demand manager of last resort

The Fed Decides the Economy Still Sucks by Kevin Roose

The no-taper decision is sending stocks to all-time highs, since Wall Street had anticipated a taper of at least $10 or $15 billion in monthly buying. But the bigger takeaway is that this is a sentient Fed — a Fed capable of setting its compass not simply by the data in front of it, but also by the stories it hears. Ben Bernanke was on solid logical footing when he proposed the taper last May; it has to end sometime, after all, and a housing recovery coupled with a falling headline unemployment rate had given him the cover to begin tightening. But progressive economists and consumer advocates objected loudly, on the grounds that the labor participation rate and wage stagnation meant that not all was well in the economy, despite appearances.
...
That's probably true. But it also shows how widely influential doves like Yellen have been in reorienting the Fed's priorities around helping to create jobs. Part of the reason today's move shocked Wall Street is that this is a much different Fed from the one most traders are used to dealing with. It's a more compassionate Fed, a more holistic Fed, and a Fed that sees its role as not only fulfilling the official mandate of price control and low unemployment, but as filling the gaps where legislators are failing. It's also a political body, deeply aware that the fiscal shenanigans likely to occur in this fall's debt-ceiling debate could undo months of its efforts to stabilize the economy. It's the most subtle ideological transformation of a major monetary policy body in decades, but one of the most important. The Fed, with few exceptions, is all Yellens now.  

Emphasis added.

(via DeLong)

India and Indonesia react to potential tightening/tapering

Amid Economic Stress, Differing Strategies Emerge

why liberals blocked Summers

Summers lost because liberals don’t trust Obama on financial reform by Ezra Klein

Summers fell because at least five Democrats on the Senate Banking Committee doubted his bona fides as a bank regulator. But even that doesn’t get at the whole truth. Summers really fell because those Senate Democrats — and many other liberals — don’t trust the Obama administration’s entire approach to regulating Wall Street. For all the talk of Summers’s outsized personality and polarizing past, he really lost because he was a stand-in for Obama.

QE mulitplier

The surprising value of not tapering by Felix Salmon

I’m very late to this — I was a bit distracted by other things today — but the big storyline of the day seems clear: the Fed didn’t taper, and markets surged in response.

So here’s my question. If you take the amount of tapering that the market expected yesterday, and the amount of tapering that the market expects today, what’s the difference, in dollar terms? In other words, by the time tapering ends, and the Fed is no longer engaging in quantitative easing, how much extra money will it have spent buying bonds, if current market expectations hold, compared to what the market expected on Wednesday?

Then comes the next question, which is this: how much did the value of US fixed-income assets rise on Thursday? And, for that matter, how much did the value of US stocks rise on Thursday?

I don’t know the exact answers to the questions, but I’m pretty sure that the latter numbers are much larger than the former — that the market reaction, in dollar terms, was hugely greater than the extra amount of QE that the market now expects.

If that is indeed the case, then what we’re seeing is what you might call the QE multiplier — the amount by which every dollar of QE effects the markets as a whole. I don’t know what we thought the QE multiplier was on Wednesday, but in light of Thursday’s market action we might need to revise our guesses: the QE multiplier is, I suspect, much larger than most of us would have pegged it at.

And that, in turn, is surely a reason to keep on easing. If QE does no good, then you might as well not do it. But the lesson we learned on Thursday is that the markets really, really love QE. And insofar as robust markets feed through into a healthier economy, the logical conclusion is that we should retain current policy well into 2014. The downside is limited — and the upside is much bigger than we thought it was.

(via DeLong)

The Widowmaker

Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred by DeLong (May 11, 2013)

Harpooning Ben Bernake by Krugman

Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”.

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower).

But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

Warren Buffett compares US Fed to a hedge fund (9.21.13)

Billionaire investor Warren Buffett compared the US Federal Reserve to a hedge fund because of the central bank's ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

"The Fed is the greatest hedge fund in history," Buffett told students yesterday at Georgetown University in Washington.

It's generating "$80 billion or $90 billion a year probably" in revenue for the US government, he said. "And that wasn't the case a few years back."

The central bank has been buying $85 billion of bonds a month to help the US recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S Bernanke and other Federal policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy. 

The Fed remitted $88.4 billion to the US Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed "is under no pressure, none whatsoever to have to deleverage," Buffett said. "So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that's never quite been done on this scale. It will be interesting to watch."

Soros bet against the British hedge fund in the early 90s and won. In the end it helped Great Britain via devaluation.

Calgarian candidate

The blame should lie with Boeher, but Cruz gave the not-credible impression that sending the CR defunding Obamacare to the Senate was somehow worthwhile. The other Senate Republicans are saying it's stupid.

Looks like it's a way for the Tea Party to single out Republican Senators who vote for Romneycare.

Knowing When to Worry by Gail Collins

Ted Cruz Turns Obamacare Defunding Plan From Disaster to Utter Fiasco by Jonathan Chait

Step one of this far-fetched scheme was the passage of a “continuing resolution,” which keeps the government open, attached to abolishing Obamacare. Now it goes to the Senate. Once that bill comes up for a vote in the Senate, the majority can vote to strip away the provision defunding Obamacare. That vote can’t be filibustered. It’s a simple majority vote, and Democrats have the majority.

What Senate Republicans can do is filibuster to prevent the bill from coming to a vote at all. That’s the only recourse the Senate defunders have. And Ted Cruz is promising to do just that: “ I hope that every Senate Republican will stand together,” he says, “and oppose cloture on the bill in order to keep the House bill intact and not let Harry Reid add Obamacare funding back in.” A “committed defunder” in the Senate likewise tells David Drucker, “Reid must not be allowed to fund Obamacare with only 51 votes.” 

In other words, the new stop-Obamacare plan now entails filibustering the defunders’ own bill. They can do this with just 41 votes in the Senate, if they can get them. But consider how terrible this situation is for the Republicans. If they fail, it will be because a handful of Republicans joined with Democrats to break the filibuster, betraying the defunders. This means the full force of the defund-Obamacare movement – which is itself very well funded by rabid grassroots conservatives eager to save the country from the final socialistic blow of Obamacare — will come down on the handful of Senate Republicans who hold its fate in their hands. The old plan at least let angry conservatives blame Democrats for blocking their goal of defunding Obamacare. Now the defunders can turn their rage against fellow Republicans, creating a fratricidal, revolution-eats-its-own bloodletting. 

But what if it succeeds? Well, success means the government shuts down because the Senate Republican majority has successfully filibustered a vote on the House bill preventing a shutdown.

Debt Default by the Hyperpower

I don't see it but Bernstein and Krugman both say it's a possibilty.

If Boehner defaults on the debt, he'll destroy the Republican party. If he doesn't he'll probably be replaced but c'est la vie.

market values from relationships to transactions and societal rot

On Panitch & Gindin and American decline by Doug Henwood

And now onto the psychological realm. I’ve been thinking lately about what we might call the neoliberal self. Gone seems to be the classically bourgeois executive ego, a relatively stable, if sometimes anal-retentive structure to guide the subject through life. In its place is a much more fragmented thing, adaptable to a world of unstable employment and volatile financial markets—but unable to think seriously about long-term things like social cohesion or, god save us, climate change. 

The material basis of this transformation looks to be the replacement of the relationship by the transaction, to steal the language of corporate governance. Workers are told to run their lives like little entrepreneurs, moving from one ill-paying short-term job to another, or maybe holding two or three at a time. And at the top of the society, we see the erosion of the planning function, and any rationality beyond the most crudely instrumental. It’s been a long time since I read Polanyi, but this seems to me a perspective on the social rot produced by market-regulated societies, from the macro level of investment down to the socially shaped psychology of how we think and feel. I don’t see how the imperium can long survive this sort of pervasive rot.

Evans rule

Chicago Fed President’s ‘Evans Rule’ Completes Its Odyssey, As the Fed Gets Dovish by Whet Moser

Good picture and caption.

too few jobs = more bad jobs

Few Jobs Means Bad Jobs by Dean Baker

taper paradox

Taper Paradox by Andy Harless


What the blogosphere does best by Scott Sumner

Sumner is feeling good

trillion here and a trillion there . . by Scott Sumner

...PPS. A few days ago Andy Harless left a comment pointing out that when interest rates are falling, higher stock prices don’t necessarily imply higher NGDP expectations. BC left a comment with data suggesting that NGDP growth expectations have probably risen as a result of recent events:

I do have some inflation swaps data. Inflation swaps are usually a little higher than TIPS breakevens due to some differences in financing rates between TIPS and nominal treasuries in the repo market.

The most pronounced change in inflation swap rates was in 1-2 yr forward inflation (expected inflation between Sep 2014 and Sep 2015). It rose from 1.80% to 1.95% between Friday 9/13 and Monday 9/16, coincident with the Summers withdrawal. As of Wednesday, it had risen to 2.18% in response to the Fed surprise non-tapering. So, overall in increase of 0.38% between Friday and Wednesday. Over that period, 0-1 yr inflation has not changed much (increased from 1.59% to 1.63%), nor has 2-5 yr inflation (decreased from 2.54% to 2.49%). 5-10 yr inflation has increased from 2.70% to 2.93%.

And RGDP expectations? That’s why we need a . . . that’s right, an NGDP FUTURES MARKET!!!

 From yesterday's news about the Fed's non taper.

Instant reaction: All hail Ben Bernanke! by Scott Sumner

The Bridge

AV Club review of "Take the Ride, Pay the Toll' from The Bridge

on net positive meeting - inflation floor of 2.5 percent?

Septaper surprise by Ryan Avent

mechanisms, NK and Fed Fail

Whiskey-Tango-Foxtrot-Bang-Query-Bang-Query Thursday Weblogging: Simon Wren-Lewis and Chris Dillow on Robert Lucas's and John Cochrane's Mistakes and Ideology in Macroeconomics by DeLong

And Simon Wren-Lewis today on those who cling to their gods and guns RBC models and claims of the impotence of fiscal policy at the ZLB:

ZLB Models?: There was a little interchange between Noah Smith and Paul Krugman… on… Japan’s stagnation, and… the Great Recession…. In NK models recessions last for as long as it takes for prices to fully adjust. So how can NK models explain a lost decade or more?… Often the implication is that this is implausible, so the explanation must be supply side. The answer… is the Zero Lower Bound (ZLB). Noah replied…. I was unhappy about how his discussion was framed… [a] framing is common to a lot of macroeconomists…. 

It is often said that NK models just add price stickiness to RBC models, and if prices are sticky in the short run, aggregate demand matters in the short run…. I like to express it differently…. The mechanism by which we can or cannot ignore aggregate demand… is monetary policy…. [In] NK models… price adjustment induces a monetary policy response… that ensures demand shortfalls are not persistent. Break the monetary policy response, because you hit the ZLB, and you break the correction mechanism…. The ZLB therefore allows NK models to generate much more persistent recessions, if the recessionary shock is itself large and persistent…. 

The implications of the ZLB for RBC models are just as profound…. If the correction mechanism is broken because of the ZLB, then the foundation on which the model is built becomes problematic…. You cannot assume that the real interest rate will always be at the natural level if there is no way that real interest rate can be achieved…. 

Of course you can ignore this… try to use RBC models…. But there are two huge problems with this. First, it ignores a big piece of evidence--these economies are at the ZLB!… [Second] the model is not microfounded. Thinking about mechanisms rather than models helps you see that….

"gods and guns + RBC models and claims of the impotence of fiscal policy at the ZLB:" = the American rightwing.

interest rates and taper talk

When Bernanke broached the subject of tapering in June, the market took it as a tightening signal and interest rates on 10 year Treasuries went up as bonds were sold and money moved into stocks. Money also moved out of emerging market economies back to the mothership. When the Fed did not perform the expected tapering yesterday, interest rates went down but not back to where they were in June. The stock market went up again.

Interest rates and the face/vase problem by Scott Sumner

No Taper

FOMC Statement: No Taper by Bill McBride

He called it.

Edit: Bernstein did as well.

The Demand for Risk-Free Assets

What Are the Risks of Quantitative Easing, Really? by DeLong

Not fully versed in this fascinating subject. Mortgage-backed securities (MBS) filled this need during the "global savings glut." But S&P and Moodys were shown to be frauds.

My guess is that 4 percent inflation would help the situation but that's a no-go because Bernanke is afraid that the Fed my lose its street cred and we'd quickly turn into Weimar/Zimbabwe.

Creditors don't like seeing their contracts devalued.

What were "maestro" Greenspan's arguments in favor of the Bush tax cuts? What were the dangers of a budget balanced by his dot-com bubble? That it would morph into a housing bubble which would eventually pop with disastrous consequences? No I don't think that was it.
 

government shutdown!

Party like it's 1995!

Wikipedia:

United States federal government shutdown of 1995 and 1996

Clinton's approval rating fell significantly during the shutdown. According to media commentators, this indicated that the general public blamed the President for the government shutdown. However, once it had ended his approval ratings rose to their highest since his election.
...

The shutdown also influenced the 1996 Presidential election. Bob Dole, the Senate Majority Leader, was running for President in 1996. Because of his need to campaign, Dole wanted to solve the budget crisis in January 1996 despite the willingness of other Republicans to continue the shutdown unless their demands were met. In particular, as Gingrich and Dole had been seen as potential rivals for the 1996 Presidential nomination, they had a tense working relationship. The shutdown has also been cited as having a role in Clinton's successful re-election in 1996.

According to Gingrich, positive impacts of the government shutdown included the balanced-budget deal in 1997 and the first four consecutive balanced budgets since the 1920s. In addition, Gingrich stated that the first re-election of a Republican majority since 1928 was due in part to the Republican Party's hard line on the budget. The Republican Party had a net loss of eight seats in the House in the 1996 elections but retained a 228-207 seat majority. In the Senate, Republicans gained two seats.

--------------------------------

I Wish I Could Curse in Fluent Kangaroo by Mistermix

Love that “if” in the second paragraph–have two letters ever done heavier lifting? Anyway, back here on planet Earth, once this thing arrives stillborn on the floor of the Senate, we know that there are between 49-87 Republicans who will join in with Democrats and vote on something sane. The question is whether this vote will happen before or after a government shutdown. The Noam Scheiber piece that DougJ mentioned yesterday says that this vote will occur after a shutdown and he’s probably right.

Scheiber:

Boehner clearly prefers to avoid a government shutdown. He’s spent months figuring out how to do that, fully aware of the political debacle it would entail. Unfortunately, it’s now clear that the only way he can induce the political isolation he typically relies on to prod his caucus into semi-rational action is by shutting down the government and inviting the public backlash he’s been so desperate to avoid. Boehner simply has no other way of talking sense into his people, no other hope of making the House GOP governable. And so, in the end, a shutdown is in Boehner’s interest, too. 

A shutdown perhaps. A debt-ceiling default, not-so-much.

(via DeLong)

priorities

NYT Says Ignore Those 9 Million Missing Jobs, the Budget Is Projected to Be Out of Balance in Ten Years by Dean Baker

Fed meeting

Ten Questions About Today's Federal Reserve Meeting by Ygelsias 

6. So what's Woodford's argument? Part one for Woodford is that giving the economy a monetary boost is all about expectations, not about bond-buying. He thinks you boost the economy by telling people to expect faster nominal growth in the future—saying the Fed will give us faster real growth or faster inflation, but will absolutely refuse to countenance a slow-growth low-inflation combination. In that framework, QE is unnecessary.

7. But even if it's unnecessary, is it doing any harm? Yes, Woodford's view is that taking the bonds off the market is dangerous. Government debt plays a crucial role as a "safe asset" in the broader financial and economic situation. Public policy ought to ensure that this government debt is around in ample supply.

8. Doesn't that also imply that the budget deficit should be higher? Woodford hasn't said this, but it does appear to follow from his logic. For that matter, the Fed's own statement that it will tolerate inflation in the 2-2.5 percent range as long as unemployment stays high also argues for a higher deficit. It's a clear signal from the Fed that if fiscal stimulus gave the economy a boost, monetary policy wouldn't calm it down again. Either way you look at it, the government should be collecting less in taxes and doing more opportunistic investment. But the Fed can't make that stuff happen.

Oldie But Goodie

Lovecraftian School Board Member Wants Madness Added To Curriculum

ARKHAM, MA—Arguing that students should return to the fundamentals taught in the Pnakotic Manuscripts and the Necronomicon in order to develop the skills they need to be driven to the very edge of sanity, Arkham school board member Charles West continued to advance his pro-madness agenda at the district's monthly meeting Tuesday.

"Fools!" said West, his clenched fist striking the lectern before him. "We must prepare today's youth for a world whose terrors are etched upon ancient clay tablets recounting the fever-dreams of the other gods—not fill their heads with such trivia as math and English. Our graduates need to know about those who lie beneath the earth, waiting until the stars align so they can return to their rightful place as our masters and wage war against the Elder Things and the shoggoths!"

The controversial school board member reportedly interrupted a heated discussion about adding fresh fruit to school lunches in order to bring his motion to the table. With the aid of a flip chart, West laid out his six-point plan for increased madness, which included field trips to the medieval metaphysics department at Miskatonic University, instruction in the incantations of Yog-Sothoth, and a walkathon sponsored by local businesses to raise money for the freshman basketball program.


"Our schools are orderly, sanitary places where students dwell in blissful ignorance of the chaos that awaits," West said. "Should our facilities be repaired? No, they must be razed to the ground and rebuilt in the image of the Cyclopean dwellings of the Elder Gods, the very geometry of which will drive them to be possessed by visions of the realms beyond."

West has served on the school board since 1997, when he defeated 89-year-old incumbent Doris Pesce by promising to enforce dress codes and refer repeat disciplinary cases to the three-lobed burning eye. He has run unopposed ever since.
 
"Charles sure likes to bang on that madness drum," fellow school board member Danielle Kolker said. "I'm not totally sold on his plan to let gibbering, half-formed creatures dripping with ichor feed off the flesh and fear of our students. But he is always on time to help set up for our spaghetti suppers, and his bake sale goods are among the most popular."
 
"I must admit, he's very convincing," Kolker added.
 
West's previous failed proposals include requiring the high school band to perform the tuneless flute songs of the blind idiot god Azathoth and offering art students instruction in the carving of morbid and obscene fetishes from otherworldly media.
 
Several parents attending the meeting were not impressed by West's outburst.
 
"Last month, he wanted us to change the high school's motto from 'Many Kinds of Excellence' to 'Ph'nglui mglw'nafh Cthulhu R'lyeh wgah'nagl fhtagn,'" PTA member Cathy Perry said. "I asked if it was Latin, and he said that it was the eldritch tongue of Shub- Niggurath, the Black Goat of the Woods with a Thousand Young. I don't know from eldritch tongues, but I'm not sure that's such a good idea."
 
"We already changed the name of the school from Abraham Lincoln High to Nyarlathotep Academy," Perry added. "What more does he want?"
 
Immediately before the vote on his motion, which was defeated eight to one, West gave his final remarks, arguing that the children are our future and that it's the school board's obligation to make sure they are fully versed in the unspeakable horrors still to come.
 
"In the information age, it is easier than ever to gather knowledge about things that should not be but nonetheless are, and such wisdom could prepare our students to be better citizens amid the ruins of sunken cities infested with swarms of ravenous, bloated rats," West said. "Also, I believe that birth control should not be distributed by the guidance counselor."
 
All of West's remaining proposals were tabled so the board could debate repairing the hole in the locker-room wall, as five students have disappeared in the adjacent skull-filled catacombs since the opening was discovered last week.

Republicans and Obamacare

The Plot to Kill Obamacare: Why it continues to drive many Republicans to madness by Jonathan Chait

The Republican party has voted unanimously against establishing the Affordable Care Act in the Senate and then in the House of Representatives, then voted some 40 times to repeal or cripple it; it has mounted a nearly successful campaign to nullify it through the courts and a failed presidential campaign that promised to repeal it; and it has used its control of state governments to block the law’s implementation across vast swaths of the country, at enormous economic cost to those states. Yet somehow, in the wake of all this, the party is consumed with the question Have we done enough to stop Obamacare?

This peculiar subject of introspection, as if Joe Francis were lying awake at night cursing himself for his prudery, reflects the deepening mix of terror and rage with which conservatives await the enrollment of millions of uninsured Americans beginning in October. On the substantive merits of the law, only the subtlest variations can be detected in the GOP’s evaluation. Mitch McConnell calls it the “single worst piece of legislation passed in the last 50 years in the country.” Representative John Fleming of Louisiana calls it “the most dangerous piece of legislation ever passed by a Congress” and “the most existential threat to our economy … since the Great Depression.” Virginia gubernatorial candidate Ken Cuccinelli harks back to the Fugitive Slave Acts for a comparative affront to liberty.

Sleepy Hollow: Could Flop

AV Club reviews the Pilot for Sleepy Hollow

Still, there are some critical flaws baked in from the start, the most obvious being a loopy mythology that tries to cram about five seasons of Supernatural into forty minutes. To sum up: Ichabod Crane (Tom Mison), a college professor turned soldier turned spy was tasked by General George Washington with killing a very nasty man who just might be the first of the Four Horsemen of the Apocalypse.

Crane is the pointed-headed liberal who tells his soon-to-be partner that he was in favor of the abolition of slavery. He also switched sides against his homeland in favor of the American revolutionaries, so he could be considered an international humanitarian. His partner is a black female police officer who was on the way to the F.B.I. but decides to remain in Sleepy Hollow. They agree to team up to try to prevent the end of the world.

I recently saw two apocalyptic films; This Is the End and The World's End. Both were entertaining.

Another review by the AV Club.

Summers bows out

How Larry Summers Paid for Obama’s Sins by Jonathan Chait

Democrats on the Senate Banking Committee came out against Summers. Merkley of Oregon and Brown of Ohio are liberals I guess. Tester of Montana represents rural interests and community banks. I'd guess Elizabeth Warren would have voted no also. New York Times reports North Dakota Senator Heidi Heitkamp was also wavering. Obama, Geithner, Bernanke and Summers allowed the community banks to face the harsh free market while the big banks benefitted from the socialism of the rich. Their reps didn't appreciate it.

Summers didn't apologize for his Kaleckian views of growth through deregulation. Or rather he didn't admit to his mistakes or his "group's" mistakes.

Brown organized a letter of 20 Senators supporting Yellen after it became apparent that she wasn't the frontrunner and Obama wanted Summers. Kudos to Durbin for signing that letter in July.

Kohn was a Greenspan man and Bush appointee. It would be disappointing for Obama to go with him.

It was disappointing how the Summers partisans with the exception of DeLong attacked Yellen anonymously in the press.

repo market & "shadow banking system"

After a Financial Flood, Pipes Are Still Broken by Gretchen Mortgenson

AV Club reviews "Ozymandias" from Breaking Bad

Pynchon and Lethem; wage inflation and the Death of God

Pynchonopolis, review of ‘Bleeding Edge,’ by Thomas Pynchon reviewed by Jonathan Lethem

A Calamity Tailor-Made for Internet Conspiracy Theories by Michiko Kakutani

Turn Left, and Head for Queens: ‘Dissident Gardens,’ Jonathan Lethem’s New Novel reviewed by Janet Maslin

Red Queens: Jonathan Lethem’s ‘Dissident Gardens’ reviewed by Yiyun Li

A little pop philosophy of history. Along with the theories of evolution and science and relativity theory, etc. came Modernism and the "Death of God." The wasteland of T.S. Eliot. Nietzsche etc. and the losing of religion.

For the ideological left, the disillusionment with the Soviet Union in 1956 and much earlier for other leftists, was like the loss of God. Today it is politics without a viable socialist movement. Could the turn away from Bloomberg in New York City and the turn towards de Blasio mean something? Could the back-to-back elections of Obama mean something related to demographics and the conservative movement collapsing in upon itself in an enclosed ideological bubble? Could the election of Elizabeth Warren (who replaced Scott Brown); the flash of Occupy Wall Street and Jerry Brown's success in California auger something more hopeful than a political wasteland devoid of a strong, viable socialist movement? Could the legalization of gay marriage and the sidelining of the Right's useful religious idiots?

The political economy's record is not good. It could be that Steve Randy Waldman is correct and that the 1970s inflation was the least-bad option for Arthur Burns and the Fed. Lower inflation would have meant much higher unemployment and social unrest for the uppity 1970s.

But what happened next? The 1970s could be the last bout of "excessive" wage inflation tolerated by the Fed. What followed was Volcker slamming on the breaks; global competition with Japan and Germany with their export economies coming online (and now the Chinese); Reagan breaking organized labor and PATCO; the metastasization of the financial industry and global capital flows; the end of the Cold War and "there is no alternative (TINA)".

We will not see excessive wage inflation again. Instead the Fed will pop financial sector bubbles ahead of time (early 90s, early 2000s, 2007-) and the result will be balance sheet recessions.

The final result? Growing inequality.

Shadow banking system

Time’s Foroohar Responds to Treasury: Our Financial System Is Not Stronger

Treasury's Anthony Cole blogged:

Point Four: Shadow Banking

The risk in the so-called “shadow banking system” – the financial firms that operated outside of the protections and constraints we impose on banks – has fallen substantially since the crisis.

Assets in the “shadow banking system” are roughly half the level seen in 2007. Funding through tri-party repurchase agreements has fallen 40 percent from its peak in 2007, and asset-backed commercial paper outstanding – which was often used to fund leveraged off-balance sheet vehicles – is a third of what it was in 2007.

​We now have the authority to subject, through designation by the Council, major financial companies operating in the United States to consolidated supervision and adherence to heightened prudential standards, such as enhanced capital, liquidity, and risk management requirements. That represents a dramatic change from before the crisis, when there was no authority for such regulation of such institutions, which comprised more than half of the financial activity in the nation.

Since the housing bubble popped, business people are now gun-shy. But the assets levels in the shadow banking system will rise again as the crisis fades from view and people become complacent yet again. They'll need to be risky in order to compete. There needs to be an FDIC system for the shadow banking system as there is for the regular banking system. But that will make it less profitable. Instead it depends on the regulators.

As Konczal reports, Jack Lew is not regulating very well. And he's a Democrat.

AIG failed because its derivatives position became impossible for it to manage. The Commodity Futures Trading Commission (CFTC) has made major progress in bringing the light of transparency to the over-the-counter derivatives market, making sure collateral and price transparency clean up the market.

They have hit resistance, though. As the economist Alan Blinder wrote earlier this week, the CFTC’s Gary Gensler “ran into a wall of resistance from the industry, from European regulators, and from some of his American colleagues when he tried to implement even the weak Dodd-Frank provisions for derivatives.”

It’s important to name the actual agents involved. Instead of a nebulous and nefarious blob of interests called “the industry,” there’s an actual human being putting pressure on Gensler to stop these cross-border regulations that tie U.S. firms in Europe to U.S. regulations. And, as Silla Brush & Robert Schmidt reported in a great Bloomberg piece, his name is Jack Lew, and he’s the Treasury secretary of the United States. 

It's possible Larry Summers will be a good regulator as Fed Chair. It could happen. But my bet would be that he'll turn out to be like Jack Lew here. More of the same.