. 10 from an upwardly revised 417,000 the prior week, the Labor Department said.

Exacerbating the problem is the rise in headline inflation:

The Labor Department said its Consumer Price Index increased 0.4 percent last month, after rising 0.5 percent in July. The reading was higher than the 0.2 percent rise expected, with food prices posting their biggest gain since March. Gasoline prices climbed 1.9 percent after jumping 4.7 percent the prior month. Food prices rose 0.5 percent after increasing 0.4 percent in July.

This is bad because the folks that want Austerity Now! get to yell Inflation! The reality is that core inflation is 2% due to slack demand. But energy and food prices go up more because demand for these items is inelastic. This is a toxic brew of economic news. Things are looking bleaker.

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AP Analysis: Obama's Job Plan is an IOU

The Associated Press has this analysis of Obama's assertion that his job bill pays for himself:

The jobs plan is an IOU from a president and lawmakers who may not even be in office down the road when the bills come due. Today's Congress cannot bind a later one for future spending. A future Congress could simply reverse it.

Anyone else notice Obama is proposing taxes on those who make $200,000 rather than $250,000? Is that gross income before deductions? Or taxable income? Or what?

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