Friday, December 12, 2014

What I heard at the Consumer Federation of America’s annual Financial Services Conference

Every year, the Consumer Federation of America (CFA for short) hosts a financial services conference, which brings together consumer advocates and financial industry experts for presentations and discussion. This year’s conference focused on emerging issues like Big Data, the CFPB, and overdrafts.

The conference kicked off with remarks from Eric Belsky, the new director of Community Affairs at the Federal Reserve Board. Belsky explained that since the transfer of many of the Fed’s powers to the CFPB, his Community Affairs office has been focusing on supervision of state banks for compliance with consumer protection laws, the Community Reinvestment act, Flood Insurance, and the Servicemembers Civil Relief Act. His office also supervises large banks for Fair Housing Act compliance.

Belsky also noted that the Fed is trying to take a more risk focused approach to supervision, especially on new financial products and bank relationships with 3rd party vendors.

Next was a panel discussion on the CFPB’s enforcement actions, featuring Hunter Wiggins, the CFPB Deputy Enforcement Director for Policy and Strategy. The panel began discussing how financial regulatory agencies in the past had constantly been behind the curve, focusing on cleaning up the last crisis and ignoring the growing one.

Wiggins then explained the Bureau’s approach to enforcement. When determining what cases to pursue, the Bureau’s enforcement teams look at the number of victims, whether consumer harm is temporary or long lasting, the size and composition of vulnerable populations, and if private litigation options have been used or are available. This results in about half of the enforcement teams focusing on the “core work” of mortgage origination/servicing, fair lending, payday, auto, etc. The other half is devoted to “cross product” issues and evaluation of emerging products. So far in 2014, the Bureau has made 36 such enforcement actions, covering a large swath of the financial services marketplace.
The first point of contact that Bureau attorneys have with business is often when delivering Civil Investigative Demands, or CID’s. Mr. Wiggins stated that the Bureau’s CIDs, which can often be very demanding and go into the thousands of pages, have gotten more precise over time.


Big Data panel

The next panel was on the use of “Big Data”, focusing on how credit bureaus, furnishers, and insurance companies use all sorts of new data in their businesses. The consumer advocate in the panel stated that while ECOA and FCRA were good at protecting consumer information in the early days, the rapid development of digital technology and social media presents new opportunities for consumer harm and privacy violations. He also stated that the tendency of new/young firms, especially in Silicon Valley, to move too quickly into these new data mining fields can be a recipe for mistakes and consumer harm.  

One of the more memorable statements came from the “big data” expert on the panel, who revealed that some analytical firms claim to be able to predict credit scores based on how many exclamation points a person uses in their social media posts. Some of these firms can also track and record where a person clicks on a webpage, what they “like” on Facebook, and what they search for on Google. Companies can then use this data to predict credit scores and target their marketing of various financial and insurance products.

The downside is that this sort of data analysis can give inferences and establish correlations between certain behaviors, but it cannot prove social causations. The main takeaway here is that increasing use of big data reduces consumer surplus in the lending/insurance markets. Any benefit of the doubt that consumers may get from service providers is lessened when doubt can be filled with this new information.

The panelists stressed that going forward, more federal regulations may be needed in this data collection field, because the machinery is far too complicated for consumers to understand and make informed decisions upon. A basis for these regulations may be a “right to be forgotten”, where consumers can opt to use social media and software applications without being tracked.



Overdraft panel

The afternoon panel on overdrafts featured CFPB Deposit Markets director Gary Stein, Pew Research’s banking expert Susan Weinstock, consumer advocate Sarah Ludwig, and Bank of America SVP for Check/Debit products Kevin Condon.

The panel began with an analysis of the 2009 overdraft rule from the Federal Reserve. Despite the “opt-in” system established by this rule, the amount of overdrafts and account closures due to overdrafts has increased. The basic conclusion is that the Fed’s opt-in system was too confusing for consumers to understand and thus failed to work. Research from the Woodstock Institute also found enormous variations in how overdraft programs were explained at different banks. Bank employees often made errors in explaining these programs, and one employee was even found pitching overdraft protection as a way to “avoid fees.” According to Ludwig, the difference in opt-in rates across banks is further evidence that the Fed’s form is terrible. And while Ludwig praised credit unions, she also aggressively criticized overdrafts fees in general, focusing on their tendency to hit lower income consumers the hardest.

Stein explained that according to the Bureau’s research, about 25% of all checking accounts overdraft at least once per year, and young people are far more likely to incur overdrafts than old. Ludwig noted that the banking industry made $32 billion in overdraft fees in 2013. Weinstock also noted that in a certain minority neighborhood in Los Angeles that her organization studied, more people were kicked out of the banking system due to overdrafts than from losing a job during the Great Recession.
The panel agreed that generally, overdraft penalty fees are the most expensive form of overdraft, while overdraft protection/courtesy pay is cheaper for consumers.

According to Condon, Bank of America’s “Safe Balance” checking account product is a zero overdraft account. However, it carries a monthly fee and can’t have checks written on it. Codon also explained that Bank of America banned debit card overdrafts after the 2009 Regulation E change, and that BofA markets its “Safe Balance” accounts to customers who frequently overdraft.

Stein also took some time to explain the Bureau’s new prepaid card proposal. The Bureau is proposing to treat overdrafts on prepaid cards as extensions of credit, which will therefore be covered under Reg Z credit protections. Issuers of these cards may also be prohibited from forcibly clearing overdrafts with funds from a related transaction account. However, Weinstock noted that very few prepaid card issuers currently offer overdraft or credit extensions on their cards.



Monday, November 17, 2014

Don't 'bank' on your econ textbook

If I had a dollar for every time an economist says something wrong about the modern economy, I'd be able to buy up an entire economics department (a-la Koch brothers).

In many of my previous posts in this blog, I've detailed how economists chronically misunderstand debt, deficits, interest rates, inflation, and trade. But so far I've ignored what is probably the biggest gaping hole of knowledge in the economics profession: the retail banking system. There is almost a laughable difference between the way economists explain banking, and the way that people who actually work in banking know how the system operates.

Economists remain wedded to very outdated, stylized views of banking that ceased to exist a long time ago. The overly simplistic money multiplier is perhaps the most inaccurate of these views. You've probably heard an economist describe banks as special kinds of private businesses that take money from savers/depositors, and recycle that money back into the economy through lending. This is called 'fractional reserve banking', which, like competent leadership of the Washington Redskins, has not existed for decades.

Banks have a very important role in the US economy. The government has empowered them with the ability to create credit based on creditworthiness and public need. In the simplest terms, modern US banks are credit allocation utilities, and serve as our conduits into the federal government's payment system.  Our modern economy would not exist without either of these facilities, especially the payments system. If you have ever used cash, check, debit, or ACH to acquire a good or service, then you have used the federal government's payment system. This payment system consists of wires between banks, which allows the deposits of difference banks to clear at par (face value). For example, if a customer of Bank A writes a $100 check to a customer of Bank B, then $100 is debited from Bank A's dollar account at the Federal Reserve, and credited to Bank B's dollar account at the Federal Reserve. Just like we have tubes and wires for water, sewer, cable, phone and internet, banks are tubes and wires for money. And just as competition among utilities leads to bad outcomes (duplicative infrastructure and poor service), competition among bankers for lower and lower lending standards leads to other bad outcomes (financial crises).

When it comes to credit creation, this is the arrangement: The federal government allows licensed banks to create an infinite amount of money out of thin air, and charge interest on it. The federal government also allows the liabilities created by individual banks to clear at par with each other, via the interbank payment system (Fedwire), and insures these liabilities (through the FDIC). Depending on the temperament of the bankers, and the state of the economy, banking can be a very easy and profitable enterprise. For example, in the old days of basic S&L banking, people used to joke about the "3-5-3 rule." Bankers would take in deposits at 3% interest, make mortgages at 5% interest, and be on the golf course by 3pm.

In exchange for these privileges, banks have to comply with the regulations that the federal government writes for them. These regulations can be roughly grouped into three categories: prudential (protecting the safety and soundness of the banks themselves), consumer protection (protects consumers from being ripped off by banks, mainly through disclosure requirements), and a group of rules called the 'Bank Secrecy Act', which prevent money laundering, and allow government agencies to monitor and track potential terrorists.

When a US bank creates credit, a the loan officer simply keystrokes a new deposit into an account. So when banks create credit, they create their own liabilities, which themselves are not US dollars. This bank money is denominated in US dollars, and is cleared by US dollars, but it is not US dollars. This is crucial to understanding the banking system. Only the US government can create a US dollar, which is its own distinct liability. Banks cannot create US dollars, since dollars are not their liabilities. Banks create bank money, which are their own liabilities. So while bank lending does create new money, it does not create new US dollars. Only deficit spending from the US federal government can create new US dollars. Therefore, the amount of US dollars in the world does not change as the result of bank lending. When a bank orders cash to fill its ATM, its dollar account at the Federal Reserve is debited by the same amount of cash as it receives. The size of this Federal Reserve account is not affected by lending. This is the same account that is used to maintain reserve requirements and make payments to other banks on behalf customers.

For example, if you get a $250,000 home loan at Wells Fargo, you receive $250,000 in your Wells Fargo checking account. This money is your asset, and the bank's liability. In exchange, the bank creates the mortgage, which is their asset and your liability. This is called dual-entry accounting, and is the best way to understand modern banking. When you pay off the mortgage, this process happens in reverse. The deposits created by the loan are destroyed, and the mortgage disappears. Both your and the bank's liability vanish once the mortgage is paid off in full.

Banks are not part of the private sector, since they could not exist without the Federal Reserve System and deposit insurance provided by the FDIC (to say nothing about how the Fed and Treasury rescued the banking system in 1933, 1991, and  2008/9 -plus every time the FDIC puts a failing bank into conservatorship). Banks also do not recycle your deposits into loans. In modern times, banks are infinitely funded, and only rely on consumer deposits as one source of liquidity. This bloody brilliant paper and a video from the Bank of England (the central bank of the UK) confirms exactly what I am saying here.

As members of the Federal Reserve System, banks can always get the reserves they need to meet reserve requirements, from the federal funds market, the discount window, or overdrafts. Since the Fed itself mandates these reserve requirements, the Fed also always provides the reserves necessary for these requirements to be met. Since we are no longer under a gold standard, the Fed does not have to worry about its liabilities (reserves/dollars) being called in for gold, and can therefore flexibly create/lend these reserves as necessary to meet the requirements it imposes. As the requirer and monopoly issuer of these reserves, the Fed always provides them in infinite amounts, but at certain and variable prices which are voted on by the Federal Open Market Committee. This price of these reserves is what people usually refer to as 'interest rates.'

Note that reserve requirements are entirely different from capital requirements. Reserve requirements are about setting monetary policy. Capital requirements are prudential measures intended to maintain the safety and soundness of the banking system.

At its core, retail banking is a simple activity, with best practices that are well known and established. Like other utilities, it should be a boring and marginally profitable enterprise. The US used to have such a simple, sound banking system in the five decades after the Great Depression. Then, when a fever of deregulation took over in the 1980's, banking was unleashed into the wild, rapacious, and highly profitable business of rent extraction that it is today.

If you've reached the end of this blog, congratulations! You now have a better understanding of the banking system than many economists. Now feel free to use that overpriced textbook as kindling or to even out a wobbly chair.

Thursday, October 9, 2014

Macro update

So far this week, we've had several pieces of economic news, which have significantly affected the stock market. We had a new CBO deficit projection for the year, a release of minutes from last week's FOMC meeting, and new unemployment numbers today. This month will also likely see the completion of the so called "taper" of the Fed's Quantitative Easing program, meaning that the Fed's net additions of US Treasury and Agency Mortgage-Backed Securities to its System Open Market Account portfolio will go to zero after October 31. The stock markets and financial media have been all over the map in interpreting this information, with a triple digit loss on the Dow on Tuesday, followed by a triple digit gain on Wednesday, and another triple digit fall today.

On the fiscal side, the deficit is the smallest it has been since.....2008--you know, that year we went into a recession. According to CBO, total federal outlays were about the same as last year, but revenues increased by about $200 billion, bringing down the deficit. If we were a country like Germany, which does not spend its own currency, this news might be a reason to celebrate. However, we in the US spend our US dollar, which is our own sovereign, nonconvertible fiat currency. That means that more dollars the US government spends, the more that are added to the economy. Conversely, the more dollars the the US government redeems through taxation, the less dollars that are left to the economy. So for an economy to grow, it needs a constant stream of new dollars added to it--and the only way this happens is through federal "deficits." I put word deficit in quotes, because it is really an inappropriate term for modern public finance. The word deficit comes from 'deficient', which means a running out or lacking of "things." Problem is, since 1933, US dollars have not been materials 'things that can be run out of, because they cannot be consumed or redeemed for anything other than themselves. US dollars are created by decree-- the Fed and Treasury declare them into existence by simply marking up bank accounts, to the tune of billions of dollars a day. So this shrinking deficit represents a shrinking amount of dollars being added to the economy-- not a good thing when we have so many resources, labor and otherwise, still sitting idle in the US.

On the monetary side, we had a release of the minutes from the last meeting of the Fed's FOMC, where we heard members discussing the continuing weakness of the labor market, the lower than expected inflation, and potential continuing need for what they believe is "stimulus." This news of potential stimulus caused the Dow to jump by almost 300 points and wiped out the losses from the previous day. However at this point, policy observers should have serious doubts that the FOMC actually knows what it is doing. Its member's comments and statements have been all over the map...sometimes things are improving and rates may need to go up, sometimes things are weaker than they seem and rates need to stay low (the latter of which we just heard them say). They also still seem to cling on to the belief that low rates and large scale asset purchases (QE) are an economic stiumulus, despite 6 years of contrary evidence. They haven't seem to have caught on to the fact that QE hasn't even succeeded at its ostensible goal of bringing down long term  rates (it has actually done the opposite:)

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To make matters worse, these FOMC statements cause the markets to jolt back and forth based just on reading the tea leaves and trying to guess intentions. Not a good way to make policy in the 21st century.

Its high time that the Fed consider Warren Mosler's thoughts on this: that low interest rates, while doing relatively little to stimulate bank lending, actually cause a drag on the economy, because all the trillions of dollars in outstanding assets and savings produce much lower yields for their owners. These asset holders therefore have much less interest income, which means they have less to spend. This is roughly equivalent to a tax increase on these asset holders. To make matters worse, most of the interest income that the Federal Reserve Banks earn on their increased holdings of Treasuries and MBS, by law, have to be remitted back to the Treasury. These remittances reduce the deficit in the same way as a tax increases reduce the deficit (and therefore the number of dollars in the economy)

So this "tax increase", along with the additional $200 billion collected by the IRS, represents a significant drain on the purchasing power of American citizens. This means that some other entity in the economy ie private sector creditors, have to spend more than their income to offset the federal shrinkage, otherwise X amount of produced goods/services will go unsold. Problem is, this private credit expansion via new originations of mortgage, student, commercial, and auto loans, as well as credit cards, never expanded very rapidly following the financial crisis, and now appears to be tapering off from even these low levels. This leaves foreigners as the only remaining source of net demand via "spending more than their income". But with China and Europe rapidly decelerating in the past few months, export led growth aint happening either.

One bit of recent good news has been the fall in oil prices. If this translates to lower gas prices for US consumers, this means we will have more money left over to spend on other things-- meaning a higher quality of living and more domestic demand. However this good news has a big downside as well. You know all that incredible job growth that states like North Dakota have seen over the past few years? Thats because higher oil prices have finally made the very expensive extraction techniques (fracking, shale, oil sands) that they use more economical. The problem is that these techniques, which have led to the much celebrated US energy boom, are only economical feasible if oil stays above around $78 a barrel. Oil prices are now near 2-year lows and sliding further. This puts many of the US oil operations, and the tens of thousands of jobs that they support, in serious jeopardy.

So I'm not suggesting any sudden collapse a-la-2008. However, there is little reason to expect any significant growth in the coming months. Remember, economic growth does not fall from the sky-- its always a result of policy choices. And the unfortunate reality now is that our policymakers have chosen to remain ignorant of how the economy actually works, and are therefore incapable of implementing any growth-restoring policies.

Monday, September 29, 2014

Congress now considering expanding energy exports

Via Politico:


"The petroleum industry’s crusade to lift the four-decade-old ban on crude oil exports is shaping up as next year’s hottest energy debate, and potential White House contenders like Gov. Chris Christie and Sens. Rand Paul and Marco Rubio are already on board.

Some GOP fans of crude exports are ready to move even without party unity. Asked if he had qualms about getting ahead of his leaders in pushing to end the ban, Oklahoma Sen. Jim Inhofe said, “No. Because it’s right.”

Another outspoken export advocate is Alaska Sen. Lisa Murkowski, who’s in line to chair the Energy and Natural Resources Committee if Republicans retake the chamber.
Democrats face their own divide on the issue. The White House has left the door open to re-examining the ban, former top economic adviser Larry Summers called for its demise this month, and Energy Secretary Ernest Moniz last year described barring exports as a 20th-century policy. In June, the Commerce Department caused a stir with the news that it had approved licenses for two oil producers to export limited amounts of a lightly processed ultralight crude known as condensate. The administration appears “ready to go where the Hill is on this,” Catanzaro added."


The fact that this issue in now being seriously debated points to the stupidity and corruption of our Congress. Exporting oil and gas makes absolutely no sense for US consumers. For years, all we heard was that we had to develop domestic oil resources to rid ourselves of foreign oil imports--and the second that trend starts to reverse, the Republicans want us selling our natural resources to foreigners. Whatever you may think about fracking and drilling in environmentally sensitive areas, at the very least you should want these fuels to by consumed by Americans, since we are the ones taking all the health/environmental risks from the extraction processes.

In all honesty I hope the Repubs continue to push forward on this issue, because it would perfectly demonstrate how they never really cared about reducing gas prices-- it was always about profits for their industry donors. It would be impossible for them to ever construe oil exports as a good thing for the American consumers for whom they pretend to care so much about. And this is from the same people that always said we cant afford environmental protections because it may cause energy prices to rise. Now they want to be able to sell our oil to higher bidding foreigners, which borders on treason in my book. Selling our domestic energy for foreign fiat...brilliant idea guys!

Wednesday, September 24, 2014

There is no lending solution to an income problem

Working people need more income, not more debt. Yesterday’s release of Home Mortgage Disclosure Act (HMDA) data revealed that lending to African-Americans slipped to 4.8 percent in 2013 from 5.1 percent in 2012, while whites are taking a bigger chunk of the mortgage market-- 70.2 percent ofborrowers last year, and 69.9 percent of borrowers in 2012. While this new information is terrible and unsurprising, I fear that it could lead to a renewed push for weakening of lending standards, under the banner of expanded credit opportunity.

In my experience as an intern in the Consumer Financial Protection Bureau’s Office of Community Affairs, I regularly interacted with advocates from community, religious, ethnic, and consumer protection groups. They were all lovely people who were smart, passionate about what they did, and tough as hell. The success, and even the existence of the CFPB is testament to their ability to stand up against powerful banking lobbyists, who were usually paid much more than them. And while I agreed or at least sympathized with most of what these folks advocated, there was one issue where I found their means to be questionable. 

While I think the ends  that they were advocating for (equality of opportunity, empowering minority groups and the poor, fair lending) were all fantastic, the means that they advocated for often left me shaking my head, especially when it came to credit availability. The overriding thought process of these advocates was that minorities needed more access to credit, aka debt. Unfortunately, this often meant that these advocates supported weaker lending standards, and found themselves in the odd position of agreeing with banking industry lobbyists. This was especially true during the development of the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules.  

However, I always felt that these folks were advocating for the wrong tools. The economic struggles of the poor and minorities stem from a lack of income, not a lack of debt. It is high levels of unemployment and deterioration of unions that have caused a collapse in incomes, and therefore creditworthiness, in these communities. Therefore, restoring income growth should be the primary focus of minority and consumer advocates.  Lowering lending standards to meet these lower incomes is certainly not the solution to this problem, as we already tried this experiment in the last decade. No amount of lent money can replace a lack of earned money, and deliberately weakening underwriting standards to paper over insufficient incomes is a fool’s errand. As we now know, it was minority groups, especially African-Americans, who lost, and have not recovered, the most wealth in the financial crisis, since most of their wealth was in their homes. And of course, at the height of the bubble, many fly-by-night originators were more than happy to push out ARM NINJA loans to minority communities, who were rarely able to make payments after the teaser periods expired. 

The political implications of this are even scarier. We already know how conservatives love to blame the entire financial crisis on the federal government incentivizing lending, (through the GSE's and Community Reinvestment Act) to “those people.” I fear that trying this experiment again will not only set minorities back, but it will further inflame the lunatic fringe that empowers the very politicians who make income inequality worse.

As far as I know, the MMT community is the only one that clearly elucidates the relationship between national spending, incomes, lending, and debt. I think it’s vital that the ethnic/community/consumer groups come to fully understand MMT and the stock/flows that we describe. Without it, they may continue to walk down the beaten path, and over the cliff once again. 

Tuesday, July 8, 2014

Update on the Fed's new Term Deposit Facility

Its been a few months since my earlier post discussing the Fed's new Term Deposit Facility. Since then, the scope of this program has grown significantly, with auctions growing from around $25 billion per week, to a massive $125 billion in last week's auction.

These term deposits are simply one-week CD's offered by the Fed. Participating depository institutions have their reserve accounts debited, and then re-credited 7 days later, plus the small, but free amount of interest. While each institution can only tender a maximum of $10 billion, the amount of participating institutions has more than doubled since March of this year-- from 27 to 58. Not surprisingly, this growth in participation follows the Fed's gradual raising of the rates it will pay, from 26 basis points in March, to 30bp just today. Not surprisingly, the 26bp auctions had fewer participants than the 29 bp auction, since many institutions likely figured that getting a one-basis point spread over what they receive on their excess balance accounts (25bp) was not worth the trouble. For now, the Fed has stated that 30 basis points will be the ceiling for this round of term deposit auctions, with the first 30bp auction set to go off today.



The size of this latest auction demonstrates the ease to which the Fed can drain reserves if it chooses to. It simply states the rate that it will pay on term deposits,  and accepts bids. Last week in a matter of hours, the Fed was able to drain $125 billion in reserves from the banking system, with no problems. It will be interesting to see how much higher the Fed may decide to pay on its Term Deposits, and how large these auctions may become as a result. Unfortunately, the Fed states on multiple TDF related pages that the auctions "are a matter of prudent planning and have no implications for the near-term conduct of monetary policy."

It remains to be seen if this statement holds true in the future, since it seems to me that these term deposits are an easier way of raising rates if the Fed needs to, as opposed to trying to sell off their securities portfolio and expose themselves to potential losses. From a political standpoint, it will certainly be easier to expand the TDF than to try and "unwind QE", as many analysts put it.

Monday, June 23, 2014

Crying for Argentina

Last week, the US Supreme Court made a decision that could force Argentina to pay American billionaire hedge fund managers the full value of its decade-old debts. Argentina’s dollar denominated/pegged debt is one of many cruel legacies of the Washington consensus government under Carlos Menem. Menem was known for being buddy-buddy with Bill Clinton, and excluded the same sort of chill machismo as Clinton, while turning his country into an internationally financed Ponzi scheme. In the 90’s, he was lauded as a hero of fiscal discipline and inflation control, but his real achievement was severely eroding Argentina’s sovereignty and allowing it to become a petri dish for reckless neoliberalism. As poorly managed as Argentina had been before the neoliberal experiment, it should now be clear that establishing a currency board and pegging the peso to the US dollar was a disastrous “solution.”

The current Kirchner government is also deeply flawed, and I have trouble finding anything positive to say about the leadership of my second home country. This government has continually lied about inflation statistics and violated freedom of the press. That being said, Argentina has been struggling for years to build up its dollar reserves by exporting an enormous amount of its agricultural production, at the cost of increased food prices for the poor. Argentina has also seen millions of acres of its virgin land transformed into soybean farms, with all the environmental consequences from the herbicides and fertilizers that go along with it. Meanwhile, the US refuses to allow imports of Argentina’s higher valued agricultural goods, such as meat and citrus, due to grossly outdated health and safety measures that masquerade as protectionism for America’s welfare farmers. On the one hand, US policy is forcing Argentina to pay back debts in dollars, and on the other hand, US policy is making it difficult for Argentina to actually acquire those dollars! Along with the current disaster in Iraq, it’s hard to see how our current leadership could do a better job of turning the entire world against the US.

The recent series of decisions from our neo-con court system may force Argentina to pay back these illegitimate debts, which could drain billions of its hard earned dollar reserves. This is crony capitalism of the worst kind; investors like Paul Singer are using America’s court system to force the sovereign government of Argentina back into client-state status. The already unstable Argentine peso, which has caused some farmers to start reverting to commodity currency, could fall even further as the result of this decision. In the purest sense, it’s hard to see how human welfare, except for the top 0.001%, will improve as a result of this decision.


Friday, May 23, 2014

BREAKING NEWS- CBO warns of impending email scarcity

Washington- The Congressional Budget Office today released a report warning of an impending scarcity of electronic messages and digital data communications, commonly known as ‘emails”. “For too long, Americans have been recklessly sending emails, with no regard to future emails”, said CBO director Douglas Elmendorf. “We are now downgrading our Outlook outlook for the next 10 years. Unless Congress can get it’s emailing under control, our nation’s ability to send digital communications in the future will be compromised." 

According to the report, at the current rate of emailing, even our retirees who still use MSN could be in danger. Additionally, the Gmail Trust Fund is running low, and is on track to be completely defunct of clicking-capacity by 2032. Fix the Emails CEO Paul Paulson was quick to join the fray, saying “for too many years, we have been sending more emails than we have been receiving. This profligate emailing is unsustainable, and we immediately need to enact reforms to get us on a path to balanced-emailing. Its not like we can just create emails ad-hoc, or something!” Former Wyoming Senator Bart Simpson added: “40 years ago when I was 83, we were still buying stamps and licking envelopes. If we’re not careful, the country could be forced to default back to snail mail. How will my long-lost Nigerian relatives contact me then?” said the nervous Senator.

Representative Paul Ryan had been eagerly awaiting this report, saying “If we keep borrowing these emails from China, eventually they are going to email us back. One day our children and grandchildren will suffer under the weight of having to read these Chinese emails. If you thought the Nigerian prince emails were bad, wait till you see the Chinese ones”, Ryan exclaimed. E-mail-conomist experts have concluded that these Chinese emails are even more dangerous than previously thought. A recent study from the Center for Responsible Messaging  indicated that no matter how many of these Chinese emails stuff your inbox, you’ll just be emailing again in an hour or two. Perpetually accurate and prescient investor Peter Schnitt added "we are on the verge of a messaging collapse, and hyper-emailing is right around the corner. This is a great time to buy gold!"

However, notable economist Paul Krugperson had a slightly different view. “Right now, email interest is too low, because the NSA has been pumping trillions of emails into the economy. We actually need to send more emails in the short term, not less. As long as we eventually balance our emails in the long run, we should be fine. Want proof? Just look at these lines on a graph that someone made up 40 years ago” the economist said. At press time, the Postmaster General was not available for comment.


Monday, April 14, 2014

Latest Pew Research Report- Interesting data, misleading rhetoric


The demographic data is nicely displayed, and in a clear, thought provoking way. However, the next to last segment entitled: "Saving the Safety Net" reads like it was written by Maya McGuiness and the Fix the Debt Hacks. It is very uninformed and misleading, disguised in an otherwise useful media piece:

"But the status quo is unsustainable. Some 10,000 Baby Boomers will be going on Social Security and Medicare every single day between now and 2030. By the time everyone in this big pig-in-the-python generation is drawing benefits, we’ll have just two workers per beneficiary – down from three-to-one now, five-to-one in 1960 and more than forty-to-one in 1945, shortly after Social Security first started supporting beneficiaries. 
The math of the 20th century simply won’t work in the 21st. Today's young are paying taxes to support a level of benefits for today's old that they have no realistic chance of receiving when they become old. And they know it – just 6% of Millennials say they expect to receive full benefits from Social Security when they retire. Fully half believe they’ll get nothing."
Its a good thing that I'm bad at math, since the author of this piece didnt bother to do any- apparently rhetorical flourishes will suffice. And hey, who knew  all that 20th century math expired on December 31, 1999?

The only thing wrong with the financing of federal programs is the public's perceptions of them, and poorly researched pieces like this one are part and parcel of this problem. I can however concur with the finding the just 6% of millennials think that we will get full benefits when we retire. The ceaseless and well funded propagandizing on this issue has been successful in making my generation very cynical. This hopelessness runs deep in our perceptions of government and economics, thanks in part to the almost fetishized doom-and gloom scenarios from "serious experts." MMT in contrast, provides sunlight and fresh air to US policy discussions, and in my view is the best antidote to the "learned helplessness" that permeates my generation.

Friday, February 21, 2014

Hey Democrats, Please Stop Talking about the Meaningless "Trust Fund"

With the good news that the Obama administration is dropping its proposal to cut Social Security through chained CPI, I figured it would be a good time to do a refresher on how Social Security actually works. Although I usually target right-wingers in this blog, I sometimes come across Democrats making some misleading statements too. The worst, and most common error is discussing the "Social Security and Medicare Trust Funds." As innocent as this mistake may be, I cringe every time I hear it. 

Sorry folks, but these Trust Funds aren't real. They exist only in a legal/accounting sense, but not in any real economic way. Unfortunately, many Americans hold views that range from thinking SS&M are not part of the government, to thinking that SS&M are funded from payroll taxes and the Trust Funds. Neither are true.

Want proof? Just take a look at the Daily Treasury Statement (link) which is a income statement for the Federal Government. 



On the "deposits" side, you'll see a line item for "Cash FTD's."



For a further breakdown, you can scroll down to Table IV- Federal Tax Deposits:




The first line in this box says " withheld income and employment taxes. The "employment taxes" part is that damn FICA tax that sucks away 7% of every dollar of our hard earned income (up to $112,000 that is.) These revenues supposedly go into the "trust fund" where they are either used to pay for benefits or saved for later. As you can see, this does not really happen.

Then, on the "withdrawals" side, you can see line items for Social Security and Medicare. Not surprisingly, they are the largest withdrawals:




See? Both programs deposit into, and withdraw from, the same Treasury General Account as all other government programs. Its clear just from this statement that the "funds" don't fund anything at all. When Grandma gets her Social Security check every month, the check says "Department of the Treasury", not "Social Security Trust Fund."

The Treasury describes Trust Funds as such- "These are accounts maintained to record the receipt and outlay of monies held in trust by the Government for use in carrying out specific purposes or programs in accordance with the terms of a trust agreement or statute." Notice how they used the word "record", and not "deposit" or "withdraw."

Its like if Congress passed a law allowing me to be called "Justin Santopietro." Thanks, but I was already doing that. The numbers that show up in the Trust Fund are just accounting records for transactions that have already happened. There is no "there" there.

This is because, as few people understand, the federal government creates ex nihilio all the dollars that it chooses to spend into the economy in any given year. Federal taxation functions as a control on inflation and aggregate demand, and is entirely unrelated to spending. In fact, since taxation does not give the federal government anything it cannot already create, there is no real sense in which dollars collected by the federal government can be spent again. There are no tax dollars flying in and out of giant tubes in the Treasury Department. Federal taxation is merely a digital transaction that deletes dollars balances in private bank accounts, and federal spending is merely a digital transaction that adds dollar balances to private bank accounts. 

When we send tax money to the government, nowadays usually as a wire, the dollars that existed only as numbers in a checking account are functionally destroyed. They are no longer part of the monetary base, because the Treasury’s General Account at the Fed, which is shown in the above statement, is isolated from the monetary base (unlike the accounts of all state and local governments and the entire private sector). US dollars can only exist in bank accounts outside the Treasury, so when the Treasury spends, the monetary base increases, and when it taxes, the monetary base decreases. Only the US Treasury (and Fed, for distinct reasons) can affect the monetary base in this way.  As the sole issuer of US dollars, the US federal government does not and cannot “use” or even “save” dollars that only it can create.

I make these points because the supposed Trust Funds have now become the weak point for Social Security and Medicare. The Peterson hacks love to scream about how the funds are going broke, and how we need to slash benefits NOW!! The reality is that Social Security and Medicare will always be solvent, just like every other federal program. There is no financial reason why the federal government cannot just credit our bank accounts in any amount that it wants. 

Setting up an additional trust fund for something that is already perfectly solvent is like wearing two condoms at once. Not only does the second condom not protect you any more than the first one, the extra friction can actually make things worse than just wearing one - just like the Trust Fund makes Social Security and Medicare seem like they can be insolvent. If there were no trust funds set up for these programs, no one could claim they were somehow independently going broke. 

It almost seems that in a genius move of cruelty, Alan Greenspan intentionally set up Social Security as a "Trust Fund", in order to make it seem insolvent down the road. The great irony here, is that Greenspan himself once said, in an accidental moment of honesty, that "there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.” See, Greenspan always knew that the Trust Funds were a scam. 

For a more detailed discussion on these accounting maneuvers, please read this.

Sunday, February 16, 2014

"The Can Kicks Back" demonstrates the difference between currency issuers and users

Just when I thought the cheesy "The Can Kicks Back" group couldn't get any worse, they came in handy, in a very ironic way. Though I never thought they were particularly threatening, I have made fun of these goobers in previous posts. Several recent reports have revealed that this group, which argues the entirely false myth that the US government can go bankrupt, is itself near bankruptcy. This beautiful irony presents us MMTers with a potent "teachable moment". I'll keep it short and sweet this time. Please enjoy these free tidbits, courtesy of your fellow currency user:

1) Currency issuers, such as the governments of the US, Canada, Japan, and the UK, can never go bankrupt unless they deliberately choose to. Their overriding financial concern is inflation.

2) Currency users, like you, me, McDonalds, the people who make the Shake-Weight, the State of Colorado, Portugal, and the goons at "The Can Kicks Back" can very easily go bankrupt if they are not careful, since they do not control the currency- they merely use it. If their spending exceeds their income for too long, they can get into serious economic and financial trouble.

3) People who don't understand or appreciate the above differences cannot understand modern economics.

Nobel please!

Wednesday, February 12, 2014

Is Moore's Law the Ultimate Inflation Killer?

Lately I have thinking about how technological progress makes inflation less and less likely over time. For those that aren't familiar, Moore's Law is s the observation that the number of transistors on computer circuits doubles approximately every two years. The law is named after Intel co-founder Gordon Moore who described the trend way back in 1965. His prediction has proven to be accurate over the years, and tech growth has roughly followed this law for almost half a century now, and our quality of life has drastically increased as a result.

This exponential growth of computing power has led to unbelievable increases in productivity and transmission of information. This means that production can respond to increased demand at ever increasing levels, making inflation less and less likely over time, at least in sectors which are computing heavy. We can now produce more and more stuff, with less and less inputs, especially human labor. The easiest example is lawyers/researchers- where it used to take hours to pour through documents to find information, it now takes only seconds thanks to CTRL-F.

Certain basic commodities may be not be affected by these improvements, especially energy- its proven much harder to manipulate energy than transistors. But for all else, the more that computers can do, the less that humans must do, and computers can produce 24/7 without asking for a raise or cost of living adjustment. General supply becomes more elastic over time, and the United States is more efficient than ever. The problem is that aggregate demand is based on the intelligence of our federal policy makers and legislators, which is desperately lacking. 

Why is is so hard for modern humans to realize that our recurring problem is a lack of demand, which can easily be solved by our agile, fiat currency issuing federal government? Whenever we MMTers bring up the need for more government spending/lending, we get faced with the tired "hyperinflation" schtick, as if war-ravaged 1920's Germany bears any resemblance to the modern United States (pro-tip: It doesn't!)

So as it turns out, its really not that easy to create inflation in modern competitive economies. The Fed has blown all its wads, and still can't hit its target. As I see it, concerns about inflation are about as relevant as concerns about a Soviet invasion....both haven't existed since the 1980's. The baby boomers really need to update their macro, or get the hell out of the way.

Our lack of cultural evolution leaves us stuck in the mindset that was appropriate for most of human history- that resources were very limited and production could not easily adjust to increases in spending power. But in the 21st century, we are facing the opposite problem- too little spending power to spur demand for everything we are capable of producing. 

As with everything else it boils down to politics- the 1% stupidly think that giving "those people" too much spending power might drive up prices. Yeah, as if any public school teacher is going to show up to an auction in Greenwich and outbid a hedge fund manager for a Picasso or Renoir....

Friday, February 7, 2014

What is Fiscal Responsibility?


Most conventional macro though these days is incorrect because it comes out of the old fixed exchange rate days, when the US was on a gold standard. This outdated thinking, which includes monetarist Keynesians like Paul Krugman, unfortunately treats money like a commodity that should be regulated, as if it can run out. These types of descriptions are fine for a fixed exchange rate system, but they simply don't apply to countries with sovereign, free floating fx. Its like playing a football game with the rules of soccer….both may be referred to as futbol/football but you have to understand the difference to avoid disaster. For example, I frequently hear talking heads on Bloomberg and CNBC talking about the US and Euro economies in the same sentence. This simply cannot be done accurately, and anyone that attempts it is committing economic malpractice. The differences between a currency sovereign such as the US, and non-sovereigns such as the Eurozone countries are impossible to overstate, but usually missed by business/econ pundits


Few terms in Washington are abused more than the notion of “fiscal responsibility.” Since almost no one understand the implications of currency sovereignty, almost no one uses this term correctly. Fiscal responsibility, from the standpoint of a currency issuer, means spending enough to create an economy where everyone who wants to work, can work to their full potential. The current approach to fiscal responsibility is the stunningly stupid opposite- People just pick a number out of thin air, and determine any spending above this level to be “irresponsible.” This is an incredibly infantile way of approaching public policy, and it is almost always the poor and least powerful than suffer the most as a result. 


For those struggling with this as a novel context to picture, managing a fiat currency supply is analogous to managing the amount of oxygen/CO2 which an individual breathes in and out. How much fiat currency do we need? Answer: as much as our activities dictate. No more and no less. Same as during WWII. Breathing, initiative or fiat currency is not something you need to regulate in anyway EXCEPT avoiding the extremes of hyperventilation and hypoxia. Our current congress has been holding the country's breath until the Middle Class turns blue, and is now at risk of outright death. And this is totally bipartisan stupidity....Democrats are just a guilty as Republicans, especially when they perpetuate the pernicious lie that Social Security and Medicare need to be "paid for" by maintaining or raising the cruel and regressive FICA tax.


Government spending, when you take a look at the actual mechanics, which few people ever feel the need to do, is just a big digital balance sheet. You cannot project human values on to digital balance sheets! Thats like saying, “that powerpoint is such a slut” or “that word document is greedy”. These things make no sense at all. You cannot determine just by looking at a balance sheet if it is “fiscally responsible”....you must look out into the Real World to see what is going on. If there are unemployed resources, then the currency monopolist ie the US government, is not spending enough/taxing too much. Pure and simple. Nothing is more irresponsible than the currency issuer restricting currency issuance based on numerical concerns and causing unnecessary human suffering.