A Minsky Moment?

John Plender wrote in yesterday's Financial Times,  "Complacent investors face prospect of a Minsky moment."  

One observation is hard to quarrel with, to wit,  "It is historically atypical in that the central banks have been encouraging market participants through quantitative easing to take on more risk to help stave off a perceived deflationary threat. This was, in a sense, a perpetuation of the asymmetric policy pursued by the Federal Reserve before the crisis." we have seen the Greenspan Put on the stock market, the Bernanke Put on the housing market, and are we now seeing the Powell Put on the current bubbles?

Financial assets have grown rapidly relative to the stock of physical capital and certainly some bubbles have been inflated, most notably the growth of unicorns.

On the the hand, he claims hat that "Since the Trump tax changes (sic) are unlikely to have more than a modest impact on potential output, the economy, already close to full employment, could run into capacity constraints."  This is unduly pessimistic.  The Paul Ryan/ GOP/Trump tax cuts have dramatically reduced the cost of equity and, for well capitalized companies, for corporate investment in real capital.  Reducing marginal individual tax rates improves incentives to work.  The limit on state and local tax deductions reduces the tax incentive to drive prices up in the most expensive markets in the nation.

The supply side tax changes combined with the administration's deregulation initiatives has accelerated economic growth after the slowest economic recovery in a century.  Growth, the first real wage rate rises since the 1990s, and the improved incentives have increased labor force participation by attracting workers who have given up or face disincentives to taking paying employment.  Workers on disability have reentered the workforce.  Yes the unemployment rate is the lowest in forty-nine years, but the prime age employment ratio is still below its level at the beginning of the 2007-9 recession even though it is eleven years later.

Not only did the 2017 tax act create supply side incentives for the real economy (which Mr. Plender judges too weak), but it also reduced the tax incentive to over lever.  It limited corporations' ability to deduct interest expense and the lower corporate marginal corporate tax rates reduce debt's tax subsidy.  The debt binges by Netflix and Amazon among others is their last hurray.  

Citing Dr. Doom (Henry Kaufman), Plender worries that "the 10 largest financial institutions held about 10 per cent of US financial assets. Today the figure is about 80 per cent."  While that may reduce the liquidity of financial markets, but it also makes the banking sector more stable.  Canada with similar concentration for a century or more has not had a banking crisis since the 1840s.  A shift of capital raising from the financial markets to the commercial banks by itself would increase the potential for economic growth.  A key initiative by the Republicans with some bipartisan support is to reduce the regulatory burden of smaller banks that are not a systemic threat and shifting the emphasis from regulation to capital.

Did the Fiscal Stimulus Cause a Net Loss of Jobs?

Ohio State University economists Tim Conley and Bill Dupor have done a study of the impact of the fiscal stimulus embodied in "The American Recovery and Reinvestment Act." They concluded that the Act created or saved 450,000 state and local government jobs but destroyed or forestalled a million private sector jobs. Investors' Business Daily editorialized "That's a net loss of half a million jobs."

The working paper, "The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled",  bases its statistics analysis on a cross-sectional analysis by the state and a program.

A Historic Day for the 10-year U.S. Treasury Note

In this video (4m 25sec), the FT's Michael Mackenzie takes to the floor during the final 20 minutes leading up to the sale of $24bn in 10-year treasury notes as the bond market passes a key test of investor sentiment with record demand for the new issue:  

http://video.ft.com/v/786844760001/A-historic-day-for-the-10-year-treasury-note

Uncle Sam can still sell paper.   But for how long?

A Trillion Here, A Trillion There, and After a While You are Talking Real Money!

A J. Paulson tells me:

"And I can remember when John Kennedy held the budget to $98 billion because
he was unwilling to be the first President to go over the $100 billion limit."

You know what? I can too!

Economic Policy: Where Do We Stand Now?

The economy won President Barak Obama his job and the economy is the focus of his agenda. Given the speed of events, it is not too early to assess the administration's economic policy and the key issues confronting us.

The administration's economic policy is a three legged stool. The first leg is the new bank rescue package; the second is its trade policy; and the third is the stimulus package. By the end of last week it already seemed a bit wobbly.

Treasury Secretary Timothy Geithner has the lead on the first two and he had a rough week.


Preventing a banking collapse is crucial. How do we prevent the debacle on Wall Street from destroying the banking system which must fund economic recovery? It was the collapse of the banking system that was the biggest reason an ordinary recession in 1929 turned into the Great Depression.

Geithner introduced the administration’s bank rescue plan on Tuesday and how did security markets react? They dropped like a rock. The stock market fell 4.6% in the first half hour after his speech was released. Bond prices fell. Markets around the world followed suit. Martin Wolf, the associate editor and chief economics commentator at the Financial Times (London), asked "Has Barack Obama’s presidency already failed?" Geithner’s plan lacked specifics and gave no indication that it would work.

Back to the drawing board.

The second leg is trade policy. Protectionism is a monster that must be caged. Trade is so crucial, but seems to be the most backburner of issues in the news. How do we avoid a return to the trade wars of the 1930s? The collapse of world trade was the second most important reason the 1929 recession turned into the Great Depression. The U.S. passed the Smoot-Hawley Tariff in 1930, Canada promptly retaliated before the law was even enacted. One nation after another tried to steal trade from the others by devaluing its currency and/or raising tariffs. As each tried to pull itself up by pulling down its mates, they all crashed to the floor. The nineteenth century's great age of globalization came to a final end. Will we learn from the past? For as Ben Franklin put it, "We must all hang together, gentlemen...else, we shall most assuredly hang separately."

America must lead the battle against protectionism. So far the new administration has been more a source of worry than leadership. As candidate Obama, the President advocated protecting American jobs on the campaign trail. That doesn't help. Congress tried loading the stimulus package with "Buy America" provisions. Even before being confirmed as the new Treasury Secretary, Geithner started out bashing China, but then had to backpedal when the finance ministers of the G-7 (i.e., the main economies) met in Rome. Peer pressure? After all, China's $581 billion stimulus package might do more to help slow the global downturn than Congress's many headed monster. Japan's decline at a double digit annual rate (see yesterday's posting) emphasizes how this is a global economic downturn with each country's decline feeding its falling domestic demand back to its trading partners.

And the third leg is the stimulus package: How do we get the economy jump started? Here the administration left the job of putting a stimulus package together to Congress, an institution whose approval ratings rank below those of former President Bush and used car dealers. The result is a package many people doubt will do the job but will blow up the deficit. It managed to unite the Republican opposition, no mean feat.

So even as the President basks in his Congressional victory on the stimulus package, his economic team is licking its wounds after a tough week. Managing economic policy is proving more difficult than campaigning against the status quo.

Monetary Policy: Meanwhile the Federal Reserve faces the daunting task of being ready to turn on a dime once (should I say "if") normality returns to financial markets. The explosion of the Fed's balance sheet poses major threats to its ability to conduct policy. When it turns the corner of the banking crisis and maybe sooner, the Fed faces the Sylla of a run on the dollar and the Charybdis of exploding inflation. That we should have a Ben Bernanke as Fed Chairman at this peculiar time and place seems providential. I do not envy him.

I must add Ben Bernanke to my ever lengthening list of causes to pray for.

Columbia's Economic Transformation

Do corporate tax rates matter?