All Your Base Are Belong To Us: What Is the Question? by Krugman

My questions involve whether interest on excess reserves changes any of the fundamentals of monetary policy and its relationship to the budget. That is, does IOER change the fact that the Federal Reserve has great power over aggregate demand except when market interest rates are near zero, and the related fact that when we’re not in a liquidity trap there is an important distinction between debt-financed and money-financed deficits?

Reading Izabella Kaminska with Krugman's focus in mind:

For the record, FT Alphaville has long argued that IOER’s role as a sterilisation tool is under appreciated. (This, by the way, is why we believe it’s naive to argue that ECB liquidity operations are somehow less inflationary than Fed operations. Both are in reality sterilized.) 

It’s the icing that entices banks to hold excess liquidity rather than chasing secured loans or safe assets. This is needed to compress rates during a crisis — that is, to bolster secured (collateralised) rates so that they don’t plunge below zero and therefore distance themselves from positive, near-zero unsecured rates. 

This is important because banks that are frozen out of the unsecured market depend almost entirely on private collateralised markets for funding. 

If a bank can’t borrow unsecured for less than 5 per cent even when official rates are at zero, it has three options: 1) seek emergency funds (with the associated stigma) at a punitive rate from the Fed, 2) pawn its liquid collateral at the going repo rate, or 3) in the event it doesn’t have good enough collateral, either borrow the correct collateral from the Fed or (as happened in 2008) exchange poor quality collateral for better collateral via an emergency programme.
But the problem that really struck markets in 2008 wasn’t one of insufficient liquidity. Rather, it was the problem of collateral market bifurcation. 

Banks which previously had adequate amounts of collateral for use in repo markets suddenly found their collateral unusable. This led to genuine liquidity shortfalls in some quarters, which propagated fear in the unsecured funding markets, which subsequently froze the entire market.
Banks with plenty of liquidity, on the other hand — scared of lending to potentially insolvent banks — turned entirely to secured markets instead. But here they were presented with a different problem. There were suddenly not enough safe assets to lend against, at least not at rates comparable to or better than the Fed Funds rate. 

As healthy banks began to crowd each other out for any chance to lend against a diminished pool of safe assets, and/or just opted to keep excess reserves at the Fed for zero, repo rates understandably began to tank well below target. 

The following chart from the New York Fed illustrates the story well:

[graph] 

In short, the problem wasn’t insufficient liquidity, per se. It was too much liquidity in some quarters and not enough in others. 

The challenge for the Fed was how to equalise the distribution of liquidity in the system, without putting further pressure on an already stressed-out repo market, on the verge of taking the “risk-free” funding rate negative. 

Offering interest on excess reserves was seen as an effective solution. Not only would IOER ensure that all banks holding excess liquidity could now benefit from a stable and positive rate — thus suspending the panicky capital destruction process — it would allow the Fed to continue adding liquidity until all shortfalls were covered, and more importantly all fear of potential shortfalls was removed from the market. 

In short, IOER was the key factor that compressed the spread between the risk-free and risky rate. But not because the risky rate was being suppressed. Rather, because the risk-free rate was being propped up with the IOER floor. 

Going back to Waldman’s argument, it’s at this point that “base money” became fully substitutable with short-term US debt. But, we would add, interest-bearing reserves even became preferable in some cases. 

Nevertheless, the entire debate really relates to liquidity preferences. 

The way we would put it is that IOER skewed the usual preferences in play. It’s the key reason why the proportion of reserves to currency in “base money” suddenly skyrocketed. The situation would undoubtedly reverse quickly if IOER was ever to drop to zero (or negative territory), since an opportunity cost would immediately be associated with holding reserves over zero-yielding currency. 

In fact, we would go one step further and argue that IOER was the key factor that stopped private rates turning negative, and in so doing suspended a process that could otherwise have led to a money market fund breaking the buck or even stacks of physical banknotes being hoarded and vaulted all over the United States. 

In this way, we agree with Waldman that the moment IOER created a preference for excess reserves over short-term debt assets or cash, was the moment excess reserves became a new type of safe asset security in their own right. 

Excess reserves became the equivalent of state debt. But, very importantly, a state debt taken with the intention of never being spent, but rather for the purpose of creating safe assets instead.

 On the exit strategy:

But there are other problems associated with unwinding such a huge position on the market, too. Especially if you view this as tantamount to either “spending” the money borrowed, or paying it off. 

Consequently Waldman’s argument is essentially: why bother if you don’t have to? Let the excess reserves, just like state debt, roll on:

Why go to the trouble of unwinding the existing surfeit of base money, which might be disruptive, when doing so solves no pressing problem? 

And since not moving quickly enough poses too great a risk, the alternative would be committing to IOER as a long-term rate-steering alternative instead. 

As Waldman sums up:

If the Fed adopts the floor system permanently, then the Fed will always “sterilize” the impact of a perpetual excess of base money by paying its target interest rate on reserves. As Krugman says, this prevents reserves from being equivalent to currency and amounts to a form of government borrowing. So, we agree: under the floor system, there is little difference between base money and short-term debt, at any targeted interest rate! Printing money and issuing debt are distinct only when there is an opportunity cost to holding base money rather than debt. If Krugman wants to define the existence of such a cost as “non-liquidity trap conditions”, fine. 

But, if that’s the definition, I expect we’ll be in liquidity trap conditions for a very long time! By Krugman’s definition, a floor system is an eternal liquidity trap. 

Krugman, for now, remains unconvinced. 

Waldman has opted for the cunning use of apple analogies in one final attempt to explain. But we think we’ll leave it here.

Krugman's point is that the Fed's sterilization amounts to a form of government borrowing. And in non-liqudity trap conditions there's is a limit on borrowing. He seems to be arguing against the MMT position while Kamiska and Waldman are predicting we'll be in a liquidity trap for a long time.

Once you turn base money into short-term debt, can you go back? by Izabella Kaminska 

Forget about the $1 trillion coin debate. 

The most exciting wonky discussion being had right now is between Steve Randy Waldman and Paul Krugman over whether “base money” and short-term debt are perfectly substitutable or not, and what that may or may not mean for central bank policy. 

We confess that we have a bit of a vested interest here because for a long time we’ve been arguing much the same point as Waldman. 

That’s not to say that Krugman is necessarily wrong; he may just be taking Waldman slightly too literally....

Comments at Waldman's latest post:

 Carter writes:

Having paid a lot of attention to speeches by Dudley, Brian Sacks, etc, I suspect that there is a “middle path” that the Fed may take once growth warrants higher rates. Consistent with a “risk management” philosophy, the Fed will not want to surprise markets by raising rates much more quickly thatn the forwards. They played that game in the 1990s, and the result was Orange County and LTCM and BT’s clients. 

One might consider that the Fed will raise the short rates “in an orderly fashion” and perhaps use interest on reserves (a tool they are now enamored of) to “tail-the-hedge”. This means they may raise IOER faster than nominal fed funds

Fedwatch writes: 

Not sure if it’s been noted yet in these comments, but the April 2011 minutes are telling 

http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20110427.pdf#page=4 

Normalization steps were discussed, and “Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate.” And work how? “Most of these participants indicated that they preferred that monetary policy eventually operate through a corridor-type system in which the federal funds rate trades in the middle of a range, with the IOER rate as the floor and the discount rate as the ceiling of the range, as opposed to a floor-type system in which a relatively high level of reserve balances keeps the federal funds rate near the IOER rate.”

Dean Baker says in effect that Yglesias, Klein and I shouldn't be worried that the Republicans will bring on a default. They voted for TARP.

The Medieval Plague and Full Employment by Jared Bernstein

Bernstein links to Annie Lowrey's piece: "The Politics of Low Growth"

Tom Friedman discusses it as well.

Maybe my baby-boomer generation really does intend to eat it all and leave our kids a ticking debt bomb. If only we had a second-term president, unencumbered by ever having to run again, who was ready to test what really bold leadership might produce.

He's wrong as usual.

Nate Silver on the composition of government spending.

Serfs Up! by Krugman, cited by a commenter that Bernstein - who usually right -  is wrong.

Japan should rethink its stimulus by Adam Posen

huh? He favored fiscal stimulus early on for Japan and favors it for the U.K.

Fed’s Rosengren Says Economy Responding to Stimulus

Boston Fed President Eric Rosengren Had A Great Answer About The 'Cost' Of All That Fed Easing

Wow Jon Stewart sort of admitted he was ignorant about economics and his show wasn't meant to be informative, in regards to Krugman's pushback on the trillion dollar coin, but he did he repeat that the coin was a stupid idea. And he said he was a fan of Krugman.

Part of the point of the coin was that it was ridiculous,* as Krugman has written. So maybe Krugman's criticism wasn't well put but I still see Stewart as in the wrong. He can't have it both ways and yet you don't him to be dogmatic and always pushing the party line. Weird episode.

Krugman will have the last laugh if neither Obama or the Republicans back down and the government defaults, then the coin won't look so fucking stupid. Maybe this is what Klein and Yglesias are worried about.**

---------------------------------
*intended to counter/comment on the debt ceiling clown show.
**Yeah the more I think about the more I've come to the conclusion that they're worried Obama will box himself into a corner over not negotiating, the Republicans won't. We'll get default and disaster which is what Klein and Yglesias are worried about, they're not concerned Obama won't negotiate a good deal. Maybe I've been blaise like Stewart.

Obama is off the chain

As Nate Silver points out, he longer has to worry about re-election.

Is Yglesias doing a walkback-climbdown over his insistence that Obama has no credibility?

Americans For Prosperity Advises Members to "Calibrate Your Message" on Debt Ceiling by Yglesias

David Leonhardt tweets:

Obama sees politics as based on interests much more than relationships. And in fairness, he passed health reform and Clinton didn't.

The Floor System

The new thing for me is the realization - reading Waldman - that we will be in a liquidity trap for a long time. Atlanta's Lockhart says QE is not "QE infinity."

Yesterday Steve Williamson blogged:

The quantity of reserves held by US financial institutions is now approaching $1.6 trillion, and the Fed has promised to increase that stock by $85 billion per month for the indefinite future. Thus, it seems safe to say that the Fed will be working within a monetary regime with a large quantity of excess reserves for a very long time.

All Your Base Are Belong To Us, Continued (Still Wonkish) by Krugman

Yet more on the floor with Paul Krugman by Steve Randy Waldman

Krugman "And I think he’s implying that there’s really no difference between 2(b) and 3." 3 is what MMTers argue something Krugman has discussed before.

Waldman "But Waldman definitely does not at all believe that 2(b) and (3) are equivalent when the interest rate is positive." So he's not a subscriber to MMT?

At Economic View, Sadowski links to "the Money Illusion":

Currency matters even with IOR by Scott Sumner

Which I can't make sense of. As I understand it, there are three schools of demand management: the Modern Monetary Theoryist (MMTers, far left), the Market Monetarists (rightwing) and the mainstream DeLong-Krugman-Thoma axis to which I subscribe.

A link history of this discussion:

Debt in a Time of Zero by Krugman 

It’s true that printing money isn’t at all inflationary under current conditions— that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public. 

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry.

Which led to Ip's blogpost which linked to the above:

Platinomics by Greg Ip

But the politics are utterly different. We have a central bank to separate fiscal from monetary policy. The Fed implements QE when it has decided that’s the best way to carry out its monetary policy objectives. Buying a coin solely to finance the deficit is monetizing the debt, precisely the sort of thing central bank independence was meant to prevent. How could any Federal Reserve chairman justify cooperating in such a scheme, in particular since the Fed would be taking the White House’s side in a fight with Congress over a matter of dubious legality? 

Yes, the Fed has sacrificed its independence for the sake of the national interest before, such as maintaining a ceiling on Treasury yields between 1942 and 1951; but that was (initially) in wartime, and it eventually led to inflation. Would avoiding the debt ceiling be important enough to compromise the Fed's independence? Perhaps not in this one case; but it would set a precedent future presidents will happily exploit and feed the perception that America’s economic institutions are in terminal decline. America has had debt ceiling crises before (in 1957, 1985, 1996 and 2011) and survived; are the unknown risks of the platinum coin option obviously preferable to the known risks of hitting the debt ceiling?

Duy linked to both Krugman and Ip:

On The Disruptiveness of the Platinum Coin by Tim Duy

Carrying the argument further, the illusion of a difference between cash and debt at the zero bound is counterproductive because it prevents the full application of fiscal policy.  Fears about the magnitude of the government debt prevent sufficient fiscal policy, but such fears are not rational if debt and cash are perfect substitutes. If cash and debt are the same, the fiscal authority should prefer to issue cash if debt concerns create a false barrier to fiscal policy.  Still, I would argue that this is best done in cooperation with the monetary authority.  Note that this is not really a new idea, as then Governor Ben Bernanke drew a similar conclusion with regards to Japan:

However, besides possibly inconsistent application of fiscal stimulus, another reason for weak fiscal effects in Japan may be the well-publicized size of the government debt...In addition to making policymakers more reluctant to use expansionary fiscal policies in the first place, Japan's large national debt may dilute the effect of fiscal policies in those instances when they are used....My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation.

And then we come to the platinum coin, which threatened to expose the illusion that cash and debt are different at the zero bound.... 

...
Ultimately, I don't believe deficit spending should be directly monetized as I believe that Paul Krugman is correct - at some point in the future, the US economy will hopefully exit the zero bound, and at that point cash and government debt will not longer be perfect substitutes. Note that Greg Ip disagreed with this point:

I disagree. The Fed does not have to sell its bonds, or the $1 trillion coin, to control inflation (though it may do so anyway). It only needs to retain control of interest rates, and that does not depend on the size of its balance sheet.

Waldman links to Duy and Ip:

There’s no such thing as base money anymore by Steve Randy Waldman

Krugman responds

All Our Base Are Belong To Us (Wonkish) by Krugman

Waldman responds

Do we ever rise from the floor? by Steve Randy Waldman

and then Krugman responds again (see above) and Waldman responds again (see above)

Update:

Tim Duy has another post:

My takeaway from Waldman is that under some institutional structures, there is little difference between platinum coins and government debt (or because we have debt we have a particular institutional structure?) In effect, the the zero-bound issue and platinum coin debate have forced us to think down paths that blur the lines between fiscal and monetary policy. The longer we are in at the zero-bound, the more we will challenge the existing status-quo. 

Alternatively, this can also be simply a misunderstanding on Krugman's part if he believes that Waldman is saying that we can use platinum coins to literally monetize deficit spending with neither budgetary nor inflationary implications. I don't think Waldman is thinking this, and if he is, then I think he would be wrong.

And  commenter RebelEconomist (from the UK) at Waldman's latest:

What a lot of fuss about nothing! Americans might save themselves much confusion if they paid more attention to practices in other countries. Well before the financial crisis and QE, the Bank of England switched to paying interest on reserves to make the demand for reserves more elastic and hence make moneymarket interest rates, through which the BoE regulated its monetary stance, less volatile. Provided that the interest rate paid on reserves is a bit less than low credit risk private sector debt, the banks will still hold reserves primarily as a settlement asset, but simply hold more reserves. On May 18 2006, the day the new regime was introduced, reserves held by British banks rose about twenty fold, a demand met by the BoE, without any disturbance to inflation, sterling exchange rates or government debt markets. I explain the reasoning in more detail in this old post of mine:  

http://reservedplace.blogspot.co.uk/2009/04/easing-understanding.html 

(especially paragraphs 20-24). I suspect that the Fed always wanted to introduce such a system themselves, but found it difficult to get past populist congressmen whining about giving money away to banks, and now they have it, they are going to hang onto it for operational reasons long after they cease paying interest on reserves for QE purposes!

Commenter Tom Hinkey at interfluidity:

I think that it is unlikely that the Fed will continue the setting floor rate by paying IOR for political reasons similar to the reason that the platinum coin was smothered in the crib. It gives the game away and threatens the illusion that government finance is like firm or household finance under the current monetary regime. This is not an operational requirement since there is no operational reason for government not to fund itself directly. The illusion that government needs to be funded from revenue or borrowing from the private sector is created by political means, that is legislation, regulation, and interpretation. There is serious speculation that the central bankers’ club nixed the platinum coin gambit for this reason, and I would not be surprised to see TPTB nix payment of IOR when it no longer suits their purposes. 

Another Updated(!) 

Once you turn base money into short-term debt, can you go back? by Izabella Kaminska

All Your Base Are Belong To Us: What Is the Question? by Krugman

Lost Decades

Do we ever rise from the floor? by Steve Randy Waldman

The Game Theory of the Post-Platinum Coin Debt Ceiling by Mike Konczal

Aaron Swartz's Lawyer: Prosecutor Stephen Heymann Wanted 'Juicy' Case For Publicity

Secrets of the crisis revealed: What to expect from transcripts of 2007 Fed meetings by Neil Irwin

Why Obama May Drive a Hard Bargain by Nate Silver (1.15.13)

A long time ago I mentioned the fact Obama doesn't need to be re-elected.

Memes of the Moment (Silly) by Krugman (1.15.13)

On the debt ceiling, the White House tries to solve its credibility problem by Ezra Klein (1.14.13)

Why Nobody Believes Obama on the Debt Ceiling by Yglesias (1.14.13)

He says "Now there is a credibility problem." Why? Because he was negotiated up/down to 400k?

Are Klein and Yglesias glaringly wrong? Were they spreading disinformation? Is that overthinking it?

Political Economy

Japan, the Platinum Coin, the ZLB and central bank independence

This is regarding my earlier post linking to Waldman and Duy.

Andy Harless comments at interfluidity:

“Printing money will always be exactly as inflationary as issuing short-term debt, because short-term government debt and reserves at the Fed will always be near-perfect substitutes” 

Depends on what you mean by “printing money.” We’ve grown up using the phrase figuratively, but the people who started doing so never anticipated that electronic bank reserves would some day bear interest. I suggest we should go back to using the phrase literally, in which case your statement is not true: printing money will be inflationary (assuming we exit the ZLB), more so than issuing short-term debt (and arguably issuing short-term debt will be inflationary only because it reduces the demand for printed money). 

Back in the days before IOR, the Fed would from time to time change reserve requirements. And if the Fed were to raise the reserve requirement and offset this change with an increase in reserves, we would probably not say that the Fed had “printed money,” even though it had done so in the “literally figurative” sense of having created reserves. But imposing a reserve requirement is essentially the same as paying IOR and then taxing it away. These days the Fed can use adjustments in the IOR rate to prevent the need to literally print money, just as it could use reserve requirements in the past (and still, if it chooses). 

I submit that what is actually relevant is the literal printing of money. (Note that platinum coinage, assuming it were to remain in circulation after the ZLB exit, would not constitute net printing of money, because it would be offset by reduced printing of Federal Reserve notes — or else, if it remained on deposit at the Fed, it would be essentially nonexistent from the private sector’s point of view) The Fed has promised to print money under certain circumstances, but it can control those circumstances (at a cost). Creating reserves is potentially inflationary inasmuch as it raises the cost of refraining from printing money and thus raises the chance that the Fed will print money, but it does not constitute printing of money. Issuance of interest-bearing debt is potentially inflationary inasmuch as it reduces the demand for printed money (by raising the opportunity cost of holding it), thus reducing the amount of money that has to be printed to create a given amount of inflation. 

What is critical here is that there is a demand for Federal Reserve notes — a product that the Fed is licensed to provide monopolistically and can therefore choose a point on the demand curve so as to set the price where it wishes. The fact that the Fed also competitively supplies the market for interest-bearing assets is of less importance. Of course the Fed’s monopoly also becomes less important when normally interest-bearing assets become close substitutes for the Fed’s monopoly product (i.e., when we are at the ZLB).

The interest on reserves seems to be the new thing. As Duy wrote quoting Ip:

I disagree. The Fed does not have to sell its bonds, or the $1 trillion coin, to control inflation (though it may do so anyway). It only needs to retain control of interest rates, and that does not depend on the size of its balance sheet.

Ip argues that interest on reserves gives the Fed the power to control interest rates, and consequently the power to control inflation, regardless of the size of the balance sheet. If you follow Ip's analysis through to its logical conclusion, then why should the Treasury issue debt at all?

Krugman chimes in:

 All Our Base Are Belong To Us (Wonkish)

Well, almost all, at least in normal times. 

Via Mark Thoma, I see that Steve Randy Waldman believes that the distinction between monetary base — the stuff only the central bank can create — and short-term debt in general has disappeared, not just for the moment, but permanently. It’s a point of view I hear fairly often, along with the view that in fact there never was a difference. But it’s a view based, I think, on a slip of the tongue. 

What do I mean by that? That people saying these things — you can see it clearly in Waldman’s post — slide much too easily into identifying monetary base with bank reserves. And since bank reserves now pay interest, well, aren’t they just debt? 

But bank reserves are just one component of the monetary base — and in normal times, a trivial component. Here (pdf) is a useful table:

 

Before the crisis, only about 5 percent of the monetary base consisted of bank reserves. The rest was basically currency. 

This meant that the simple textbook description of how an open-market operation increases the money supply — a bank lends out 1-r of its new reserves (with r the reserve ratio), which return to the banking system, leading to another round of lending, and eventually the money supply rises by 1/r times the injection — is deeply misleading. What actually limits the growth in the money supply is the fact that a substantial part of each round of lending leaks out of the banking system, getting added to hoards of green paper bearing the faces of dead presidents. 

And dead presidents, as you may have noticed, don’t pay interest. 

Now, under current conditions that doesn’t matter; dead presidents don’t pay interest, but neither do T-bills, so short term debt and currency form an aggregate (a Hicksian composite commodity, for the serious nerds out there), whose composition doesn’t matter. But interest rates won’t always be zero, and at that point the size of the monetary base — dead presidents plus a sliver of bank reserves that can be converted into dead presidents at will — will matter again. 

It’s true that the Fed could sterilize the impact of a rise in the monetary base by raising the interest rate it pays on reserves, thereby keeping that base from turning into currency. But that’s just another form of borrowing; it doesn’t change the result that under non-liquidity trap conditions, printing money and issuing debt are not, in fact, the same thing.

The last paragraph is where he disagrees with Ip and Waldman and possibly Duy. I take it Krugman is saying that in non-liquidity trap conditions, printing money would be inflationary while issuing debt would not be. I take it that it's another way of saying deficit spending in a liquidity trap isn't inflationary while, deficit spending in non-liquidity trap conditions even if sterilized would still be borrowing and increasing the debt even if it doesn't add to the monetary base and inflation. I think.

Internet Activist, a Creator of RSS, Is Dead at 26, Apparently a Suicide

Different obit in the print edition I picked up. It ended with his last blog post, a review of "The Dark Knight Rises" where he discusses how Bruce Wayne faked his suicide. Was the writer hinting that perhaps Swartz is alive in another country?

"Thus Master Wayne is left without solutions. Out of options, it's no wonder the series ends with his staged suicide."

There’s no such thing as base money anymore by Steve Randy Waldman

Fed Watch: A Trap of My Own Making by Tim Duy

Remembering Aaron Swartz by Rick Perlstein

I remember always thinking that he always seemed too sensitive for this world we happen to live in, and I remember him working so mightily, so heroically, to try to bend the world into a place more hospitable to people like him, which also means hospitable to people like us. I like what the blogger Lambert Strether wrote on my Facebook page (in Aaron’s memory, friend me!): “Our society should be selecting for the Aaron Swartz’s of this world. Instead, generous and ethical behavior, especially when combined with technical brilliance, turns out to be maladaptive, indeed lethal. If Swartz had been Wall Street’s youngest investment banker, he would be alive today.” 

Aaron Swartz: A Tragic Early Death by Dean Baker

It is difficult not to be outraged by this part of the story. Here is an administration that could find nothing to prosecute at the Wall Street banks who enriched themselves by passing on hundreds of billions of dollars of fraudulent mortgages in mortgage backed securities and complex derivative instruments, but found the time and resources to prosecute a young man who wanted to make academic research freely available to the world.

It would be an appropriate tribute to Aaron if his death prompted a re-examination of copyright and patent laws. These laws are clearly acting as an impediment to innovation and progress. If economists had the allegiance to efficiency that they claim, and not just serving the rich and powerful, the profession would be devoting its energies to finding more modern mechanisms for promoting creative work and innovation.

On the Geithner Legacy by Mike Konczal

How Tim Geithner Saved the Banks—with Ben Bernanke's Help by Matt O'Brien

Sometimes I wonder if Dean Baker/Atrios/Matt Taibbi are right and we should have let the whole thing crash and burn thereby ridding us of the parasitic financial sector. I do believe that Obama should have flipped/nationalized Citigroup as he did with the auto makers.

I also believe that we won't get bailouts the next time around, so we'll see how it plays out.

Wall Street thanks you for your service, Tim Geithner by Dean Baker

Treasury Secretary Timothy Geithner's departure from the Obama administration invites comparisons with Klemens von Metternich. Metternich was the foreign minister of the Austrian empire who engineered the restoration of the old order and the suppression of democracy across Europe after the defeat of Napoleon. 

This was an impressive diplomatic feat – given the widespread popular contempt for Europe's monarchical regimes. In the same vein, protecting Wall Street from the financial and economic havoc they brought upon themselves and the country was an enormous accomplishment.
During his tenure as head of the New York Fed and then as treasury secretary, most, if not all, of the major Wall Street banks would have collapsed if the government had not intervened to save them. This process began with the collapse of Bear Stearns, which was bought up by JP Morgan in a deal involving huge subsidies from the Fed. 

The collapse of Lehman Brothers, a second major investment bank, started a run on the three remaining investment banks that would have led to the collapse of Merrill Lynch, Morgan Stanley, and Goldman Sachsif the Fed, FDIC, and treasury had not taken extraordinary measures to save them. Citigroup and Bank of America both needed emergency facilities established by the Fed and treasury explicitly for their support, in addition to all the below market-rate loans they received from the government at the time. Without this massive government support, there can be no doubt that both of them would currently be operating under the supervision of a bankruptcy judge. 

Of the six banks that dominate the US banking system, only Wells Fargo and JP Morgan could conceivably have survived without hoards of cash rained down on them by the federal government. Even these two are questionmarks, since both helped themselves to trillions of dollars of below market-rate loans, in addition to indirectly benefiting from the bailout of the other banks that protected many of their assets. 

Had it not been for Geithner and his sidekicks, therefore, we would have been permanently rid of an incredibly bloated financial sector that haunts the economy like a horrible albatross. 

Along with the salvation of the Wall Street banks, Geithner also managed to restore their agenda of deficit reduction. Even though the economy is still down more than 9 million jobs from its full employment level, none of the important people in Washington is talking about measures that would hasten job creation. 

Instead, the focus is exclusively on deficit reduction, a process that is already slowing growth and putting even more people out of work. While lives are being ruined today by the weak economy, Geithner helped create a policy agenda where the focus of debate is the budget projections for 2022.

technological change

Phrenology

Maybe "Django Unchained" will win at the Golden Globes* tonight?

Wage Inequality: Opening Salvo by Dean Baker

Dylan Matthews gets the award for the first news item on the new paper on wage inequality (still in draft form) from my former boss Larry Mishel, colleague John Schmitt, and friend Heidi Shierholz. Mishel, Schmitt, and Shierholz (MSS) take issue with the job polarization explanation of wage inequality, put forward most prominently by M.I.T. professor David Autor. Autor's claim is that the pattern of inequality we have seen over the last three decades can be explained in large part by a loss of middle class jobs, with gains in employment for occupations at both the top and bottom end of the wage distribution.

...

The other point is one of motives. Matthews quotes Autor: 

"Larry and people in that group hate technical change as an explanation of anything. My opinion about why they hate it that much is that it’s not amenable to policy, ...All these other things you can say, Congress can change this or that. You can’t say Congress could reshape the trajectory of technological change." 

While Mishel has made it fairly clear that he considers the technical change argument to be an excuse for not addressing the real causes of inequality, it is possible to turn the question of motives around. The view that inequality is simply the result of technical change and there isn't much we can do about it has plenty of rich and powerful adherents.

--------------------------------------
*hosted by favorites Tina Fey and Amy Poheler.

Fed Watch: On The Disruptiveness of the Platinum Coin by Tim Duy

Jon Stewart Flunks Econ by Jonathan Chait

National Income Accounting for the Washington Post and Robert Samuelson by Dean Baker

Aaron Swartz, Precocious Programmer and Internet Activist, Dies at 26

In 2007, Mr. Swartz wrote about his struggle with depression, distinguishing it from the emotion of sadness. “Go outside and get some fresh air or cuddle with a loved one and you don’t feel any better, only more upset at being unable to feel the joy that everyone else seems to feel. Everything gets colored by the sadness.” When the condition gets worse, he wrote, “you feel as if streaks of pain are running through your head, you thrash your body, you search for some escape but find none. And this is one of the more moderate forms.” Earlier that year, he gave a talk in which he described having had suicidal thoughts during a low period in his career.... 

Lawrence Lessig, who heads the Safra Center at Harvard and had worked for a time on behalf of Mr. Swartz’s legal defense, noted in an interview that Mr. Swartz had been arrested by the M.I.T. campus police two years to the day before his suicide. That arrest led to the eventual federal indictment and financial ruin for Mr. Swartz, who had made money on the sale of Reddit to Condé Nast but had never tried to turn his intellect to making money. “I can just imagine him thinking it was going to be a million-dollar defense,” Mr. Lessig said. “He didn’t have a million dollars.”

Tributes to a Digital Pioneer Follow Reports of His Death

Another friend, the legal scholar and copyright activist Lawrence Lessig, wrote an angry post, describing the federal government’s decision to indict Mr. Swartz in 2011 — when he was charged with downloading 4.8 million articles and other documents from JSTOR, a nonprofit online service for distributing scholarly articles, and plotting to make them available online for free — as a kind of “bullying.”

Here is where we need a better sense of justice, and shame. For the outrageousness in this story is not just Aaron. It is also the absurdity of the prosecutor’s behavior. From the beginning, the government worked as hard as it could to characterize what Aaron did in the most extreme and absurd way. The “property” Aaron had “stolen,” we were told, was worth “millions of dollars” — with the hint, and then the suggestion, that his aim must have been to profit from his crime. But anyone who says that there is money to be made in a stash of ACADEMIC ARTICLES is either an idiot or a liar. It was clear what this was not, yet our government continued to push as if it had caught the 9/11 terrorists red-handed.

Aaron had literally done nothing in his life “to make money.” He was fortunate Reddit turned out as it did, but from his work building the RSS standard, to his work architecting Creative Commons, to his work liberating public records, to his work building a free public library, to his work supporting Change Congress/FixCongressFirst/Rootstrikers, and then Demand Progress, Aaron was always and only working for (at least his conception of) the public good. He was brilliant, and funny. A kid genius. A soul, a conscience, the source of a question I have asked myself a million times: What would Aaron think? That person is gone today, driven to the edge by what a decent society would only call bullying.

Tributes also appeared on Twitter, where Mr. Swartz had recently posted a note [his last] drawing attention to the campaign for the Treasury to mint a $1 trillion platinum coin to avoid a showdown over the debt ceiling.

"Philip Diehl, the most respected U.S. Mint director America's ever had, joins the campaign to #mintthecoin: buff.ly/Zp58iM" 8 Jan. 13

Mint the coin. For Aaron. Regarding the bullying of prosecutors, I always thought the anti-bullying campaign targeting school kids was worthwhile but kind of weird. American culture is all about the bullying. It's how you get ahead. Where do these bully kids learn it but from their older siblings and parents?

Public choice = Marxism by John Quiggin

Can an exploitation movie be a great movie? with Tasha Robinson and Scott Tobias

Henry Farrell on Aaron Swartz.

His guest posts at Crooked Timber.

I sort of agree with the generous broad view he takes in the post on Toward a Larger Left.

Corey Doctorow via DeLong

JSTOR

JSTOR (pronounced jay-stor;[3] short for Journal Storage) is a digital library founded in 1995. Originally containing digitized back issues of academic journals, it now also includes books and primary sources, and current issues of journals.[4] It provides full-text searches of more than a thousand journals, dating back to 1665 in the case of the Philosophical Transactions of the Royal Society. More than 7,000 institutions in more than 150 countries have access to JSTOR. Most access is by subscription, but some old public domain content is freely available to anyone, and in 2012 JSTOR launched a program of free access to some further articles for individual scholars and researchers who register.

On July 19, 2011, internet activist Aaron Swartz was charged with data theft in relation to bulk-downloading academic journal articles from JSTOR.[9] According to the indictment against him, Swartz surreptitiously attached a laptop to MIT's computer network, which allowed him to "rapidly download an extraordinary volume of articles from JSTOR".[10] Prosecutors in the case say Swartz acted with the intention of making the papers available on P2P file-sharing sites.[11] Swartz surrendered to authorities, pleaded not guilty to all counts and was released on $100,000 bail. Prosecution of the case is ongoing.[12] Two days later, on July 21, Greg Maxwell published a torrent file of a 32-GB archive of 18,592 academic papers from JSTOR's Royal Society collection, via The Pirate Bay, in protest against Swartz' prosecution.[13][14] 

From September 6, 2011, JSTOR has made some public domain content freely available to anyone.[15] JSTOR stated that they had been working on making it free for some time, and the Swartz controversy made them "press ahead" with the initiative.[16]

Swartz committed suicide yesterday at the age of 26.

Swartz's father worked in the computer industry, and from a young age Aaron was interested in computing, frequently studying computers, the Internet and Internet culture.[3] At the age of 14 Swartz co-authored RSS 1.0 Specification. He later attended Stanford University, however he left after one year of studying, stating 'I didn't find it a very intellectual atmosphere, since most of the other kids seemed profoundly unconcerned with their studies'.[3]. Instead he founded the software company Infogami, a startup that was funded by Y Combinator's first Summer Founders Program.[4] 

Through the Y Combinator program, Swartz found himself working on the Reddit website. Initially finding it difficult to make money from the project, the site later gained in popularity, with millions of users visiting it each month. In late 2006, after months of negotiations, Reddit was sold to CondéNet, owners of Wired magazine.[3] Swartz moved with his company to San Francisco to work on Wired, but grew unhappy with the set-up[3] and in January, 2007, he was asked to resign from his position.[5] Swartz described himself as being ill and suffering from a constant depressed mood throughout 2007.[6] In September, 2007, Swartz joined with Simon Carstensen and launched Jottit. In 2010-2011 he was a fellow at Harvard University's Edmond J. Safra Center for Ethics.[7] 

Swartz was also the creator of the web.py web application framework,[8] and co-founded Demand Progress,[7] a progressive advocacy group that organizes people via email and other media for "contacting Congress and other leaders, funding pressure tactics, and spreading the word" about targeted issues.

Platinomics by Greg Ip

I disagree with Ip more often than with most economic writers I read in that he seems to take it easy on Bernanke and the Fed, often writing with skepticism about what the Fed can accomplish. That's exactly what Romer and Romer warn about.

Fed Watch: More on Central Bank Independence by Tim Duy

Fox News Doesn't Understand How Coins Work by Yglesias

There are multiple equilibria

How effective is fiscal policy: Guest post from Roger Farmer by John Quiggin

Thought-provoking.

IOUs

The Debt Ceiling’s Escape Hatch by Edward Kleinbard

A Trillion-Dollar Coin Brings a Jackpot of Jests by Annie Lowrey

The inflation dragon is just around the corner by Simon Wren-Lewis

Django is a BAMF*

I recently saw Tarntino's "Django Unchained," the first part of PBS's "The Abolitionsists," and the season opener of "Justified."

"Justified" was entertaining and had a number of sudden turns. A conflict is being set up between Boyd Crowder and an evangelical preacher who is successfully weening the residence of Harlan County off of Oxycotin and the other drugs Crowder is peddling by turning them on to the opiate of religion. A down on her luck prostitute could be the Crowder's downfall. And it was gratifying to hear Walton Goggins quote Asimov and Keynes to one of his pushers who had found the Lord and stolen Boyd's money.

Goggins was also in the highly entertaining "Django Unchained." Great performances by the actors: Jamie Foxx, Christoph Waltz, Leonardo DiCaprio, Samuel Jackson, and Don Johnson (and Jonah Hill,etc.) I loved the soundtrack. While Tarantino helped the Germans look bad in "Inglorious Basterds," in "Django Unchained" one of the protagonists is a anti-slavery German bounty hunter played by Waltz. Waltz's Dr. Schultz is a great humanist and shows that Germans have a great liberal, pro-enlightentment tradition - see Goethe, Schiller, Beethoven, Marx - one that was crushed by war, economic depression and fascism.** Southerners come off really bad as the Germans did in Basterds. All the actors do an outstanding job, but Jackson's Uncle Tom Steven is the one who stuck with me. What a nasty fellow. I liked DiCaprio's speech on phrenology and the supposed submissiveness of blacks (everyone tossed about the N word.) And I liked how Tarantino had that one slave who hated Django because he thought he was a black slave trader. Pretty brutal but entertaining movie. DiCaprio could get some awards. Jackson should.

"The Abolitionists" was kind of brutal too but very thought-provoking and educational. It was the first of three episodes and focused on Frederick Douglass, Garrison, William Lloyd Garrison, Angelina Grimké, John Brown and Harriet Beecher Stowe. All of the whites were hardcore evangelical Christians who believed slavery was a sin. Douglass was a slave at first. He wasn't submissive enough for his owner so he brought in someone out of Tarantino movie, a guy who would "break" slaves by beating them once a week. Douglass fought back, even though it meant death, and bested the "breaker" guy who never told or came back, because if word got out his reputation would be damaged. Douglass said up to that point he had been a boy, but from there on he was a man. Grimké's story was very interesting as she was a black sheep of one of the wealthiest Southern (slave-owning of course) families, if not one of the wealthiest in the world at the time. But she felt slavery was a sin and worried for the souls of her fellow white southerners. So she moved north. In one dramatized scene, Garrison was attacked by a pro-slavery mob in the North and was so rattled he bowed out of the movement for a while. A lot of drama about Slavery these days, see "Lincoln" also.

-----------------------------
*Bad ass mother fucker.
**Dr Shultz at one point asks a southern musician at the plantation to stop playing Beethoven, because I assume it's offensive to him to hear such beautiful music in such a context. He notes the irony of the plantation owner admiring the black French novelist Dumas. He holds up the idealism and morality of art in contrast to corrupt institutions. On a personal, emotional level, Shultz also has bad flashbacks over the recent mauling of a runaway slave by dogs he witnessed. This reminded me of similar episodes or stories about Europeans like Nietzsche and William Wilberforce, both of whom became unhinged after witnessing the beatings of a horse by its master.

I have some German ancestry. On my father's side my great-grandmother emigrated from Germany to New York City where she married another German immigrant who died young. One of her nephews (my grandfather's cousin) was conscripted late in WWII and sent to the Eastern Front. He disappeared as the Red Army advanced westward. My grandfather fought in the Pacific.
    "Inglorious Basterds" did have some good Germans, so to speak: the starlette played by Diane Krueger and Til Shweiger's Sgt. Hugo Stiglitz. And the German soldier who had heard of Stiglitz was pretty tough and honorable in a way:

My third blog post back in March 2004 on the first day of the blog's existence.

Titled: "Fast, badass zombies versus slow, dumbass zombies" and linked to "My Stupid Dog" blog.

Dawn of the Dead and ressentiment

I probably won't see the remake of George Romero's Dawn of the Dead. I love the original, though I think Romero lost the eeriness of Night of the Living Dead when he decided to make Dawn in color. But the remake has one major problem that I could see from a mile away.

To paraphrase James Carville, it's the zombies, stupid. In the remake, they're first-rate badasses. They act as if they were on a constant adrenaline high. They have extra speed and super strength. They are powerful. They're much like the beefed-up, overcaffeinated, perpetually angry "infecteds" in Danny Boyle's recent 28 Days Later. And they're all wrong.

Romero's zombies are weak, slow and stupid. You could outsmart one, outrun it, or if need be, take it down in a fair fight. The only problem is, these zombies vastly outnumber any humans still alive. The ratio is several dozen zombies to one warm body in Night; by Day of the Dead it's grown to something like several hundred thousand to one.

In Romero's Dead trilogy, zombie attacks become an objective correlative for what Nietzsche called ressentiment. They involve a mobocratic tyranny, as weak and incompetent corpses band together and achieve a dominance over the living minority that they could not otherwise attain. It's no surprise, then, that Romero's zombie attacks usually involve a surrender of the individual "live" person to a mob of walking dead. Dawn and Day both feature an attack in which dozens of zombie bodies burst from an enclosed space (in Dawn, an elevator; in Day, a locked roof) and overwhelm a human in a wave attack. Most telling, though, is that when the zombies attack, their arms are outstretched toward the victim, as if they were begging for something. Which, in a manner of speaking, they are: They all want a little piece (or maybe a big piece) of the human victim. Engulfed in this mob's sudden coercive demand, the living human falls to the ground, where seething masses literally devour him.

Seldom do these zombies succeed at a one-on-one attack, and when they do, it's usually because the victim has a misplaced sense of compassion. Of course, Nietzsche claimed that along with democracy, compassion and religion were other weapons that the weak routinely use against the strong. But in Romero's Dead trilogy, victims of one-on-one attacks seldom die quickly; instead, they malinger for days, "infected" by a deadly virus which apparently all walking dead carry. Upon their death, they become assimilated into the faceless mob. Compassion for the weak comes with a very heavy penalty.

Of course, the survivors in Romero's films don't fare too well, either: Their individualistic tendencies lead to squabbling and bickering. In the Dead trilogy this infighting becomes an all-too-predictable motif. Individuals seem more concerned with battling each other than with defeating the hordes of walking dead, and as a result they are unable to form the coalitions necessary to turn the tables on the mob.

Nietzsche's vision of individualism was no less tragic. The social apparatus, fueled by ressentiment, stacks the deck against the great-souled man (or ubermensch) to the point that his only real options are to withdraw or perish. Dawn and Day opt for withdrawal; Night, the most bracing and unnerving of the three, chooses death instead. Ayn Rand attempted to resolve this basic problem in Atlas Shrugged by uniting all productive men and women. Yet she fails to recognize that John Galt's crypto-fascist consensus of resistance is no more conducive to individual activity than the repressive societies these productive folk attempt to resist.

Whatever we can say of Romero, he is at least smarter than Rand. His zombie flicks frighten us not just because they're gory or shocking, but because they insinuate that, much as we may like the idea of individualism, it may not have much of a future in an increasingly mobocratic society. The idea of being overwhelmed by stinking masses, of being forced into a way of life (or death) we would not choose for ourselves, lies at the maggot-infested heart of the original Dead trilogy. That's why it disturbs us long after the lights come up.

The slow, dumbass zombies of "The Walkind Dead" return in February. The zombie phenomenon is now rivaling the vampire one. These are the fastest, badass zombies I've seen to date:

Coin of Freedom

The platinum coin idea is idiotic. That is the point. by Neil Irwin (Jan. 9)

This idea is positively idiotic, though it has gained a more and more respectable set of fans. (They now include Bill Gross, the nation’s biggest bond investor, a Bush administration economist named Donald Marron, and the Nobel laureate and New York Times columnist Paul Krugman). Some of the critics are misunderstanding what it would do and wouldn’t do. The fact that it is idiotic is kind of the point.

Everything You Need to Know About the Crazy Plan to Save the Economy With a Trillion-Dollar Coin by Matt O'Brien

Enter the trillion-dollar coin. It sounds nuts. But there's a loophole that actually lets the Treasury create coins in whatever value it wants, even $1 trillion. It's all straightforward enough. The Treasury would create one of these coins, deposit it at the Federal Reserve, and use the new money in its account to pay our bills if the debt ceiling isn't increased. This has gone from being just another wacky idea in the world of internet comments to something that's getting taken seriously due, in large part, to the efforts of Joe Weisenthal of Business Insider and Josh Barro of Bloomberg View to promote it. (Which you can follow on Twitter at #MintTheCoin). Their logic is that as silly as the trillion-dollar coin sounds, the debt ceiling is far sillier -- and much more destructive.

As this terrifying report from the Bipartisan Policy Center shows, the consequences of going over the debt ceiling are unthinkable and unpredictable. At best, it will mean immediate 40 percent austerity; at worst, it will mean an outright default on our debt. Both are bad enough that a legal gimmick like the trillion dollar coin sounds sane in comparison, if it comes to that. At least that's what Representative Jerry Nadler, Paul Krugman, and, as of pixel time, over 6,000 other patriotic Americans think.

The Hobson's choice is either let the economy crash and burn or further the banana-republicization of America.

Jeffrey Lacker, a Man Who Never Changes His Mind No Matter How Often He's Wrong by Yglesias

A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong by Binyamin Appelbaum

Okun, Unemployment, and Wages by Jared Bernstein

Keith Phipps leaves the A.V. Club.

ROUGH TRANSCRIPT: STIMULUS OR STYMIED?: THE MACROECONOMICS OF RECESSIONS

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

Panelists:
CARLO COTTARELLI (International Monetary Fund)
PAUL KRUGMAN (Princeton University)
VALERIE A. RAMEY (University of California-San Diego)
HARALD UHLIG (University of Chicago)

The Frustrating Fiscal Stimulus Debate by Yglesias

Is he right? Will rightwingers admit they don't care about the unemployed, inequality or the output gap? You would think that rightwingers would like to close the output gap and then funnel the gains to the 1 percent and/or cut taxes.

Nate Silver on Reddit today at 1 p.m. CST.

Bobo Brooks pushes the Pete Peterson agenda and lies by omission once again by failing to mention the housing bubble.

Andrew Ross Sorkin waves away the housing bubble and financial crisis by classifying them as a once-in-a lifetime event:

While there is no question that the original rules would do a better job preventing the next 100-year flood in the banking system, their quick adoption most likely would have created their own drag on the economy because bank lending would most likely have been curtailed.

Hopefully Yellen is right and Bernanke will raise rates on reserves to slow the economy when it needs slowing in 2018 or whenever the output gap is closed.

Why Is Our Policy Agenda So Biased Toward Fiscal Policy? (As Opposed to Jobs…) by Jared Bernstein
TARP didn't buy a recovery as Geithner promised and it discredited ARRA in the public's confused mind. We spend all of this money for such a tepid recovery.

Romer & Romer on Monetary Policy Complacency by Yglesisas

The Fire Next Time

Or Hostage-taking extortion by the banks and Republicans

Rebranding the “trillion-dollar coin” by Steve Randy Waldman

Kicking the can down the road, either by Waldman's reasonable suggestion or by a deal that doesn't include cuts to entitlement benefits but does have spending cuts, may buy time for the Republicans to be voted out of office. My preference would be for a confrontation.

Secret and Lies of the Bailout by Matt Taibbi

Yellen: Fed Likely to Vary Interest Rates for Reserves in Future (via Thoma)

I don't believe there will be bailouts next time. And there will be another bubble as the financial industry successfully blocked reforms.

So we should just shoot the hostages in both cases and let the banks and Republicans deal with the consequences.

Sen. John Cornyn's Outrageous Op-Ed on the Debt Ceiling by Yglesias

Politicians are often successful shakedown artists and the debt ceiling clown show is just a big shakedown. Republicans lost the Presidential race and Senate seats hopefully in part because of the clown show in 2011.