Friday, May 17, 2013

Extra Friday Links

1---Richard Koo on the ineffectiveness of monetary expansion, zero hedge

Koo: As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down. At the moment, however, that is not yet the case, as the sharp fall of the yen following the announcement of Abenomics with its commitment to monetary easing amply demonstrates...

 The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limited impact...

 In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging


Koo affirms that fiscal spending and not monetary policy saved the US from the Great Depression:

Koo: Unfortunately there was a period in economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.

The asset side of banks’ balance sheet clearly indicates that it was lending to the government that grew during this period (chart below). The lending to the private sector did not grow at all during this period because the sector was still repairing its balance sheets. And the government was borrowing because the Roosevelt Administration needed to finance its New Deal fiscal stimulus. In other words, it was Roosevelt’s fiscal stimulus that increased both the GDP and money supply after 1933...

Although deficit spending is frequently associated with crowding out and misallocation of resources, during balance sheet recessions, the opposite is true...

About Japan’s Abeconomics:

Koo: In Japan, the new governor of Bank of Japan Mr. Kuroda, who has no prior experience with monetary policy, is still clinging to the obsolete idea that additional bond purchases will somehow get the economic activity and inflation rates to pick up.

About the withdrawal of liquidity by central banks:

Koo: But once the private sector finishes repairing balance sheets and regains its appetite for borrowings, the central bank will be forced to remove the massive reserves in the banking system before both money supply and inflation go through the roof. The benefit of implementation QE and the cost of its removal are not symmetrical because the two take place at different phases of the economy. At this juncture, a QE of $200 billion or $2 trillion really does not make much difference because the money multiplier is dead in the water...

This time, however, the US and UK central banks are in the long end of the market. This means the removal of QE will have much larger effect at the long end of the yield curve, with equally larger impact on the economy just when the economy is regaining its health and willingness to borrow (The risks outweigh the benefits?) 

2---Big Banks Get Break in Rules to Limit Derivatives Risks, NYT

Under pressure from Wall Street lobbyists, federal regulators have agreed to soften a rule intended to rein in the banking industry’s domination of a risky market.
The changes to the rule, which will be announced on Thursday, could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.
The $700 trillion market for derivatives — contracts that derive their value from an underlying asset like a bond or an interest rate — allow companies to either speculate in the markets or protect against risk.

critics worry that the banks gained enough flexibility under the plan that it hews too closely to the “precrisis status.”

“The rule is really on the edge of returning to the old, opaque way of doing business,” said Marcus Stanley, the policy director of Americans for Financial Reform, a group that supports new rules for Wall Street.

Making such decisions on regulatory standards is a product of the Dodd-Frank Act of 2010, which mandated that federal agencies write hundreds of new rules for Wall Street. Most of that effort is now complete at the trading commission. But across several other agencies, nearly two-thirds of the rules are unfinished, including some major measures like the Volcker Rule, which seeks to prevent banks from trading with their own money....

Mr. Gensler said that, even with the compromise, the rule will still push private derivatives trading onto regulated trading platforms, much like stock trading. He also argued that the agency plans to adopt two other rules on Thursday that will subject large swaths of trades to regulatory scrutiny.
“No longer will this be a closed, dark market,” Mr. Gensler said. “I think what we’re planning to do tomorrow fulfills the Congressional mandate and the president’s commitment.”

Yet the deal comes at an awkward time for the agency. Mr. Gensler, who was embraced by consumer advocates but scorned by some on Wall Street, is expected to leave the agency later this year now that his term has technically ended.

In preliminary talks about filling the spot, the White House is expected to consider Mr. Wetjen, a former aide to the Senate majority leader, Harry Reid. The administration, according to people briefed on the matter, is also looking at an outsider as a potential successor: Amanda Renteria, a former Goldman Sachs employee and Senate aide.

The prospect of someone other than Mr. Gensler completing the rules provided some momentum for the compromise, officials say. The officials also noted that Mr. Gensler had set a June 30 deadline for completing the plan....

The banks have all these ways to reverse the rules behind the scenes,” Mr. Stanley said.
The compromise also alarmed Bart Chilton, a Democratic member of the agency who has called for greater competition in the derivatives market. Still, Mr. Chilton signaled a willingness to vote for the rule.
“At the end of the day, we need a rule and that may mean some have to hold their noses,” he said

3---Pentagon plans to fight ‘War on Terror’ for another 20 years, RT

4---Military Sex Abuse Prevention Official Ran On-Base Prostitution Ring, antiwar
 Forced Subordinate Into Prostitution

5---Civil liberties, press freedom, and America's global role, antiwar

 


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