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Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!
While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do.The government cannot tell the private sector don't repay your balance sheets
because private sector must repair its balance sheets. In Koo's words: "the only thing the
government can do is to spend the money that the private sector has saved and put that
back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).
DEIRDRE BOLTON, BLOOMBERG NEWS ANCHOR: Based on the data points, the economic data points we've got in the past month, how likely is it that the U.S. is heading towards a lost decade? Is it more or less likely than what you told us about four to six months ago?
RICHARD KOO, CHIEF ECONOMIST, NOMURA RESEARCH INSTITUTE: Well, it is beginning to look more like Japan. The amount of house price declines, the commercial real estate price declines there, all following the Japanese pattern very precisely and very slow GDP growth, even with all this monetary easing, QE2, possibly QE3.
So yes, to me, the United States is going through the same process of what I call balance sheet recession, that Japan went through 15 years earlier.
BOLTON: You mentioned the possibility of QE3. What should Ben Bernanke do today in his speech and then what should he do as a follow-up action?
KOO: Well, actually, the Japanese experience told us that when private sector is minimizing debt or deleveraging with very low interest rates, there's very little monetary policy can do.
In fact, Chairman Bernanke has been saying, since the middle of last year that this is no time to cut budget deficit. The fiscal stimulus should be in place because I think he also understands that under the circumstances, there's so little that monetary policy can do.
But there's a lot the fiscal policy can do to keep the U.S. economy from losing its bottom.
BOLTON: Richard, how.
KOO: And so I think he should continue to push that line. Yes?
BOLTON: Continue to push that line and maybe try to subtly encourage Washington to take a little bit more control. Sounds like you think that Congress should do something.
KOO: Yes, because when people are deleveraging even with zero interest rates, that means they are very sick. The private sector is very sick and in need of help because their balance sheets are under water.
And then that's the case, even if Federal Reserve lowers interest rates, puts liquidity into the market, the private sector cannot really respond because they have balance sheet problems.
And the government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. So the only thing the government can do is to spend the money that private sector has saved and put that back into the income stream.
And that, I think is what the U.S. has to do. And that means this is no time to cut budget deficit. You have to maintain the fiscal stimulus until private sector is healthy enough to start borrowing and spending money again.
And at that point, Federal Reserve will become all very irrelevant. But at the moment, I think the control of the U.S. economy is really in the hands of Congress.
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It is against the law to allow big insolvent banks to continue in business.
The government has illegally outlawed risk for the TBTFs not only in the present but in the past, according to an older article on Dr. Nikolai Bezroukov’s Softpanorama website entitled The “Too Big to Fail” Problem. And many economists believe “that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion.”
The laws to do so already are on the books. In fact, the law “not only authorizes the government to seize insolvent banks, it mandates it,” writes Bezroukov referencing William K. Black, senior regulator during the S&L crisis, who said the Bush and Obama administrations broke the law by refusing to close the insolvent banks.
“We don’t really need these giant gamblers,” says Bezroukov. “We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.”
The article concludes:
“In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.
“In other words, the nine biggest banks were all insolvent in the 1980s.
“Indeed, Richard C. Koo – former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed’s Board of Governors, and now chief economist for Nomura – confirmed this fact… in a speech to the Center for Strategic & International Studies. Specifically, Koo said that -after the Latin American crisis hit in 1982 – the New York Fed concluded that 7 out of 8 money center banks were actually “underwater” and “bankrupt," but that the Fed hid that fact from the American people.
“So the government’s failure to break up the insolvent giants – even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up – is nothing new.
“William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (‘the entire strategy is to keep people from getting the facts’) makes a lot more sense.”
http://www.softpanorama.info/Skeptics/Financial_skeptic/Casino_capitalism/Systemic_instability_of_financial_sector/tbtf_problem.shtml
“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.” — Thomas Edison
https://libertyrevival.wordpress.com/2012/08/05/kudos-to-paul-craig-roberts-and-herman-daly/
Sorry for the bad link ZHers.
National Debt is Meaningless
ou’re paying a big chunk of your salary in income taxes to the bond holders of national debt. Queen Elizabeth is one of those people holding treasury bonds. You’re paying someone with a graduate degree to groom the Queen’s stool. You’re working your butt off so that some parasite can have her butt wiped by someone with a stuffy graduate degree and no self respect. You might want to reconsider how meaningless interest is on $15T the next time you buy toilet paper and would like some of your taxes back to pay for it.
We wouldn’t even need national debt and the income tax if the government printed rather than borrowed their own money, like George Washington did to fund the American Revolution, and like Lincoln did to fund the Civil War. We could pay off the national debt without taxation if we ended fractional reserve banking and the Congress fulfilled their Constitutional duty to issue and regulate the value of the legal tender. Legislation even exists from the American Monetary Institute to do just that.
Deirdre is such a babe
I am very sick.
When someone is really sick, sometimes the best thing to do is nothing. Stop giving them medicine that makes them sicker, stop bothering them -- let them sleep, and heal.
But somehow, these uber economists like kung fu here, wants to SPEND MORE MONEY. Ok, sure, the best thing to do when the country is broke is to do that, right? NO! The best thing for government to do is to allow people to have confidence that if they actually invest they won't lose it because the entire government is spending like there is a meteor headed our way or printing money like Zimbabwe. How f'ing tough is it to figure out?
Economists are no better than the most incompetent profession on the planet, and by that I mean of course Traffic Engineers.
http://www.ft.com/intl/cms/s/0/474f7d82-fea5-11e1-a2e2-00144feabdc0.html#axzz26h6o4KYA
Extract:
"This was partly designed to ease further the cost of mortgages, but bankers say the impact will be limited by a dearth of loan officers with banks reluctant to cut mortgage rates without the staff to process any increase in business."
This is just 2 business days after Cocainated Easing 3 announcement. Zerohedge should ask Chris Whalen to publish something related to how much of MBS is stuck in courts due to foreclosure lawsuits.
The way it's going CE3 may end up being illegal. That would be funny.
http://www.youtube.com/watch?v=gEmJ-VWPDM4
http://www.youtube.com/watch?v=pJGGZZUvVJs&feature=share Come on boys, put your money where your mouth is. Support your country.
Let's go back an read the comments here the last time we had "the debt ceiling" debacle. Remember everything written here was, "we're done, they won't solve it". Again, are people really this naive to think these clowns will let us "fall over the fiscal cliff"?? Ain't gonna happen. But makes great doomer fodder for sure.
Basically as the world moves to more MIC play worldwide, as the governments start coming down hard on fiscal evasion; aka UBS deal in Swiss land, we will see the big stick of government more at play. As the CB print to infinity to avoid 1930 type depression, rightly or wrongly, makes the uber nation states take front seat.
Monetary debasement, makes asset levitation very difficult, as the ability to keep low interest is countered by the tendancy of the world inflation to spike. If this spike occurs, it will kill FED asset play.
If the BRIC countries go into recession along with first world, then we are in great depression and world wide biflation will become uncontrollable.
Massive inflation vs massive deflation are now the more likely scenarios, as the pendulum swings harder. All in between "controlled" scenarios are now receding. Keep eyes wide open as the CB can kicking official spiel will sell us all the middle road...going nowhere.
The MSM media gurus , like here on Bloomberg, keep saying : we are not seeing the world economy recovering YET!
As current liquidity pump does not resolve aggregate insolvency; more the contrary, the YET is like the YETI!
Am I the only guy that sees this whole thing turning into a full-scale world war over resources (soon)? And that the whole thing is totally scripted? And that part of it's design is a massive de-pop of all the "worthless feeders"?
Just asking.
They sure would like it to go down that way, but the U.S. military won't play ball on WWIII and there will be no Armageddon. The NWO is actually on the ropes, being undercut and hedged against at every turn. The death of the Federal Reserve Note needn't be the end of the world either. Mankind is actually on the verge of a golden age, not the dark ages. Once you end the FED, reset the money system with asset-backed Treasury Notes, and ARREST ALL THE PERPETRATORS you will have a sound system... http://tinyurl.com/cd5cyjo/
Headed TOWARDS a lost decade? What the F do they think 2000-2010 was?