Thursday, October 7, 2010

Krugman: Inflate! Spend! Inflate! (A report from the field)

Mike Siegel emails:

I attended the morning sessions of a symposium held at DC's Newseum on Monday. The headliners were Krugman and Feldstein.

Thought you and your readers might be interested in my raw notes.


Outlook is "lousy for next year".

When do we get back to full employment? "Basically never"

"Nothing visible on the horizon that's out there" that would restore employment to pre-recession levels.

The current situation "can go on indefinitely where "N" can be a double digit number" (I believe he was referring to "N" here as the number of years).

What can be done? "QE2 plus stimulus".... Both monetary and fiscal are necessary to increase capacity utilization.

Whatever it is, it "must be big enough to get business investment going"

If there is renewed pressure on financial system it "doesn't matter as everybody is now back-stopped" by the government. This in response to Feldstein's observation of further declines in the housing sector.

"50% probability of a government shutdown" going forward.

If so (shutdown) its "hard to imagine TARP II"

"We're not doing [as well as] what Japan did, we're doing worse"

If there is an exhaustion of political will to act "we will look at Japan's lost decade as a success"

Need another round of fiscal stimulus and QE, "kitchen sink"... "throw everything at it".

Krug's prescription: tax cuts, more transfer payments, fiscal stimulus

"have to do unconventional economics for a very long period" and "we're just not there yet" in terms of the public/decision-maker's realization of this necessity.

"Got to do principal adjustments" for housing

1) "fix mortgage situation"
2) increase in savings rate "would be a drag"
3) "CRE - highly concentrated in smaller/mid-size banks" and these are the next area to experience defaults/write-downs.
4) FDIC should implement rules for controlled sale of impaired CRE that would minimize and extend reduction in bank capital over 4-5 years.

Something that "might move us out of this... a 25 percent decline in the value of the dollar".

Jan Hatzius - Goldman Sachs guy

Prospects are "bad and pretty bad", and then later he added a third "worse" that being another decline back into recession and return to fiscal restraint.

"Fed Reserve will do more very likely... after mid-term election". This will have some effect "but will fall short".
As I have often said, Krugman watches the numbers very closely and thus has a very good sense for where the economy is. That said, he is totally clueless when it comes to policy prescriptions. The inflate, spend, inflate policy he is calling for would push the economy toward some kind of major breakdown.

Unemployment doesn't have to be high "forever". It is a direct result of current policies which make hiring uncertain with regard to costs and regulations (along with high unemployment benefits. Change the policies and the high unemployment will reverse.

It is interesting he expects a 50% chance of a government shutdown. I'm guessing he expects roadblocks in Congress.

Feldstein's comments are really so yesterday. Outside of the incomplete mortgage document questions, which could develop into a major problem but which Feldstein doesn't address, the markets have pretty much adjusted for the mortgage problem, including what is held by the banks. None of Feldstein's policy prescriptions are necessary.

Goldman's Hatzius is clearly clueless as to how powerful monetary policy can be. He is probably looking at the trillion that the Fed pumped in that did nothing because it is sitting as excess reserves. Any new Fed printing is unlikely to end up as excess reserves as it likely will enter the system through Treasury security purchases versus just shoving in the hands of the elite bankers. The Treasury purchases will mean a much more diverse group of holders of the new money, most of them won't even have the ability to deposit it with the Fed. -RW

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