There was a lot more wrong with what happened in the Great Depression. Mr. Rogers should know that and should have mentioned that. To act as if liquidity alone was the reason for the Great Depression is disingenuous.
For all of the talk of Krugman receiving his recent Nobel Prize for his theories on trade, nonetheless it seems to me that the committee was awarding the prize posthumously to John Maynard Keynes. Krugman, after all, is not a “neo-Keynesian;” no, he is a true-blue, out-and-out old time religion Keynesian.
His latest column, “Let’s Get Fiscal,” is right out of Keynes’ General Theory. While not using the term “liquidity trap,” nonetheless Krugman describes such a situation, and then offers “fiscal policy” as a way out:
…there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.
He then ends with the following howler:
If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.
Oh, yes. The Beltway crowd calls for “fiscal restraint.” Right. Krugman must have bought some pretty powerful weed with that $1.4 million he received for winning the Nobel.
I know it wasn’t for his recent writings and I suppose it’s not as bad as the whole Al Gore thing… but… really…
Video available at YouTube (non-embeddable)
Jim Rogers tells it like it is here. He’s a man after my own heart who is up front. But there is one critically important point where his thought is fuzzy. Asked about suspending market trading, he correctly said this would not help and in fact would defer an economic and market recovery. He went on to explain why: “Nobody has liquidity. Nobody will lend any money. Nobody has any money.” But a few minutes earlier, he correctly criticized the Fed for its money-pumping. So, with his confusion of thought, he is raw meat for Fed-supporters who wish to save the system by pumping up money and calling it liquidity.
If he were alone in this confusion, it would not matter. But there are lots of people with the same idea, and so they are helpless in saying what is wrong with the Fed’s money pumping. And the Fed has this argument, wrong though it is, that it is supplying the liquidity that the markets need. This argument could not be more wrong.
Liquidity is an effect, not a cause. Illiquidity is the effect of people who have money not wanting to lend that money. When they refuse to lend, then the credit markets lack liquidity.
People have plenty of money to transact. The money supply has not dropped at all in this whole episode. Wealth has dropped. Valuations have dropped. There is not less money. For every seller, there has been a buyer. Money changed hands. It did not disappear. The trades were at lower prices. Wealth disappeared. Assets were marked down in price.
So, Mr. Rogers is correct to say that nobody has liquidity (meaning that many debt markets are not trading in much volume.) Stock markets of course are still trading high volumes and are liquid. It’s the debt markets that have become illiquid, and it’s not for lack of money. The money in t-bills and in money market funds is very large.
He’s right to say that nobody will lend any money. He’s 100% wrong to say that nobody has any money. They have money, and so they don’t need the Fed to add more money. They are not lending that money, and the Fed should not attempt to take their place and become a lender of first, last, or any resort.
The problem is CREDIT. It’s a simple fact (overlooked by all the officials that Rogers correctly calls “idiots”) that a lender will only lend to a borrower after assessing the credit-worthiness of the borrower. That is done, in part, by learning what the borrower’s assets and liabilities are. One of the biggest problems now is that the lenders cannot ascertain the actual values of the borrower’s assets and liabilities. The financial firms are carrying junk assets with unknown values. They are carrying liabilities in the form of insurance guarantees like credit default swaps that have unknown amounts and values. Nobody will lend to a borrower whom they are so unsure of. The market needs transparency. Bailouts make matters worse because they hold up the weak banks rather than letting them fail. The potential lenders have a harder time telling the good from the bad. Furthermore, banks are connected in many ways in loan markets. Keeping the bad ones alive and running only weakens the stronger ones that they are connected to. Lenders are then more afraid to lend to any of them, good or bad.
It is the job of the markets and investors to sort the bad from the good and the beautiful. It is the job of the markets to shift the capital that is there away from the incompetents to the competents. This is why bankruptcies should have been allowed to happen from the start. This is why the market dropped sharply on the bailout bill. I learned yesterday that when the bailout bill was first broached, the volatility index (VIX) immediately rose, and it rose again when the bill was passed. The market took it as a signal that the downside risk had just increased.
Officialdom has continually been making matters worse for months. My hat’s off to Jim Rogers for speaking so bluntly and accurately. We need more like him.
There is Peter Schiff but the two of them plus Ron Paul and Bob Barr aren’t enough to stem the flow of bullshit we get constantly in the MSM.
Jim Rogers prefaced his statements about money and liquidity with the words “They are saying…” The audibility was low at that point and I missed it the first time. Thus, he attributed those statements to others, the Fed and Treasury. I withdraw my statement that he was confused. Sorry, Jim. My critique of the content of the statements remains. The Fed and Treasury are basing hugely important and expensive policies on a misunderstanding and socialization of money and credit.
I missed that one on the first watch too. It seemed rather odd that Rogers would have said that but people slip at times so I let it pass.
The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
The Fed’s expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.
“Today’s blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, “the Fed’s balance sheet is about to explode.”
Is that hyperinflation I hear? Who needs Congress when you already have the power to bailout these institutions in other ways?
All the money in the world wouldn’t help this… why do they continue to try?
Within minutes of the FED announcing the rescue of the crumbling insurer, I had the luck of being able to chat with an AIG employee about the Government’s repsonse and AIG’s current financial situation:
AIG employee looks like the Fed will be bailing us out. take THAT, taxpayers!
xyz ugh. this is really sickening.
AIG employee bwahahahaha!!
xyz you do realize that youre part of that “tax payer” category, right?
AIG employee yeah but the money this will bring me personally is probably more than Ipaid in taxes in the past year or so. finally the government does something right for a change. yay Fed!
xyz i disagree
AIG employee No, if AIG bit the dust then I just would’ve been canned with everyone else. Now we’ll be offered buyouts. That’s a lot of money for me.
xyz you should have been canned, just like lehman brothers. AIG was bankrupt and deserved to fail
AIG employee No, AIG is solvent and I did not deserve to be canned. There is a liquidity due to the Financial Services arm of the company. liquidity *issue*. Anyway, the insurance part of the company (where I work) is healthy and we have $1 trn in assets worldwide.
xyz an $85 billion rescue plan is solvent?
AIG employee You’re talking about something you don’t know anything about. it’s a bridge loan. AIG has more than enough assets to cover its credit default swaps, but not enough to to capitalize them. enough *time* to capitalize them
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