Monday, May 30, 2016

Responsibly Expand the Monetary Base Before It Is Too Late

 This article was first published by me at Talkmarkets:

According to Batman:

 "Better three hours too soon than a minute too late."
Unfortunately, the Federal Reserve Bank has never taken that advice. One hopes that someone will get serious about the expansion of the monetary base since GDP is slowing in the face of inflation that is not raging. You want fiscal responsibility? Then understand and promote the concept of helicopter money as it was meant to be.

It may prove to be more responsible than Paul Krugman's slight of hand Keynesianism, and more responsible than John Cochrane's fiscal instability views, both discussed below. They seem to push for diminished fiscal credibility as policy because they know you can't default on your own currency. Compared to those guys, Lonergan's helicopter money plan looks responsible and sensible.

This article is a summary look into ideas regarding the expansion of the monetary base (base money) founded upon the study of leading economists. The reader can decide if the expansion of the monetary base is a good thing and the best way of going about it. This overview could make it easier for the reader to get a concise take on the issue. It is all about how this expansion would be accomplished safely, without bringing economic instability, that is at stake.

Remember, even though you could have inflation running at 2 percent, as the Fed targets, you could also have a dropping GDP, meaning inflation should have run a little higher during that time to make up for the loss of GDP. This is a Sumner,market monetarist concept. (As an aside, the Fed may be constrained to not let inflation out of the bag as I have written in many articles. The Fed knows banks have bet on low bond rates in the age of derivatives and that those bonds are in massive demand, so the Fed may feel a need to protect them.)

Paul Krugman by Shankbone

So, David Beckworth wrote an article way back in 2014 that attempts to explain the process of expanding the monetary base. The goal of monetary base expansion is something that is promoted by three economists, Cochrane, Krugman and Sumner. Before I get to that article I want to review what Eric Lonergan said.

The expansion of the monetary base is something I wrote about regarding Eric Lonergan. In that article I said:

1. I checked with Mr Lonergan prior to writing this article, and he has confirmed that HM does not involve the issuance of treasury bonds as collateral. Former Fed president Narayana Kocherlakota always speaks of treasury bonds being issued for the purpose of spreading HM. But according to Lonergan, Kocherlakota is simply not correct in his analysis of what HM is. This is not to say there are laws that need to be changed from nation to nation to make this process work. But the issuance of treasury bonds is just QE again, but for the people. Helicopter money is much more powerful than QE! It is an alternative to QE.
2. While helicopter money is either a one off or short duration expansion,  it is a permanent expansion, of central bank base money. But we should not be confused about this. While the expansion of the money supply is permanent and the base money continues to circulate, the actual funding of families is either one off or for a short duration. Lonergan has called for 12 to 18 months, until the goals of the central bank are reached.
3. It is, after all, the answer to the zero lower bound, to deflation. Because it is a volatile policy if not done correctly, it should be used to get the economy off the mat and only during those times. It is a better plan than negative rates or a cashless society.

Beckworth quotes Paul Krugman on Japan's unwillingness to stoke inflation expectations in the midst of deflation:

After all, suppose investors conclude that Japan will never raise taxes enough to service its debt. What would they think would happen instead? Not default — Japan doesn’t have to default, because its debts are in its own currency. No, what they might fear is monetization: Japan will print lots of yen to cover deficits. And this will lead to inflation. So a loss of fiscal credibility would lead to expectations of future inflation, which is a problem for Abe’s efforts to, um, get people to expect inflation rather than deflation, because … what?

Then Beckworth quotes John Cochrane, the grumpy economist:

The last time these issues came up was Japanese monetary and fiscal policy in the 1990s... Quantitative easing and huge fiscal deficits were all tried, and did not lead to inflation or much‘‘stimulus’’. Why not? The answer must be that people were simply not convinced that the government would fail to pay off its debts. Critics of the Japanese government essentially point out their statements sounded  pretty lukewarm about commitment to the inflationary project, perhaps wisely. In the end their ‘‘quantitative easing’’ was easily and quickly reversed, showing those expectations at least to have been reasonable.
Then Beckworth puts the views of the two economists together with Sumner's thinking:

Even though Krugman and Cochrane may agree on the mechanism and its potential to raise aggregate demand, their policy prescriptions are different. Krugman would like to have countries like the United States and Japan ease up a bit on fiscal credibility as a way to shore up aggregate demand growth, whereas as Cochrane sees such discretionary moves as potentially destabilizing. Cochrane is concerned doing so might let the aggregate demand genie out of the bottle in an uncontrollable manner.
That it is where Scott Sumner and his push for level targeting becomes important. A level target, specifically a NGDP level target, would get Krugman the aggregate demand growth he wanted without letting the aggregate demand genie out of the bottle in an uncontrollable manner...Remember, we are talking about effective expansionary monetary stimulus but all the while trying to avoid runaway inflation!

Where I disagree with Beckworth is where he goes on to say that the Fed has been doing helicopter drops all along. No it has not. It has been doing QE all along, but QE requires the issuance of bonds in exchange for expansion of money. Also, there is interest paid on the expanded money, so that the banks do not lend it out. Only negative IOR is expansionary, as Sumner has said, elsewhere.

But Beckworth goes on to quote Cochrane regarding use of helicopter money. But Cochrane doesn't get it either:

Thus, Milton Friedman’s helicopters have nothing really to do with money. They are instead a brilliant psychological device to dramatically communicate a fiscal commitment, that this cash does not correspond to higher future fiscal surpluses, that there is no ‘‘exit strategy’’, and the cash will be left out in public hands... The larger lesson is that, to be effective, a monetary expansion must be accompanied by a credibly communicated non-Ricardian fiscal expansion as well. People must understand that the new debtor money does not just correspond to higher future surpluses. This is very hard to do—and even harder to do just a little bit.
And, of course, Cochrane is onto something (in a perverse way), that Lonergan is hoping for a permanent expansion of the money supply that will not require that expansion be offset by more government debt. But Cochrane sees this helicopter money sans treasury debt in exchange as being too fiscally responsible! Lonergan does not hold that view at all. Cochrane sounds disappointed that this helicopter money could bring more revenue in for the government!

Helicopter money issued without the issuance of treasury debt in exchange appears to be a very good thing, a very very good thing and very fiscally responsible. The alternative appears to be a bundle of excess reserves just sitting at the Fed and a bunch more treasury bond debt. People are uncomfortable with adding to all that. 

So, lets try the fiscally responsible helicopter money idea first, before efforts at destabilization. Helicopter money, then, is fiscally responsible! And it is needed to keep us out of NIRP. The whole world seems headed towards NIRP. Lonergan answers Krugman and Cochrane forcefully in the comment section:

Interestingly, Cochrane and Krugman have very similar views here. I disagree for a very simple reason. A cash transfer from the central bank does not entail higher future taxes, even if the central bank sticks to its inflation target, which I would advocate. In fact, a cash transfer from the ECB to households would probably result in lower future taxes in the Eurozone, because the stagnation would end sooner, growth would be higher and fiscal positions would improve. It all depends on what you think causes cyclicality and growth. Cochrane doesn’t really believe that you can have insufficient demand in an economy and that there is profound path-dependence, and that effective counter-cyclical policies can have important medium-term benefits. Like Krugman, he seems to believe that the only policy variable is inflation expectations. I think they are both fundamentally misguided.

Friday, May 27, 2016

Donald Trump Threatened with Scalping After Slapping New Mexico Governor

This article may be slightly adult in nature.

Donald Trump was threatened by numerous tribes with scalping after being photographed slapping the female governor of New Mexico. Other Republicans like Paul Ryan said that she was a nice lady.

Trump also threatened to boot New Mexico out of the union as protestors ran wild and Donald never forgets that sort of thing. Revenge is the likely reason that he slapped the governor.

Jeb Bush and others said the Republican governor, Susana Martinez, was the future of the Republican Party. Well, we certainly want to forget the past, and ole Jeb is the past. Go away Jeb!

In fact, the Republican party, den of thieves that it is, likely won't hold together with the Donald beating on all the women politicians. Even Hillary Clinton has been advised to wear boxing gloves for the first televised debate. She is said to have a pretty big right hook and took husband, Bill, down with it after the Monica thing.

So, what makes Donald Trump so willing to slap women, call them ugly, call them Indian names like "Pocahontas", etc? Well, clearly, psychologists have said he possesses 49 cards of a 52 card deck. Some have said that his bolts are not tightened properly.

Other highly esteemed shrinks say that he has male enlargement issues. That could explain his criticism of just about every race and nation and group, except for Israel and the KKK.

Well, we know Israel has moved to the right. And the KKK has always been right winged. Could Trump be contemplating fusing the two? An all right wing line up would feature David Duke and Benjamin Netanyahu exchanging pleasantries.

Well, David Duke may not ever go for that. But apparently Nazi right wingers in the Ukraine have been encouraged to unite with Euro Jews to fight Muslims. Maybe Trump is crazy like a fox, getting right wingers together.

Ihor Kolomoyskyi is the billionaire trying to fuse the Nazis and the Jewish people in the Ukraine, but the Jewish people have ignored him. Would that Jewish people in America ignore Trump's advocacy for more settlements on the West Bank.

Even retired military men in Israel don't want those settlements to continue and have no desire to continue the occupation of the Palestinians. Trump is badder than the Israeli military. He wants to occupy the Palestinians until hell freezes over.

Trump is a prick but girlfriends have said he has a little dick. Ihor has the big dick. You have seen the dick on a donkey before haven't you? Oh wait, that is Eeyore. Sorry Eeyore!

Idiot Billionaire bigots. Kolomoyskyi is a Ukraine/Israel citizen. Trump is a NYC citizen.

And before you all get your panties in a wad. This is satire except for the courting of right wingers on the part of the two idiot billionaire bigots.

But I wouldn't mind Trump shaving off that ugly hair. Nobody will scalp him. He can come by my house and use my gel if it would help.

I tolerate pricks like Trump.

FYI, here is the real article showing how Trump really broke off a budding relationship with the nation's only Latina governor.

Disclaimer: This article contains satire and humor, and while loaded with truth in my opinion, it is up to the reader to verify the claims of the article, which are made in jest and are not necessarily proven fact. Some claims are fiction.

Here is the link to my other satire. Some of it is pretty funny:

And here is a straight up, no nonsense explanation about Trump and Kolomoyskyi:

So, there are two billionaires in the world who think almost alike. They are Donald Trump and Ihor Kolomoyski. Kolomoyski is a dual Ukraine/Israel citizen. Both Trump and Kolomoyski:

1. Hate all Muslims

2. Love right wing white groups like the KKK and/or the Nazis.

3. Support Israel.

So, Kolomoyski wants to FUSE right wing Nazis in the Ukraine with Jewish people to fight Muslims. So far the Jewish people have shunned Kolomoyski. Trump has not gone that far in seeking a fusion of right wing Jews and racists, but their thinking is similar and Trump gets support from both. He gets support from David Duke, former KKK and Sheldon Adelson, who owns the Venetian, who is a Zionist.

Thursday, May 26, 2016

Zero Hedge Does Not Understand Helicopter Money

 This article was first published by me on my personal blog at Talkmarkets:

Zero Hedge does not understand the concept of Helicopter Money. I am a fan of the blog, and it has very interesting and informative articles. Also, Michael Snyder is afraid of the concept. I am here to help! For one thing, it would be used to prevent NIRP and a cashless society. Helicopter money would certainly be preferable to those ideas.

If you want to fear something, Michael, fear NIRP, fear the destruction of cash. I can help you fear those things because they scare me. As far as Snyder's fears, the central bank can always be protected when times are good, for sacrificing a little base money for the people when times are bad.

Tyler Durden has said that helicopter money is Keynesian. But it really isn't. It is not a fiscal stimulus. Yes, it stimulates fiscally, but that is simply a by-product. Helicopter money, or HM, is simply a monetary stimulus using no additional debt, no cut in taxes, no cut in government spending, and no treasury bond transfers. Quite simply, HM is the passing out of money, preferably to everyone equally in society, that is created by the Federal Reserve Bank.

It is either a one time gift, or given out in a short window of time, from 12 to 18 months according to Eric Lonergan, guru of the concept. He has thought it out far more than the father of the idea, Milton Friedman. So, When Zero Hedge says, in the article Why Helicopter Money Can't Save Us: We Have Already Doing It for 8 Years, the blog doesn't get it. Durden goes on to say we have been doing that for 8 years. He says:

The government prints one paper liability and buys it from itself with another paper liability that the government also prints.
Sound familiar? It’s called QE.

The only difference is who the bonds are bought from. With QE, the central bank buys in the secondary market in an absurdly transparent attempt to pretend like there’s some degree of separation between the central bank and the government.

In so-called “helicopter money,” the central bank simply drops the bullshit facade (pardon the language) and buys directly from the government. But it’s all deficit financing. Need proof? Just compare changes in government deficits to the changes in bank reserves (i.e. where QE shows up) as shown in the table below.
Sorry, Tyler, that definition of HM is unacceptable. It means more debt, ie, treasury bond transfers, possibly tax cuts, or cuts in spending or all of the above. That is not HM. That is not Milton Friedman's vision. That is not Lonergan's vision.

Zero Hedge brings in Deutsche Bank, which also misleads:

The argument that monetary easing has run its course and it is time to enact fiscal stimulus is starting to be heard around the world. The most eye-catching of such views is a call to deploy ‘helicopter money’, which we define as monetary financing of fiscal deficit.
But DB, helicopter money is monetary, it is not fiscal policy. It has a fiscal benefit but is not fiscal. It is a purely monetary policy! Sheesh people, get it right. This is not rocket science. 

So, to further blow your little minds (mine is), after Zero Hedge misses on the definition of HM, giving people a mistaken view of what it is, saying that it is Keynesian and fiscal, the blog discusses, at the end of the article, what they think is a really crazy idea, real HM. By then you have been convinced that it is just more debt, more interference with the GDP, more tax cuts or spending cuts. Then you are told that really wasn't HM after all! 

It is simple, the Fed prints base money and gives it to the people. No bonds exchange hands, no fuss, no mess. If the central bank wants a little bond collateral, fine. But that isn't what it is about. I don't see the necessity of any bonds being involved. There is already a shortage of long bonds already.

I am amazed, truly amazed that Zero Hedge has such a warm spot in its blog heart for central banks. After all, it rants that QE has transferred wealth to the wealthy without helping the regular guy. Well, now we have a plan to help the regular guy and ZH gets cold feet and comes to the rescue of central banks who need no such rescue! And if they do you can read the next paragraph for ideas on how to save the poor central banks.

If your central bank is willing to do HM, you may want to love your central bank when times get better.

The central banks are not going to go insolvent by sharing a little base money. There will not be hyperinflation like Snyder says, it is done correctly. Hyperinflation may not be monetary based anyway, according to the Dallas Fed.

And if there is some inflation and the central banks cannot raise rates because of bank weakness and bets, then the central banks just need to raise the capital leverage requirements and lending will slow down.

Better yet, when times are good, the government just recapitalizes the central bank if it is necessary. The Economist has a great article about this entitled Helicopter Money and the Government of Central Bank Nightmares.

Anyway, helicopter money is an idea whose time is already here in Europe and in Japan, and could be needed in the USA, as the stock market declines and business slows and GDP growth slows.

Tuesday, May 24, 2016

BOJ Shock Explains Negative IOR and Negative Bond Difference

This article was first published by me on Talkmarkets:

For some unexplained reason, Japan's central bank, the BOJ, did not cut interest rates on bank reserves, which are already negative. They talked as if they were going to do so. This lack of added stimulus has the markets down and bond prices up.

Draghi in the Eurozone has already decided to buy more sovereign bonds, and while that increases bank reserves and the money supply (but only if the banks lend the money), investors pay the tax for negative yield. And with a scarcity of good sovereign bonds worldwide, mainly as collateral for derivatives, negative yields are driven down simply by central banks taking them out of circulation, making them even more scarce. So, in Japan and in the Eurozone bond yields are turning negative.

We know that prices for Japanese bonds went up and yields went down, and that is no surprise. People must understand the distinction between negative rates on excess reserves, and negative rates on bonds. Negative rates on excess reserves, according to Scott Sumner, are expansionary. An argument can be made that they are not massively expansionary. Bonds with negative yields can be expansionary, if central banks buy them, but only if the excess reserves are loaned out. And don't forget the scarcity of bonds in the first place.

But obviously traders did not take well to the shock of having this stimulus not added. Scott Sumner is right that negative IOR is expansionary of the money supply. The BOJ believes negative IOR is expansionary.

But, negative bond yields are a different animal. Negative bond yields in a deflationary environment could confirm deflationary expectations. But Japanese bonds do fund the government, as the BOJ can buy and sell government bonds at negative yield.

I am not a fan of negative IOR, when real helicopter money is a far superior option and Scott Sumner says Nominal GDP Targeting (NGDP Targeting) is superior as well. But at zero lower bound, negative IOR is certainly better than living with negative bond rates. One wonders if the BOJ and Draghi at the ECB are engaged in some sort of economic fraud, a scam to fund the government in the face of economic weakness, and deflationary expectations with negative rate bonds!

We hope that is not the case, and we know that the BOJ still plans to reach their inflation target of 2 percent in the 2017/2018 time frame. Certainly Nominal GDP has improved some in Japan over the years, since the Great Recession crash of 2008. 

Since Japanese banks hold most of the Japanese treasury bonds, why would they prefer to hold onto negative rate bonds and cash reserves rather than lending the reserves into the economy to overcome the negative bond rates they must pay out?

You have to wonder what is going on in Japan and in the Eurozone, and hope the sickness doesn't find its way to the USA.

Saturday, May 21, 2016

Eric Lonergan Precisely Defines Helicopter Money

This article was first published by me on Talkmarkets:

Eric Lonergan is an economist, hedge fund manager and writer. According to his bio, he has written for Foreign Affairs, the Economist and the FT. He has contributed advice to governments.

He first proposed the concept of transferring money to households by proactive monetary policy in 2002. He is not the father of helicopter money (Milton Friedman is), but he is a significant messenger of helicopter money for the modern era. He is the foremost economist when it comes to defining Helicopter Money.

The helicopter money (HM) debate that he started was based on the concept made famous by Milton Friedman. Whatever you think about Friedman, or about neoliberalism, or about monetarism in general, put that all aside. HM is different and better and more fair, and could at least slow the divide between rich and poor.

Helicopter money has been called QE for the people but that is not quite right. I will list some important points I have found from reading Lonergan regarding this subject. Turns out, HM is the opposite of QE. It has been called QE for the people, but is quite superior to QE

It is important to understand that some in central banking appear to be in love with the concepts of negative interest rates and breaking the zero lower bound with nominal rates. If that is the case, then helicopter money, though a far better idea, will never be implemented.

This would be a big mistake for monetary policy. I hope this love affair with negative is not a sinister plan on the part of some in central banking. If it is sinister, we will have to all shout louder in our commitment to helicopter money, but understand clearly what it is and what it does. Here are ten helpful and important points that define HM for the reader:

Father of Helicopter Money Milton Friedman

1. I checked with Mr Lonergan prior to writing this article, and he has confirmed that HM does not involve the issuance of treasury bonds as collateral. Former Fed president Narayana Kocherlakota always speaks of treasury bonds being issued for the purpose of spreading HM. But according to Lonergan, Kocherlakota is simply not correct in his analysis of what HM is. This is not to say there are laws that need to be changed from nation to nation to make this process work. But the issuance of treasury bonds is just QE again, but for the people. Helicopter money is much more powerful than QE! It is an alternative to QE.

2. While helicopter money is either a one off or short duration expansion,  it is a permanent expansion, of central bank base money. But we should not be confused about this. While the expansion of the money supply is permanent and the base money continues to circulate, the actual funding of families is either one off or for a short duration. Lonergan has called for 12 to 18 months, until the goals of the central bank are reached.

3. It is, after all, the answer to the zero lower bound, to deflation. Because it is a volatile policy if not done correctly, it should be used to get the economy off the mat and only during those times. It is a better plan than negative rates or a cashless society. 

4. However, other economists believe that the actual money transfers, not just the circulation of transferred money, should be permanent in themselves. Lonergan opposes this, not being a big fan of market monetarist rational expectations. He believes central bank goals could be reached by a limited transfer, again, no more than 18 months in duration. MM's believe that people may not spend the money if they know the duration is short. Lonergan believes enough would be spent to accomplish the goal.  

5. Helicopter money cannot be a loan, unless it is a loan in perpetuity, which is legal in the Eurozone.

6. Helicopter money is not a tax cut, although it could, in my opinion, be made more palatable being couched in the language of a tax rebate. But it is not a tax cut, which would make government funding diminish, which would hurt GDP. There is simply no need for tax cuts with this plan. He takes issue with Bernanke on this tax rebate issue and on a few other issues. Bernanke, then, appears to not grasp the difference between QE and helicopter money, any more than Kocherlakota seems to understand the concept.

7. Helicopter money, for Lonergan, is a straight up gift to the people in equal measure, with one person not gaining an advantage in the size of the transfer, over another person.

8. HM should not be taxed, because it is base money and is not a fiscal plan, but rather a monetary plan.

9. Monetarism is not dead, but QE is comatose at the zero lower bound. HM breathes new life into monetarism.

10. There are differing views about Helicopter Money and how it should be applied, by the economists who promote the idea, but all who understand it know that it requires the use of base money. There are links below to show the variety of ideas among those who have discussed the subject.

We can be certain that if two Fed presidents are unable to comprehend a fairly simple concept of helicopter money, that they may simply have a more sinister plan, and may have fallen in love with using the zero lower bound to impose future represive goals. There is simply no excuse for this, with the wonderful tool of helicopter money as a way for monetary policy to be implemented in a successful way.

For further reading:

Nick Rowe, Willem Buiter*, Paul de Grauwe and Simon Wren-Lewis

(These are the economists who agree with Lonergan that base money is not a debt)

QE For the People
(Lonergan's helicopter money articles on his blog)

Pros and Cons of Helicopter Money-Bernanke Misunderstood

Federal Reserve Mandates Slow Growth. So Fed Must Finance American Infrastructure 

Central Banker ProCyclical Craziness

China Could Be the Next Basel Victim or Not 

Larry Summers 100 Dollar Bill Ban and Westfalia Lost

Clearing Up Negative Interest Rate Confusion. Kocherlakota Weighs In

*Buiter, some will remember, has also called for a cashless society. That cashless concept, an attack on main street, would be rendered completely unnecessary if helicopter money were implemented. 

Thursday, May 19, 2016

China could Be the Next Basel Victim or Not

 This article was first published by me on Talkmarkets:

China could indeed be the next Basel victim. After all, Japan was the first victim, and Basel 1 finished off the Japanese economy so that deflation is the norm. And the United States and certain Euro nations were the second victim, a group victim, of Basel 2. So, it is logical to assume that China is next and the Swiss could bring that about by counting old loans as being non performing. Here comes something similar to mark to market, to the banking system near you.

Before discussing a quick review of Basel and China's status, I have held out hope that the new thinking by central banks could really stop this liquidation nonsense. Procyclicality must be looked upon as being a form of liquidation.

I am encouraged by Ben Bernanke's recent statements and by some push by the new Basel to stop procyclical behavior. But so far it is all talk, and now we see this push to make things tough on China gaining momentum, and I just have my doubts that they will change. But it is certainly time for countercyclical action, not just countercyclical talk.

Even Narayana Kocherlakota doesn't embrace the new thinking. He believes that helicopter money won't provide much of a lift, but he isn't talking about helicopter money at all. He is talking about the government issuing bonds. But real helicopter money is tax breaks or infrastructure financed without the treasury issuing bonds, by Fed base money alone issued one time. 

Back to Basel. Japan was an easy target as we look back. But we visit the scene of the Basel crime again, not because we thought something was sinister in the first place. But the procyclical efforts of Basel 2, in impacting the US housing bubble and crash of 2007-2008, and the destruction of real estate markets in Spain and other peripheral nations, formerly known as PIIGS, makes one suspicious about both Basel 1 and 2.

According to Stern Business School, Basel 1 created this risk:
...the failure to differentiate between high quality and low quality commercial credits contributed to a steady increase, over the past decade, in the credit risk of bank loan portfolios...
Say what?  Bludgeoning death by blunt force trauma is what the failure to differentiate really meant for the Japan economy. Sure there was a bubble of assets in Japan, but, did it all have to be destroyed to the point that over 20 years later we are still experiencing deflation and Zombie banks and lost decades, plural?

Money supply had been too loose for much of the Japanese asset bubble of 86-91. But this naive article by the Economist in 2006 argues for Basel 2, saying that Basel 1 was much too crude, which is true.

But then the author lauds Basel 2 for being so much better. Well, that didn't work out so well did it? The central bank didn't buy bad paper in the housing bubble. And the central bank implemented mark to market, which also destroyed the value of good financial paper. That seems fairly blunt to me. The Fed actually destroyed the entire economy over a housing bubble that was only raging in 4 states, Florida, California, Arizona and Nevada.

So, Basel 1's crudeness took down Japan. Basel 2 took down the US and Spain. What will Basel 3 or maybe they call it IV by now, do to China? China will not become Japan or even the USA, just to please Basel.

But the Bloomberg article I found at the Swiss website, is significant. It is titled, A Swiss Pen Stroke and Bad Debt in China Could Go Boom. If the new Basel decides that all loans over 90 days old with no payments made, are automatically non performing, that puts China's banks in a world of hurt. As I said at the beginning of this article, this is mark to market but in different form, all over again. This could destroy the Chinese economy.

I don't happen to think the Chinese will take it lying down. Just because the United States congress sold out to Basel in allowing mark to market and the destruction of the economy on a much larger scale than was necessary does not mean that China will accept that international brutality. China was smart enough to reject Basel 2, while our politicians sold us down the Basel 2 river.

I am quite certain that China understands what procyclicality means and knows it just isn't the way to keep your nation sovereign and prosperous. Would that our politicians could ever learn this lesson.

Mark to market is fair in theory, as Ellen Brown has said. But she also says that implementing it in the throws of the Great Recession was a bad idea. It was a really bad idea. How can we say that this liquidation was not preplanned? We can't. It looked preplanned. By the time FASB lifted mark to market, the entire housing market had crashed.

The ghost of Andrew Mellon was present as the shadow banks failed and the commercial banks pulled back in real estate operations. Mark to market was applied in the Great Depression as well, not because the loans were all bad, but because regulators wanted them to write the values of the loans down. It helped extend the Great Depression!

As I recall, mark to market, or fair value accounting, was marketed as something good, something conservative, something beneficial to society in . But if a bank wanted to hold an asset, why did it have to be priced at a fire sale price? If it was not going to be sold, was that fair? And again, was it fair to subject the banks to it as the commercial paper market was crashing?  Mark to market losses, as Investopedia states, has nothing to do with the sale of anything. It is an accounting entry that shut down the banks.

Turns out, Alan Greenspan was warned in the 1990's about the potential destruction of allowing mark to market. Yet his predecessor, Ben Bernanke allowed it to happen 10 years later. FASB is a private board. It is like the Fed in that sense, but surely could be overruled by the Fed or most certainly by congress at the request of the Federal Reserve Bank. That never happened.

Then Bernanke, said, after the fact:
 “…commercial real estate loans should not be marked down because the collateral value has declined.  It depends on the income from the property, not the collateral value.” Ben Bernanke, Feb. 24, 2009
That confession was too late to save main street from losing their houses. This is typical Fed behavior, joined at the hip with Basel as it is.

So, for investors, one has to realize that bubbles and crashes are made worse by central banks, over and over again, especially if the panics are credit based, bank based. It means that stocks and commodities are perhaps more at risk than most investors realize. Should they decide to invest, it should be with eyes wide open.

You can bet China will have its eyes wide open. 

Sunday, May 8, 2016

Central Banker ProCyclical Craziness. Fed Exposed

 This article was first published by me on Talkmarkets:

Central banks are engaged in procyclical behavior, which makes absolutely no rational sense. After this behavior is discussed, the Basel 3 solutions are discussed at the end of this article. Maybe an exposed Fed could even be redeemed. Procyclical behavior is really bad and must be changed.

Market Monetarist Lars Christensen  said this about central bank behavior, and this pretty much defines what that behavior is:

Concluding, central banks during booms tend to take on more risk – they overweight risky assets – while they during busts tend to reduce risk – underweight risky assets. Hence, central banks consistently act in a procyclical fashion.
This is of course is not only bad in terms of ensuring the highest and most stable return at the lowest possible risk, but it also adds to the swings in the economy as the central bank will add liquidity to the financial system during booms and redraw liquidity during crashes.
So, it is not a stretch when I write that the Fed is responsible for the housing bubble and crash. That is consistent with central bank procyclical thinking. Bubble/bust exaggeration is built into the system. Banks are like the guy who buys high and sells low, or you could say banks are like momentum players. Neither of those results healthy economics, in healthy price discovery. If the American people had an understanding of this central bank process, they would probably call for the overthrow of the fed.

I have argued about the actions of the Fed creating the housing bubble and then crashing the economy both here and here. 

Moving on, we can see that even Wikipedia gives the same definition of procyclical behavior.

Procyclical has a different meaning in the context of economic policy. In this context, it refers to any aspect of economic policy that could magnify economic or financial fluctuations. Of course, since effects of particular policies are often uncertain or disputed, a policy will be often procyclical, counter cyclical or acyclical according to the view of the one judging it.
Thus the financial regulations of the Basel II Accord have been criticized for their possible procyclicality. The accord requires banks to increase their capital ratios when they face greater risks. Unfortunately, this may require them to lend less during a recession or a credit crunch, which could aggravate the downturn.[5]
Indeed, countercyclical behavior makes a lot more sense. This Wikipedia definition in the same article comes close to capturing the definition but monetarists have a slightly different application that I will share after the quote:

 Keynesian economics advocates the use of automatic and discretionary countercyclical policies to lessen the impact of the business cycle. One example of an automatically countercyclical fiscal policy is progressive taxation. By taxing a larger proportion of income when the economy expands, a progressive tax tends to decrease demand when the economy is booming, thus reining in the boom. 
Since Keynesian Economics does not always work, many economists have turned to monetarism in the belief that monetary policy can work, and even give fiscal benefits. I wrote a couple of articles about some new thinking about this view here and here.

This monetary stimulus, based upon the issuance of a large infusion of base money by the central bank, could really help the economy with tax breaks, while still funding government without budget cuts. In a slowing cycle, this would be countercyclical. It would be not be QE, but would be better than QE as it would be done without taking scarce long bonds out of the system, and it would be for everyone, not just the banks or wealthy holders of assets. This action could redeem the Fed in the eyes of the people.

Even Basel 3 acknowledges the need to reduce procyclicality. Well, even a 6th grader could see that is needed. The Fed could have done things to help out in 2007-2008.  The Fed could have bought bad paper. The Fed could have minimized the credit crisis. Before that, the Fed could have restrained the bubble just a little. But procyclicality prevented those actions. And it damaged the middle class and confidence in the economy by main street. Main street has been shunning the markets for this very reason. Procyclicality hurt the nation, both in the Great Depression, and in the Great Recession.

Bankers should be restrained by law from withdrawing liquidity in a downturn and increasing liquidity to the moon in booms. It is just a form of manipulation of the markets, in my view. It is not healthy and not even moral.

So, though I would not hold my breath, I am encouraged by the apparent goal of the BIS speaker, Mr Caruana, in encouraging the limiting of procyclical behavior by establishing a countercyclical buffer for the banks:

  On the procyclicality aspect, Basel III will promote the build-up of buffers in good times that can be drawn down in periods of stress. First, as I already noted, the new common equity requirement is 7%. This new higher level includes the capital conservation buffer of 2.5%,and will ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of stress without going below the minimum capital requirements. This will reduce the possibility of a self-reinforcing adverse cycle of losses and credit cutbacks as compared with previous arrangements.
Second, a key element of the Basel III rules to limit procyclicality will be the countercyclical capital buffer, which has been calibrated in a range of 0–2.5%. This countercyclical buffer would build up during periods of rapid aggregate credit growth if, in the judgment of national authorities, this growth is aggravating system-wide risk. Conversely, the capital held in this buffer could be released in the downturn of the cycle. This would, for instance, reduce the risk that available credit could be constrained by regulatory capital requirements. The intention is thus to mitigate procyclicality and attenuate the impact of the ups and downs of the financial cycle.
Whether Basel 3, put off until the end of this decade, will come up with real changes in bank behavior, in their own behavior, remains to be seen. We can only hope this would happen. Crashes of bad credit offered are going to happen. But to then crash entire system when the bad credit goes down, all in the name of procyclicality, is just bad behavior on the part of the elite, who have learned to game the central banks.

One wonders if the central banks will have the will to actually stop their procyclical behavior, or will we just be fooled again. The Fed helped America out in World War 2. It is time to help with a monetary infusion in the very next downturn.It could be the Fed's last chance to get it right.

Sunday, May 1, 2016

Pros and Cons of Helicopter Money. Bernanke Misunderstood

 This article was first published by me at Talkmarkets:

I thought it might be interesting to look into the pros and cons of Helicopter Money. After all, Ben Bernanke earned the title, "Helicopter Ben", for discussing the concept back in 2003. I have criticized the Fed, and Bernanke himself, severely both here, and here, but with regard to Helicopter Money, I don't think that a true understanding would cause most to have a strong concern. I think Bernanke has been misunderstood about this important issue. But there are pros and cons to the process, so they are discussed here.

Helicopter money is generally thought by the uninformed as Fed base money deposited directly into the bank accounts of ordinary citizens, or all citizens. It will not work that way, although theoretically it could. It is more likely that tax cuts would be implemented and/or infrastructure could be targeted for repair.

Helicopter money seems to be a fair way to bail out main street, since a form of Helicopter Money for banks, called Quantitative Easing, or QE  has bailed out the banks through the purchase of treasury bonds and bad paper, MBSs. But as we will see, there are good and bad benefits attached to the concept and maybe we can look at some of these pros and cons.

The goal of Helicopter Money is purely economic, to boost aggregate demand, or AD. Helicopter Money is contemplated when regular monetary policy, like QE, fails to provide the boost needed to support the economy. 

With regard to the USA, the need for Helicopter Money as a means of stimulating the economy could be low at this time, according to Ben Bernanke. We are not in negative rate territory as is Europe and Japan. We need to watch their possible experiments with the concept to judge better the pros and cons.

Besides, Bernanke, lots of other economists have weighed in on the concept, from Kocherlakota, to Buiter, to Lonergan to Market Monetarists David Beckworth and Scott Sumner, here and here, and many more.

Pros of Implementing Helicopter Money:

1. Eric Lonergan makes a crucial point and this is the unknown of implementing such a policy:

... Helicopter drops involve the central bank transferring money to the private sector financed with base money. Friedman used them as an example of the efficacy of monetary policy in a liquidity trap. Cash transfers are different to QE because the net assets (financial wealth) of the private sector rise (under QE the private sector had a bond and now has cash) – there are also distributional differences, because everyone would receive the new deposits. That is precisely why the effects of helicopter drops are likely far greater than QE...
...the central bank no longer has a new bond on its balance sheet. The long term fiscal consequences of this are uncertain, and may differ from doing QE. They will depend on many things – primarily on what happens to growth, where interest rates are over the medium term, and how the assets it would have purchased performed. None of this is unique to helicopter drops, nor does it render monetary policy ‘fiscal’.
For me, having central banks not taking good treasury bonds out of the market is a really good thing. Demand for long bonds is already too great. Pushing rates lower toward the negative is the only benefit of making bonds even more scarce and while Draghi may want to do this, it puts monetary policy into unknown territory, far more dangerous than any Helicopter Drop.

I have written about this issue, and even Investopedia says that scarcity of bonds due to supply and demand may trump the commonly accepted idea that the inverted yield curve could cause a recession. This could be part of the New Normal.

2. Adair Turner has said that in some situations, Helicopter Money may be the only way to stimulate aggregate demand. Yes, he said it could be the only way.

3. It could serve a similar function, more directly to main street, as would infrastructure spending, using base money to fund projects. In order for both to work most effectively, they must be looked upon as a monetary effort, not a fiscal effort. The fiscal benefit is fine and obvious, but the monetary effort must allow for a permanent circulation of the base money. For both to work most effectively, it would be necessary for most of the money to be deposited back to the banks, and banks could use the deposits to increase their ability to make loans. That could be inflationary, but bank lending could be tweaked controlling by reserve requirements.

In my opinion, it is not necessary to control lending by banks through paying interest on reserves as is done now. If reserve requirements were tweaked, more lending could take place. Perhaps Helicopter Money would not prove to be inflationary if done correctly. And remember, it is only for bad times, for times when negative bond rates are near. They are to be avoided.

4. Helicopter Money would stop the move toward a cashless society, and a move toward negative interest rates on bonds and on retail savings accounts. Since it would result in massive tax cuts without hurting government funding, and it would not require treasury bond buying, it could force interest rates to stabilize in times of economic distress.

Cons of Implementing Helicopter Money:

1. It isn't necessary. Kocherlakota says the US has the means to finance the stimulation of the economy already.

2.  It must be permanent. Friedman said it would be a one off transfer of money from the Fed. It would be a permanent increase in money stock, but just a one off transfer. So, it would not be a permanent transfer of money, like on a monthly bases for all time. But it must be a permanent increase of money stock. That could turn out to be a con, if some see it as a Ponzi scheme, whereby the money finds its way back to the banks and is loaned out in a way that stokes inflation and damages the economy in the long run.

3. It will not be a real infusion into the bank accounts of citizens after all, according to Bernanke, but would rather take the form of tax cuts. So, it could be unfair, depending on how it is arranged, and not that effective. But tax cuts would be welcome and may be more palatable than other ways of doing the transfer. The good thing is that it is not taxpayer money directly funding the tax cuts.That taxpayer money will still be used to fund the government.

4. Helicopter Money may be desired by politicians as a fix every time, even though it should only be a fix during times of distress when we are in a liquidity trap. Perhaps that requirement could be written into law.

Whether you are pro or con regarding Helicopter Money, you can see that the issue is an important one. If deflation takes over, and it could, this plan would be superior to a cashless society, or negative bond interest rates. I am sure most people would agree with that fact, even if they don't support the plan.

If monetarism is to work, it has to start working for the people, for the society as a whole. It is ultimately up to the economists to either ignore the concept or make it work. We hope they would do so with the interest of the nation as a whole, in focus.