The highlight of the week was supposed to be the minutes of the FOMC meeting as investors looked for clues regarding tapering. The way I read it, the Fed said absolutely nothing. This round of QE has resulted in higher equity prices. Unless you believe in the wealth effect (people spend more money because they have it) it is hard to see how this benefits the economy.
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There Must Be Some Way Out of Here
Last week I expressed some concerns about the economy. Rather than just leave it as a lost cause I would like to presented here some ideas I offered 2 years ago to help fix the economy.
The U.S. Economy is in a bad state. What can be done? I will offer an agenda:
1) reconsider our participation in the Basel accords and recognize that purely commercial banks have a different set of risks that the now hybridized investment/commercial banks. These regulations penalize purely commercial banks by demanding higher capitalization while insanely suggesting that derivative trading is no more risky. The people framing Basel III are considering something like this. The "one size fits all" notions of Basel are counterintuitive. I see no reason why every country needs the same rules. The biggest problem I have with Basel is that it assumes that risk is static.
2) enact Simpson-Bowles. Absent a comprehensive solution for fiscal sustainability, nothing else matters. This is not a short-term fix but a long-term necessity.
3) encourage privatization of infrastructure spending. Companies are sitting on something approaching $1.7 trillion in cash. Bridges and roads could be built by private companies.
4) eliminate some government regulations which discourage infrastructure building and job creation. The notion that Keynesian deficit spending can jump start the economy may have been rendered useless by excessive regulation regarding environmental protection. Nothing can get done quickly enough to have any effect on the economy. Partly because of these limitations, the 2009 American Recovery and Reinvestment Act (ARRA) was ineffective. Instead of mostly going to infrastructure much of it went to it increased transfer payments to individuals in the form of welfare and Medicaid and some of it went to state and local government which reduced their borrowing effectively pushing that borrowing up to a national level. States did not spend more they simply borrowed less.
5) give a new agency control over the deficit. This is the theme of my ongoing appeal for a Council of Fiscal Sustainability.
6) recognize that politics is the problem not the solution. This sounds like a trite slogan but what I mean is that since politicians do not have the answers we should not be looking to them for solutions.
7) eliminate government agencies which are no longer needed or have failed. The best presentation of this I know about is on the Downsizing the Federal Government website.
8) discourage the government from creating asset bubbles (see next paragraph.) This is both a monetary and fiscal issue.
What we must recognize is that much of the problem is not an economic one but a political one. Simpson-Bowles is the best example. Presented with a comprehensive solution to our fiscal ills the President and most of Congress have ignored it because it is not compatible with reelection. Another example is Dodd-Frank. Congress gave no recognition to the fact that the subprime mortgage mess was set into motion by the government with the 1994 National Homeownership Strategy. Politicians have placed the blame on banks (let me be clear that banks certainly played a gigantic role in this) and passed Dodd-Frank which creates more banking regulation. It will be years before the effects of Dodd-Frank on the banking system and the economy in general are felt. One obvious effect of the mandates of CFPB (the entity created by Dodd-Frank) is that fewer people will qualify for mortgages.
These ideas are not intended to be a short-term fix for low GDP growth and a disappointing rate of creation of new jobs. These ideas are structural notions designed to address the fact that it is impossible for the Federal government to 1) keep running while 2) servicing the debt once rates increase and 3) handle the Madoff-like promises regarding Social Security and Medicare which are impossible to meet.
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