What should we do? Doing nothing until after the presidential and congressional elections in November 2012?

I would suggest you see this letter: "An Open Letter to the Economic Leaders of the West -- especially the United States" http://t.co/vSxi5lJ

Advocates of Modern Monetary Theory predicted all this six months ago AND have solutions for the problem. But that apparently cuts no ice. In contrast, everyone wants to hear from a Harvard Professor of Economics who tells us what happened in the near past and offers NO solutions.

Perhaps that’s the real problem.

It’s free trade with developing countries that has caused our economy to stagnate.  Developing countries are growing well (5-10% GDP/year) while developed nations (U.S. and Europe) are stagnant.  The U.S. economy has only grown about 1% annually for the past decade if you take out the effects of stimulus and the housing bubble; we need 3-4% annual growth to avoid increases in the unemployment rate.  

So our present level of unemployment is a problem a decade or more in the making.  The "free trade is good" assumption must be put to the test, much like the "Housing prices only go up" assumption was recently.  Some key statistics on this:

The Economist:  U.S. manufacturing jobs have declined from 17 million in 2000 to 12 million today.

Our trade deficit is $650 billion in goods offset by $150 billion surplus in services, for a net $500 billion deficit.  At $50k per job, this is about 10 million jobs.  By definition, this amount must be borrowed to finance the trade deficit.  So the true “China price” should include unemployment insurance and interest.

The Economic Policy Institute estimated U.S. job losses due to the trade deficit with China alone at 2.3 million jobs between 2001 and 2007, along with significantly lowered U.S. wages.

The U.S. debt to disposable income ratio has risen from 80% in 1990 to 120% today. About 25% of cars were bought with home equity loans prior to the crisis; this source of funding has since dried up, leaving government the main recourse for loans (e.g., budget deficits, Fed money-printing)

Economist Paul Krugman wrote in 2007: "For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing...But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country...The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of GDP in 1990 to 6 percent in 2006."

If we continue to trade freely with countries with much lower living standards, our living standard must fall.  Our rising debt levels represent an attempt to retain an unsustainable living standard.

As we march toward 2012, one thing is coming into sharp focus: The gloom in this country will not disappear until Obama does. People do not want to re-elect a president whose only bullet is to demonize and belittle. That act has worn thin and become tiresome. It is exceptionally telling that Lib media hacks were decrying 3% GDP during the Bush years as 'recessionary.' But Obama can only dream of 3% GDP as some heroic accomplishment, which he most certainly will not come close to achieving.

Its so refreshing to read Feldstein after so much Krugman and Reich.

It seems to me that there are two key questions I think about now.  The first is how Treasury bond prices will behave post the quantitative easing.  The balance between demand for bonds increasing as a result of the weakening stock market and potential lack of demand from foreign buyers making up the size relative to the pricing the Fed managed over the past 2 plus years.  My fear is that interest rates may rise on balance, finally putting us squarely into a fairly strong stagflation period.

The second is how much of business' cash hoard of nearly $3 trillion will remain should negative cash flows eat away at it over the next 18 months and, then, whether the president is re-elected or a GOP candidate succeed him.  

If the bulk of the cash hoard is preserved and a GOP president be elected, I would expect to see considerable investment in plant and equipment and new hires.  However, if interest rates rise notably now and we do not cut the deficit, or have a strong plan to do so and will in the new administration, even those investments may not outweigh the negative effect of rising interest rates. 

The only thing holding the economy back is Obama.  If he would cut spending, cut government, cut regulations and cut taxes, he would see the economy take a bounce overnight.  But, all those actions run against Obama’s Progressive Socialist ideology.  And as an ideologue, he is more committed to his ideology than he is to the welfare of his country.

I see that someone has referred to Paul Krugman as an "economist".  I suggest this is an insult to all real economists and quoting anything Krugman says makes one's case quite suspect.

There is a very simple reason to why America is circling the toilet:

Obama has killed the American system - he killed not just OBL he killed free markets too.

Name a free market that hasn't been hijacked by Porky Pig government (Obama) where the laws of supply and demand have not been replaced with Obama's whims as to who will be the winner and loser in that market.

Boeing wants to build a jumbo jet somewhere and Obama says no.

You want to buy an old-fashioned Edison lightbulb and Obama says no.

You want to fill in some swamp land to make a better homestead for yourself and Obama says no.

You want to buy a Happy Meal for your kids and Obama says no.

That's why America is spinning out of control - free markets can't save us anymore - only Obama says he can...........

This country handed virtually dictatorial power to Democrats in 2008.  We will pay a huge price for handing over that much power.  The damage from ObamaCare will play out over many years.  Indeed, we may never recover from it.  As a people, we least we can tell ourselves that we deserve every bad thing that happens to us for our error.

Young people in particular will be paying a high price for worshiping their new messiah in 2008, totally falling for all his "hope and change, no blue state, no red state, if you like your health plan, you can keep your health plan" talk.  The guy scammed the young people.  They could have known better but fell on their knees before him.

Didn't we have already more than 20 years of deregulation and tax cuts? Didn't it take us, nowadays, to this bizarre scene in wich we are privatizing benefits and socializing losses. Socialism for the Banks and big corporations? Shame on us!!!

Bastidorosi...  If by your comment you mean we had 20 years of great prosperity due to deregulation and tax cuts and now under Obama he is doing the wrong thing, well, then, yes, nowadays things are very bizarre and shame on us.  And shame on the Democrat party.  And shame on Obama.  

Gmonsen, the crisis did not started with Obama!! It was the result of years of "prosperity", false prosperity based on easy and irresponsible credits, absurd wars ("they lied, they died), an accumulated fraud. The surprised words of Greenspan in the Senate was enough to realize the bankruptcy of an a ideology based on the law of the jungle. Yes, shame on that part of America that allowed a few gready to take over our lives!! And now the whole world has to save them, creating the largest National debt at home and overseas!!

Blaming Obama for our present circumstances, as some commenters have done, requires a high level of willful ignorance.  No one can disregard the facts so completely unless it is deliberate.

First of all, by historical standards, Obama is right of center on tax policy, defense spending, use of force in other sovereign nations with impunity, and retaining Guantanamo.  His healthcare bill was rather centrist, following bi-partisan expert panel recommendations while leaving the private sector insurance companies intact.  He did not fire the management and boards at most banks he bailed out and intervention in the automotive sector was tiny compared to what we spend on defense annually.

So saying we are moving towards socialism is just total nonsense. We tax at about 27% GDP at all levels vs. 36% in the OECD countries and tax revenues remain at a 50-year low of 14.9% GDP, vs. the 18.2% average.

A real left-leaning president would have let the Bush tax cuts expire, started cutting defense spending back to Clinton levels, not intervened in Libya, exited Afghanistan and Iraq much more quickly, nationalized a couple of the largest banks fully, and gone to "Medicare for All."

I'd really appreciate it if the counter-factual Obama-bashers would wake up and realize what is actually happening, which I described in my earlier post.

Sorry Bastardorisi et al...  Don't have time to school you today.  But, suffice it to say that you should not be discussing economics.  Perhaps, religion, or caring about this or that or taking walks in the forest and drawing trees and birds, if those are things you know something about.  Parroting what the media or your professors said is not critical thinking.

Have to say I don;t think either of you deserve this holiday.  Its for Americans...

Since the writer basically poses no solutions I have learned much from the commenters.

1. Everything is Obama's fault even though his policies and advisors are mostly from the  Bush era.

2. Beause one commenter does not like Paul Krugman he is not a real economist

3.Free markets are always the solution to all problems (even though they are abstract constructs which require (big bad ) governments to even function.

4.Free trade in developing countries is responsible for the US economic crisis (i guess "free trade"  is only good if it benefits the US)

5.And finally "the gloom in this country" is caused by Obama who is a "Socialist" (apparently supported by other "socialists"  like  wall streeters including his whole  the majority of his economic team.)

Where do all of you geniuses come from?  Must be the Republican "Party".

wolfman... How witty.  That's what you learned from the comments.  It seems you prove the lines from Superman the Movie, "Some people read War and Peace and come away thinking it was an adventure story.  Others can read the ingredients on a chewing gum wrapper and unlock the secrets of the world".  I think we all can see which you are...

If you have any desire to actually understand things, you should try reading the comments without the apparently automatic distaste for anything that does not seem consistent with your predispositions.  Just because it doesn't fit your world view actually suggest an avenue to learning, rather than smug disdain.  Though most liberals want to think they are "elite thinkers" despite the evidence otherwise.

Krugman is certainly some form of economist.  Its just that his extreme Keynesian views have been proven wrong so many times and his constant support of other, progressive talking points which have nothing to do with economics so strongly suggests he is more concerned with the political philosophy than economics, if you get my drift.  I'd like to think you can, since you seem to at least think of yourself as intelligent and can spell.

Obama's advisors are not mostly or even somewhat Bush's advisors.  Of the 21 cabinet officers and 32 czars, who are you saying was a Bush Era advisor?  I would like to call you out and challenge you to name some Bush advisors on Obama's 21 cabinet members or among his 32 czars.  Please list two or three Bush advisors from these groups of his top advisors, being his top 50 or so, if that's not too much of a stretch for you.

As you struggle to find some fig leaf to cover your embarrassment for making such a foolish statement, perhaps you could consider thinking about how much else you think you know is, perhaps, not true either?  

That's all the time for schooling this evening, wolfman.    

The authors have a fundamental misunderstanding of monetary operations.  For example, our objective isn’t to  balance the budget as a currency issuer, it’s to optimize it. Fiscal optimization at any level of public spending of a currency issuer requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It is a digital resource - a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries. For those of you interested I’ve outlined a laymen’s explanation here - http://www.DollarMonopoly.com

I still can't understand why this crisis arrived when we had such an enormous number of experts!! Where were they when everybody was happyly exchanging garbage with triple AAA qualification? Maybe it would be good to watch "The Inside job" to get a hint... It seemedto me, without a doubt, that the experts were part of the values to be exchanged. Blame the market or the shameless?

The securities crisis was largely caused by the subprime housing collapse.  The mortgages made as a result of Clinton's Community Reinvestment Act, which caused banks and mortgage lenders of all types to loan money to people who couldn't afford the houses they bought.  

Clinton caused Fannie and Freddie to buy mortgages made to these people at very low rates.  Because Fannie and Freddie were buying these loans at these low rates, mortgage lenders could make the loans and sell them to Fannie and Freddie.  Direct, balance sheet lenders had to match the low rates of Fannie and Freddie or they wouldn't get any business.

Now, subprime mortgages do not qualify as collateral for traditional mortgage-backed securities (MBS/RMBS).  They qualify as Asset-Backed Securities (ABS), as do car loans and credit card debt.  The normal practice among issuers is to issue these securities and the issuer retains the "B" piece or residual interest, which experiences the "First losses" when there are defaults.  

However, these B-pieces qualified as good collateral for Collateral Debt Obligations (CDO's) and the issuers often securities these first loss pieces from the ABS as CDO's.  Now, CDO's also are the place where similar B-pieces from Commercial Mortgage-Backed Securities (CMBS) were placed.  

All was well with CDO's until the housing bubble -- caused in no small part by the home sales surge caused by lending to people unable to afford homes -- burst in 2006.  When housing prices went down, the subprime borrowers defaulted in large, historic numbers.  They should never have been home owners.  It is a patent mistake to have applied liberal philosophy to a market.  The idea that "everyone should own their own home" is a very bad exageration of a "chicken in every pot".

The defaults in turn caused the ABS securities to experience high defaults and their values go down as much or more the the houses serving as collateral.  Also, in turn, the CDO's went bad at an even worse clip, since the first loss pieces went bad before the ABS securities did.  When the CDO's went bad, that ruined the ability of the CMBS markets to place their first loss pieces, which were part of the CMBS securities, which were not going bad.

So, when you look at securitization and why we had massive problems, a good deal of it can be traced to the liberal political idea of making home ownership a national goal.  Its very complicated.  It requires some thinking and knowledge of the financial markets that few really have or have the time to learn.  

However, it is very wrong, very simplistic, and not worthy of anyone who claims to be intelligent, to adopt a view that the financial crisis and resulting problems are the result of the greedy, fat-cat Wall Street bankers.  They are greedy, to be sure, but they live within the guidelines given them.  The are not only greedy, but very, very smart.  It is a shame that many liberals find such pleasure in painting them as the evil source of so much of our current economic pain, when much of the causation is a direct result of their own seemingly benign and generous political philosophy.  It proves, if anything, that you simply cannot "give" everyone the American Dream.  It is better that it is earned... 

@gmonson:   Your statements have been thoroughly rebuffed by the Financial Crisis Inquiry Commission.  Please see the 14-page executive summary available on their website.

The investment banks that collapsed were not subject to the CRA and dwarfed Fannie/Freddie in their lending activity.  Housing bubbles developed all over the develooped world as part of a much larger debt bubble.

You are just repeating conservative, small government nonsense, I'm sorry to say.

@gmonsen

"The mortgages made as a result of Clinton's Community Reinvestment Act, which caused banks and mortgage lenders of all types to loan money to people who couldn't afford the houses they bought."

Your statement has been thoroughly disproven time and time again.  Barry Ritholtz, a popular blogger, has compiled extensive research on this subject.  

The root of our current economic problems are more operational than ideological - proper monetary management and a properly structured banking system.  The only economists on top of these issues are the Kansas City school of folks like James Galbraith, William Black, Randall Wray, and Warren Mosler.  We are talking basic fundamental points of disagreement.  For example, mainstream economists fail to understand that government debt is simply the currency user’s savings as a matter of accounting. It’s a digital resource - a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries. Mainstream economists are using the wrong models, drawing the wrong conclusions, and giving the wrong advice because they misunderstand monetary operations.  

As a friend of mine says - the situation would be laughable if it wasn't so painful

Sorry, boys, telling me that I've been rebuffed by someone you like means nothing to me.  I actually know what I'm talking about from first hand knowledge, not a blog.  

Clearly, since you simply point to other things others said, but don't have enough knowledge to discuss it in depth, there's no debate possible here. You both sound like a kid who's called out to fight and says "my big brother can take you".

If you have anything to actually contribute in the way of factual refutation, other that just saying I'm wrong, I suggest you say it.  Even if you haven't actually assimilated whatever it is you have read, perhaps you could just quote the relevant refutation of someone who actually does know something? 

Its hard to posture as intelligent when you have nothing of your own to contribute.  Send in your big brother, perhaps?

@gmonsen

I'll take that challenge.  I bet i can prove you don't know what your talking about. How?  I'll logically prove to you the objective is not to balance budget but to optimize the federal budget.  Optimizing monetary operations involves maintaining overall price stability by running deficits at a rate currency's users save.

Just say the word and not only will i prove the statement is correct but I will prove you don't know what your talking about.  Your not messin with a pasty face economist who dribbles on in meaningless theories.  You're messin with an engineer who figured out the collossal blunder that the mainstream economic profession has made.  The Kansas City school of folks are the only ones who have it right.  Just say the word and I'll let you have it if you want. I'm not kidding I'll destroy whatever argument you present to me in seconds. :-)

@DollarMonopoly...  I read your comment.  The, I had to go back to what I had said and read it a few times.  I believe on this page I began by noting that this administration's Keynesian stimulus hadn't worked and that I thought Krugman was a progressive shill.  I then described briefly the housing and mortgage meltdown and how that effected securitizations and the institutions that made and held them.

You post something that says you can accept my challenge to provide a rational refutation of what I had posted.  You go on to say you can prove that "the objective is not to balance budget but to optimize the federal budget".

I'm sorry, big fella, I had no idea you wanted to talk about monetary policy or optimizing the budget.  Sounds very interesting indeed and I would love to hear your theory.  I fail to see how it has anything to do with what I said, but if "accepting my challenge" is a good springboard for you to present your ideas, please feel free.  I am genuinely interested in hearing your ideas, but, again, it has little or nothing to do with what I said.  

I'll stop back here this evening and look forward to hearing you prove that the objective -- and I am interested to find out whose objective this is -- is to optimize, rather than balance the budget.  However, that does not do anything to prove anything I said in describing certain key elements that led to the financial crisis of 2008.

I was not commenting at all on your segue in your former post.  I was challenging you to address what I had said in some other way than saying some "popular blogger" had proven me wrong.  Popular blogger is often like drunk cocktail party pnntificator.  If there are things you remember a=or can look up that he said that is cogent to the discussion of the housing, mortgage and securitization history from 1990-2008, please post it up.   

@gmonsen

springboard indeed. let me start off by saying i meant no disrespect, just trying to provoke a response with a playful comment. before we start on the topic at hand let me first comment on the financial crisis. The underlying cause of the boom/bust cycle is the poor structure of our banking system. Our banking sector needs to be structured for transparency,accountability, and stability to remove systemic risk. Letting private banks sell off their loans introduces a moral hazard. So to quickly summarize Warren Mosler proposals that are spot on we should require the following from banks 1) loans remain on balance sheets 2) no off-shore lending 3) no credit default insurance 4) no proprietary trading 5) real asset collateral  The currency issuer is the monopoly producer, lender, and price setter of money.The issuer can provide private banks as much money to lend as they could ever need. The function of private banks is credit analyses, lending and taking deposits. Nothing more. Nothing less. Actually, I think Warren may have some other minor recommendations but I've forgotten them off the top of my head.

Okay, so now that we solved that structural problems of our private banking sector on to my magnum opus. As of today, I'm calling it Austin's Law of Monetary Optimization. I'm not a economist so I have no idea if it has any validity or precedent.  It just has an intuitive reasoning behind it unless I've missed something. Essentially what I have done is taken a theory of constraints analysis and applied to monetary operations. So here we go:

AUSTIN'S LAW OF MONETARY OPTIMIZATION ...repeated it enough and somebody may believe it  :-)

Just as every asset has a corresponding liability in accounting, the currency issuer's debt is dollar for dollar equal to the currency user's savings. It’s a digital resource - a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries. In other words, China saves in our currency. The US government as a currency issuer does not borrow from China. This is not a theory this is a fact as a matter of double-entry accounting.

user savings

Savings by currency users, such as households, business, or foreign users, is a straightforward concept on an individual level but becomes counter intuitive on a macro level. In fact, economists have created “laws” based upon the very idea of savings at the macro level. For example, Says Law states, supply creates demand, but this presumes a specific monetary system in place, one where no monopoly suppliers are involved and a monopolist currency issuer exists. For example, if a currency user exists within the Say’s system that saves a large amount of money and the issuer does not replenish the currency supply then there is no profits for the Say's “supplier" to take. In other words without a currency monopolist to replenish the supply of dollars Say’s Law fails. Keynes' paradox of thrift provides more insight.  The paradox of thrift states that the more people save the less overall demand will result. Keynes system assumes a currency monopolist is not replenishing the supply of dollars. Both Says’ and Keynes’ oversight is that both their models presume an issuer acting within the system and fail to mention how. The confusion with monetary policy is wrapped up in both concepts. 

issuer responsibility

The nature of issuer’s debt as a digital resource and the impact of user savings informs the currency issuer’s of it’s responsibility within the system as the monopoly producer, lender, and price setter of money. For any given level of output,  it’s the currency issuer’s responsibility to maintain equilibrium when currency users are saving. The issuer needs to replenish the supply off currency by either spending and/or adjusting taxes depending on one's politics. Likewise, if users are not saving, then the issuer needs to spend less or tax more. Optimizing monetary operations for any desired output level involves maintaining overall price stability by running deficits at a rate currency users’ save

objective

The US government as a currency issuer should never seek to balance the budget, but rather optimize it for any desired output level by maintaining overall price stability from running deficits at a rate equivalent to the currency user’s savings rate. Fiscal optimization at any level of public spending requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. In order to balance spending with tax revenues, government must destroy money through taxes before it creates money to spend in the marketplace. Recognizing that some users choose not to spend, government deficits must correspond to the users savings rate in order to maintain a given level of output. The challenge of the issuer is to spend enough money to displace the saving rate but not enough to exceed it. Government debt of a currency issuer is essentially a tool to maximize the production of goods and services within a resource constrained marketplace. Constraints must be kept at full capacity to maximize production of goods and services. Exceeding those real constraints, such as production capacity, causes inflation and price instability.

@gmonsen

Let me also add the following to round out the analysis:

Fiscal policy is ultimately a political decision that influences the overall output level of the economy. It is a tool to maximize the production of goods and services within a resource constrained marketplace. Government as the currency issuer can operationally maintain optimal fiscal deficits indefinitely because government debt is a digital resource, a digital account of currency users savings. Government is fully capable of operating those real constraints at full capacity in order to maximize the goods and services produced within the economy.

The modern free market is an invention of the state. It's rules are not naturally ordained but simply the outcome of political arrangements. Political arrangements defined by law though property rights, the corporation, and the creation of money. Among other reasons, this is why classical economists never spoke of “economics” but always of the “political economy.” The intended purpose of these political arrangements is to benefit of society by reducing risk and driving economic development.

What do you think?  Pretty good huh.