Saturday, September 20, 2014

Yellen on the poverty of the poor.

I ran across this interesting speech by Fed Chair Janet Yellen, "The importance of asset building for low and middle income households."
The median net worth reported by the bottom fifth of households by income was only $6,400 in 2013. Among this group, representing about 25 million American households, many families had no wealth or had negative net worth. The next fifth of households by income had median net worth of just $27,900.
But even these numbers are in a sense overstated, since much of the "net worth" is in home equity, thus not easily available
Home equity accounts for the lion's share of wealth... for lower and middle income families, financial assets, including 401 (k) plans and pensions, are still a very small share of their assets. 
This matters because,
for many lower-income families without assets, the definition of a financial crisis is a month or two without a paycheck, or the advent of a sudden illness or some other unexpected expense. .... According to the Board's recent Survey of Household Economics and Decisionmaking, an unexpected expense of just $400 would prompt the majority [!] of households to borrow money, sell something, or simply not pay at all. 
["Majority" meaning 51% of all households seems like a lot, if the bottom 2/5 has $27,500. But I didn't look it up.]

This all brings to mind several thoughts.

Naturally, I'm delighted any time I spy broad consensus across the economic spectrum. Charles Murray bemoaning Fishtown might make the same comment. The idea that all households should be saving, building assets for retirement and for a rainy day, is not just held among curmudgeonly conservatives.

But, if we want to understand the predicament of low-income households, and if we want to understand the decision-making that in part gives rise to that predicament -- rather than the usual liberal idea that poor people are fundamentally like children, buffetted by events and needing the benevolent direction of the aristocracy -- it seems a bit superficial to leave out the role of the government.

Left out of "assets" and risk planning here,  is the present value of social security, medicare, and the income- contingent value of government programs. Those are substantial. Households who find the prospect of social security and medicare adequate reassurance against the prospect of old age, don't save as much.  Households who can, or already do, rely on food stamps, unemployment, disability, medicaid, rent and housing subsidies, and so forth, in times of need, are somewhat protected against income shocks, and in turn have less incentive to save in precaution against such shocks.

To be sure, their lives are tremendously difficult. But not nearly as difficult as they would be if people died in the gutter. And that fact surely colors their decisions to some extent.

But we agree, more saving would be good.  Or do we agree? As I look across the broad Keynesian policy consensus, I hear cacophony on that subject. Larry Summers is worrying about a "savings glut" leading to "secular stagnation." More saving, in his view, would be a terrible thing for the economy as a whole. Amir Sufi and Atif Mian's House of Debt links housing values to the economy through spending, not asset building.  They want people to spend housing equity, and view the major problem of the recession that people with less housing equity stopped spending.

The Fed itself has been promoting exactly the opposite of "asset building" on a macro level. It wants spending, lots of spending, and now.  Negative 2 percent real interest rates for 5 years are not exactly a clarion call to get people to save more.

So, does the Fed really want more saving, or more spending? Or, somehow, more of both?  Or for people to save more and the economy to save less somehow? Uh-oh, I'm about to get vilified again for pointing out the existence of budget constraints.

Perhaps this is why Ms. Yellen  chooses to use the word "asset building" not "saving," which is Keynesian poison.  But I'm hard pressed to know how one can do the former without the latter. (Once again, little Orwellian language choices matter a lot!)

More common sense from Ms. Yellen:
The housing market is improving and housing will remain an important channel for asset building for lower and middle income families. But one of the lessons of the crisis, which will not be news to many of you, is the importance of diversification and especially of possessing savings and other liquid financial assets to fall back in times of economic distress....
A larger lesson from the financial crisis, of course, is how important it is to promote asset-building, including saving for a rainy day, as protection from the ups and downs of the economy.  
Which leads to the natural question, why should housing remain "an important channel for asset building?" Why should Federal Policy so strongly promote and subsidize this idea?  Owner-occupied housing is a lousy asset. Bob Shiller, hardly a right-winger, has been loudly producing facts on this point for two decades. The average rate of return is awful, it's horribly illiquid, it's full of idiosyncratic risk. People reading this likely live in overpriced houses that seem great in retrospect. But our average low-income household in trouble "built assets" in houses in places like Detroit.

The best possible thing financial policy and "consumer financial protection" should do is move heaven and earth to get low income households to rent, and invest their savings in a nice balanced passive mutual fund instead.  Obviously, Ms. Yellen isn't going to stand up and say that.  But we can ask the question.

The only thing I found a bit to criticize in this speech is the last part:
The Federal Reserve's mission is to promote a healthy economy and strong financial system, and that is why we have promoted and will continue to promote asset-building. One way we do this is through the Community Development programs at each of our 12 Reserve Banks, and through the Federal Reserve Board's Division of Consumer and Community Affairs in Washington. As a research institution, and a convener of stakeholders involved in community development, I believe the Fed can help you in carrying out your mission, to encourage families to take the small steps that over time can lead to the accumulation of considerable assets.
I thought the Fed's mission was inflation, employment, and financial regulation. Is "promoting asset-building" really the Fed's job?  Is the Federal Reserve now a "convener of stakeholders involved in community development???"  I didn't see that in the Federal Reserve act. I thought it was a central bank.

What happens if the Fed takes any of this seriously? If the Fed gets serious about "promoting asset building" one big place to start are the horrendous disincentives to asset building in Federal social programs. You want to promote asset building? Remove asset tests from so many subsidies!  We're not going to get serious about asset building without that. But since this is absolutely not the Federal Reserve's job, it seems foolish to get involved at all.

The Fed is in danger of mission creep, that will not long be tolerated from a politically independent central bank. A lot of Republican Congresspeople might take objection to the idea of the Fed even saying it is a "convener of stakeholders involved in community development" -- or more generally a completely independent agency entitled to do anything it wants to "promote a healthy economy."  I wish for the day I hear any Fed official say "here is a terrible problem, and I think our Federal Government should do something about it, but it's not the Fed's job."


  1. These types of statistics on the distribution of wealth are problematic. When I was thirty I had no net personal worth but I did have a job, two university degrees and a university educated wife who was also employed. And I had family who had money and jobs. I was broke but relatively secure.

    Most people who have houses are over-invested in houses. (My house is somewhere between 10 and 15% of my "portfolio" and gives a real yield of 4-5% per year). Owning a house brings with it collateral expenses and locks people in geographically.

    Most low income people would be better off investing in their skills (or the skills of their children) than trying to buy a house or an index mutual fund.

    The Fed has spent the last six years frantically trying to get people to spend more and save less. Making social security more certain and more generous might be the most effective way to get people to save less and spend more.

    1. "Making social security more certain and more generous might be the most effective way to get people to save less and spend more."

      And, how does one make social security more certain and more generous? Well, by increasing payroll taxes. How does that increase spending? This was actually one of Cochrane's points about the conundrum of spending and savings: Yellen left out social security as a form of savings of the poor.

      Of course, apropos making social security more certain and generous, a part of achieving that goal is: How do we make government save more and spend less?

    2. Getting government to spend less is not an important goal to me. If it were I would start with agricultural subsidies, cut the military and go after health care spending generally.

      You make social security more certain and more generous by: (1) stop talking about cutting it; (2) reduce the age of eligibility rather than increasing it; (3) increase the payout.

      Lower income people die younger so there is no unfairness in making it possible to start collecting Social Security younger.

      If everyone has to save for their own retirement they have to allow for the possibility that they will live for longer than average with the result that rational members of the middle class will over save. If savings are pooled into Social Security with benefits ending at death a person can have a secure retirement at a lower level of savings than if they had to look after themselves. Hence, in a rational world increasing payroll taxes and social security payouts can result in both increased lifetime spending and increased economic security for retirees.

  2. On the webpage for his macroeconomics course at Yale, Shiller says that "We study second-moment, rather than just first moment, macroeconomics". His perspective as a finance scholar naturally leads him to propose hedging instruments that increase welfare by improving the distribution of risk. If I buy a house (i.e. go long) in Detroit, I should short a Detroit home price index in order to raise the funds needed for the purchase. That way I am fully invested in the house, without taking an unnecessary bet on the entire city.

    The best commentary on the so-called savings glut is by Brad DeLong. You can find pieces by him explaining the problem as a "risk-tolerance shortage". In order to solve it, we need to consider the power of social norms, conventions, and default financial choices that lead to over-investment in housing that you and Shiller are pointing out. What if we could flip a switch that reduced the demand for risk-free government debt by trillions of dollars, and shifting those funds into risky business loans? We can do that by changing the default form of bank account that is used to receive paychecks, and pay bills. Not everyone needs to hold risk-free debt as their default form of money. Let's develop a new form of money that is safe funding for banks.

    1. Brad Delong is wrong. I deal with entrepreneurs every day. There are lots of people willing to arbitrage the risk by borrowing from risk averse savers (perhaps intermediated by banks) and investing in riskier ventures if they could find suitable opportunities. The banking channel may not be working properly but that is not a result of a lack of risk appetite. Alibaba has a market cap of $170 Billion! Facebook is trading at a P/E of 84! Tesla Motors is losing money but has a market cap of $32 Billion. There is obviously a substantial appetite for risk.

      The problem is (1) the banking channel seems to be broken broken for small business borrowers and (2) a lack of opportunities.

  3. Wealth distributions not adjusted for age mean less than nothing.

    My house represents 50%, dwindling, of my net worth; I have no clue what the financial rate of return on my house is; but I LIKE living in it so much that I plan to continue living in it until the day I die, by which time I will surely have cashed in on government largesse. I suppose XYZ County could turn into Detroit and one can't purchase Detroit insurance. That's a risk I willingly bear.

    The portion of home ownership that is directly attributable to government support is the part that's got to go to allow poor people make efficient decisions. The poor have no money, not no brains.

  4. Sweden:

  5. When I said that my house returned 4-5% per year that was to account for the tax free benefit of living there. What would it cost you to rent a house?

    1. I did like your original comment, Absalon. And Anwer taught me that I need to short a Fairfax County house price index!

      Rents are subject to the same cyclical swings as house prices: I rented for a long time, pre-financial crisis. Rent never rose, on account all those speculators buying houses and renting them out to lower their carrying costs! My house is probably worth less than the price at which I bought it. So what? I like the house!

      If it were still mortgaged that would be a problem of the financial system, not solely mine.

      In a steady state equilibrium the advantage of owning is ONLY that you don't have to deal with the owner. :-)

  6. Perhaps you make too much of the contradiction between wanting the poor to save more and Keynesians worried about a savings glut.

    If the poorest 20 million households were to each spend the next couple of years building up a $1000 fund of precautionary savings, this would be only a tiny blip in total national savings. It would hardly register. Yet the welfare benefits could be large.

  7. I agree, the central bank needs no more missions---in fact, I would say a CB has only one mission, and that is sustained economic prosperity.

    The 12 Federal Reserve regional banks, with little notice, have been bloating up their economics staffs, and running "Community Development" programs, although the latter are usually mere extensions of the ideology of whoever is the reserve bank President.

    However, in total, the 12 reserve banks have hired (net) 300-400 economists since the 1960s, all in safe sinecures, all whose pay is NOT connected to the economy, and all directly or indirectly pontificating on inflation and monetary policy. This has become a powerful bulwark for the usual anti-inflation dogmas. After all, these economists, hired on step grades and seniority systems, actually personally do better in deflationary environments. They are not real estate developers, or others with skin in the game.

    By the way, the Dallas Fed has a particularly nice campus, with a sculpture garden and a locally famous and subsidized cafeteria, gym, and is a jobsite where employees get nine weeks off a year and pensions that vest in 15 years. The economy may go south, but if you are employed at the Fed, life is good. The Dallas Fed has expended staff through the recession.

    Poor people in the US are largely poor due to their own actions. We can provide charity, or not, as our society sees fit. The Fed should have nothing to do with it.

    Why the Fed is running Community Development programs is an example of how bloated that organization has become.

    The whole idea of 12 regional Fed banks and an FOMC with members from the regional banks has become dated. At times, you have two votes on the FOMC from reserve banks president from...Missouri.

    My next idea: A FICA tax holiday, financed by QE. About $1 trillion a year.

  8. Great post! I fully agree with your views.

  9. "The Fed itself has been promoting exactly the opposite of "asset building" on a macro level."

    And yet Yellen is saying here that nonetheless she believes saving is a good thing. What squares this contradiction is that from her point of view the economy is in a special, depressed, temporary state and will remain so until it's healthy enough for them to raise interest rates back up to historical trend levels. Only then people will be rewarded more for their efforts at saving. What's strange to me is how Keynesians understand this but Republican economists don't for some reason. And yet Mankiw recently blogged that savers need to be punished a while longer, something John Taylor doesn't agree with.

    As vice-chair Stanley Fischer pointed out in a speech recently: "Job cuts at federal, state, and local governments have reduced payrolls by almost 3/4 of a million workers, resulting in a decline in total government civilian employment of 3-1/4 percent since its peak in early 2009. " Thanks to Paul Ryan and company, savers will be punished longer as rates will be held down longer to compensate for the Federal Government's malfeasance. Plus it's hard for those former government employees to save.

  10. "...Households who can, or already do, rely on food stamps, unemployment, disability, medicaid, rent and housing subsidies, and so forth, in times of need, are somewhat protected against income shocks, and in turn have less incentive to save in precaution against such shocks..."

    People who are so poor as to rely on assistance programs cannot, in fact, save as a precaution against anything, for two reasons. Firstly, they don't have any extra to save. But secondly, if they have managed to put a little by, perhaps from an inheritance or something, this disqualifies them from those support programs until they have used up their savings and are once again up against the wall. The only way they could put money by would be to hide it around the house in cash form, and if that was discovered when they were also using government programs, they would be subject to legal sanctions.

    So in a very real sense, government programs ARE the savings of the poor.

    Noni Mausa

  11. First, I would recco Noni Mausa's comment were it possible. Well done!

    "To be sure, their lives are tremendously difficult. But not nearly as difficult as they would be if people died in the gutter." -J. Cochrane

    How odd to claim that people don't die "in the gutter" because of exposure, poor nutrition or inadequate or absent medical care. Dr. Cochrane writes as someone who never had or has to endure life as a joyless, stressed out hell that many people he doesn't know do. These people die in the gutter, or in their homes or at their jobs. Just because he doesn't know or want to know about it doesn't mean it doesn't happen.

    The capitalist corporate media doesn't report, repeat, sensationalize or emphasize these stories as they do journalists beheaded in the Middle East. Those stories don't support the decisions of the ruling class and their political minions' drive for more war and more cuts to public assistance programs.

    The capitalist, corporate media provides the content that attracts the viewers and readers that their advertisers covet so they they may profit from selling the so-called news commodity in an environment of "constant stimulation and pointless distraction." These stories about unfortunate people are tragically sad and no one wants to read about people dying on the job, of homeless exposure or unaffordable medical care.

    I happen to know a man in his 40s who died because he didn't have health insurance. He went to the emergency room, they stabilized him and sent him home. A couple of hours later, he was dead. It wasn't reported in any paper. He left a wife and two kids behind.

    Further, according to the AFL-CIO. "In 2012, 4,628 workers were killed on the job in the United States, and an estimated 50,000 died from occupational diseases, resulting in a loss of 150 workers each day from hazardous working conditions."

    How can someone be technically human and lack so much humanity?

    1. Oh, Anonymous, we are all human!

      The important point is to separate analysis from emotion: That the US has no functional health insurance system is hardly due to "the capitalist corporate" whatever, as other capitalist, corporate countries have long had something somewhat more functional than we. Rather, the history of health legislation in the US has been conditioned by the self serving interests of the AMA, influential to this day, who propagate the interests of a "small business" clientele and hardly the evil corporations doing their dirty work in secret. All this aided and abetted by politicians afraid to lose the next election, from FDR to the present, yes, FDR.

      The Affordable Care Act passed only because it was left to the sausage factory [Bismarck] manned and womanned by narrow interest politicians. It's not corporate interests that have messed things up, but rather, our political institutions.

      Prof. Cochrane's views on health insurance haven't got a chance in hell of becoming policy. I'm willing to settle for less. But this?

    2. I also was struck by his "in the gutter" comment, so much so that (so far) I've only been able to scan the rest of the article.

      I agree, Anonymous, with most of your comments, except for the last sentence. For I think John has far more compassion than many people -- and most economists. (With a few notable exceptions, such as Ralph Musgrave; I think he has the most compassion and understanding for what life is like for the average person.)

      Alas, humans tend to extrapolate from the the world they live in what life is like for "most" people. Even I, during my years living in a better area, started to forget how bad things are for so many down here (south of Chicago) -- including (once again) me.

      The average person is in no position to save more than they are. The only hope is for the government to stop causing so much misery, including by constantly devoting so much money (resources) and lives (death, disability, PTSD) to overseas wars that just make everything worse.

      Alas, far too many people still worship Obama and Hillary, two very pro-war presidents (current and likely future). The only hope for our country is if by 2106 peope have realized that they need to vote in an anti-war prsident (and congress), regardless of party affiliation (if any).

  12. This discussion reminds me (as a layman) of an economic question/point I've had for a long time, that maybe someone (John, Ralph?) can address:

    It seems to me that it is impossible, regardless of how good/bad the economy is, for their to overall be an increase in savings. For currency has no instrinsic value (well, except perhaps for starting a fire or jotting down notes in the white spaces).

    Thus if I "save" a dollar that simply means that others owe me a dollars worth of goods or services; the dollar bill is essentially and I.O.U. Thus, overall, there is no net savings... nor can there ever be.


    (P.S. I'm glad by all the shock over the sale of venerable beer brewer Pabst to a foreign country. Now if only people would realize the reasons foreigners have so much money is because of all the products [including oil] we buy from them.)

    1. Neal I don't teach Economics as Prof. Cochrane does but perhaps this is a good opportunity to follow up to Absalon above. The finance industry directs our savings to investments. One of the channels is bank lending, and Brad Delong is known for the view that this channel is not working very well. But if it was, our savings would be used to fund businesses and buy capital goods for them. When aggregate savings are low, there is less investment in productive capital, and more spending on consumption goods.

      In the previous decade there was also boom in house construction, and home equity is another type of saving. (We consume housing over extended periods and not all at once.) In China they have been doing a lot of construction lately, of all types. We would all be better off if we figured out a way to improve the bank lending channel to businesses, and rely less on construction to store value.

    2. Anwer,

      The thing about housing that makes it good collateral is that it tends to be a long lived good that everyone is going to need at some point in their life (whether renting or owning outright).

      Business lending against future production is far riskier because the goods being produced might have a short shelf life or might become outmoded or fall out of fashion.

      The way you improve the bank lending channel to businesses is by having the government create a type of collateral that businesses can borrow against.

      That collateral should be long lived, liquid, and should not be subject to market valuation forces.

      Housing even with its plusses, has the minuses of being an illiquid asset subject to wild market swings (boom / bust cycles).

    3. Frank, the government already does produce collateral that is used for this purpose. Shadow banks make short-term loans to large businesses using treasury securities as collateral. But the shadow banking system also needs to be bailed out in times of crisis. I believe that funding with indexed debt can change that. If it helps bring such high-yield deposits into the regulated system, that is another benefit.

    4. Anwer,

      "Frank, the government already does produce collateral that is used for this purpose. Shadow banks make short-term loans to large businesses using treasury securities as collateral."

      ??? Huh ???

      Shadow banks borrow money using Treasury Securities as collateral. Collateral is what is offered by the borrower in a loan agreement, not the lender.

      Shadow banks then have the option of using those borrowed funds to buy equity shares, bonds, index funds, or whatever other investment they want.

      Your statement:

      "We would all be better off if we figured out a way to improve the bank lending channel to businesses, and rely less on construction to store value."

      That means government sells collateral to businesses who in turn use that collateral to obtain loans from banks (shadow or otherwise).

    5. Yes, banks are both borrowers and lenders. Do you see what happens if shadow banks move from reliance on treasury securities as collateral, toward use of indexed debt for that purpose? It's like changing the unit of account for repo transactions - instead of dollars, you are borrowing the index.

    6. Anwer,

      "But the shadow banking system also needs to be bailed out in times of crisis."

      "Yes, banks are both borrowers and lenders."

      If a shadow bank is both a borrower and lender then how does changing the unit of account / using indexed debt help? Both my liabilities (my debt) and my assets (the loans that I have made) rise and fall together.

      If I both borrow the S&P 500 index and lend the S&P500 index, I am actually worse off than if I borrowed and lent dollars. The reason is that the central bank (as lender of last resort) can lend me dollars but cannot lend me the stocks that make up the index.

    7. Do you remember how the run on money market funds began during the crisis? When Liberty Reserve shares went below $1, there were panicky withdrawals from other funds, until the government guaranteed all deposits. If prime money market funds stop dealing in dollars, then there is no particular significance of them "breaking the buck". Changing the unit of loans also helps the balance sheets of businesses that borrow.

      Regarding your second point, I think the key is to consider Perry Merhling's concept of "dealer of last resort", which describes the change in the Fed's role from the historical "lender of last resort" function. The government is able to buy and sell securities to alleviate crises, and in fact it did that in the last crisis to bail out the shadow banking system. Here is an article on central banks trading the S&P 500 index:

    8. Anwer,

      This was the money market fund that "broke the buck".

      Liberty Reserve was a digital currency trader that was indicted for money laundering.

      "Changing the unit of loans also helps the balance sheets of businesses that borrow."

      ??? This is nonsensical. The only way that works is if the unit of the loan is changed after the loan is made creating a loser (lender) and a winner (the borrower).

      Business borrows in unit of account - dollars / pesos / S&P futures / whatever. Loan is denominated in same unit of account - dollars / pesos / S&P futures / whatever. As long as the asset is denominated in the same unit as the liability, changing what that unit is accomplishes nothing.

      If instead business borrows in S&P futures, S&P index goes up, and loan is changed to be paid back in dollars then business wins, lender loses.

      Think win / win instead.

    9. Thanks for the correction, Frank. I'll try to remember that it was the Reserve Primary Fund that broke the buck.

      But it isn't always true that assets and liabilities are in the same unit of account. Many overseas borrowers seek dollar funding, while earning income or collecting taxes in the local currency. Often they use swaps to reduce the mismatch in risk due to the difference in units. We can reduce the need for swaps by using liabilities that don't involve such unnecessary bets.

      This is how we should think about bank reform. They should earn their income as all dealers do - as a spread. It should not be earned by accumulating exposure on their balance sheets to housing and the macroeconomy, with taxpayers bearing the downside. The most straightforward way to bring assets and liabilities into alignment is to index liabilities to a suitable benchmark for asset performance. For companies that invest in U.S. equities, that benchmark might be the S&P 500 index.

    10. Anwer,

      "This is how we should think about bank reform. They should earn their income as all dealers do - as a spread."

      Question - Should that spread be protected by central bank / federal government action? Should a bank be guaranteed risk free profits?

      "The most straightforward way to bring assets and liabilities into alignment is to index liabilities to a suitable benchmark for asset performance."

      If the liability is fully indexed to an asset, then there is no spread - if I borrow (liability) the S&P 500 index to buy (asset) the S&P 500 index then I earn no spread.

    11. I learned to think about banks - including the central bank - as money dealers from Perry Mehrling through his presentations on Coursera. I think that a closer look at how dealers operate can answer questions like these. They compete over the spread, and drive it down to a minimum sustainable level. The spread for bank loans is the difference between the rate that they pay for funding and the rates that they charge.

      A well-chosen index is a good benchmark for performance. Some financial firms will beat it, and some will underperform. If the index is also the cost of capital, then poor performers will lose capital until they are driven out of business. That is not exactly how the money management business works now.

    12. Anwer,

      Please answer, should a bank be guaranteed risk free profits? Right now, banks essentially are able to do that by borrowing from the central bank at the short rate and lending to the federal government at a longer rate.

      John Cochrane would prefer to eliminate risk free profits by having banks issue equity to fund lending thus eliminating the central bank as a lender of last resort.

      I would prefer to eliminate risk free profits by getting the federal government out of the borrowing business entirely.

    13. Frank I see the discussion you had with him on his latest post, and his response makes sense to me, although he might be mixing up different agencies: he is curious "if even the Fed is big enough to drive the whole treasury market". The auction rates for Treasury securities would rise to meet IOR, so that no arbitrage opportunity remains, and no possibility of risk-free profits for banks.

      I've seen you comment before that you want the government rely more on equity, and there's nothing wrong with that demand; indeed that's why Robert Shiller proposed Trills. But they are real claims indexed to inflation, and we also need a monetary union to issue some debt in terms of the monetary numeraire. Otherwise the price level will be indeterminate. We all want price stability.

    14. Anwer,

      "...indeed that's why Robert Shiller proposed Trills."

      The Trills that Robert Shiller proposed are coupon securities sold by the federal government where the payments are proportional to real GDP growth. They are intended to stabilize a government's fiscal position - high rate of return paid from tax revenue during high real growth periods, low rate of return paid from tax revenue during low real growth periods.

      One problem that I mentioned with Trills is that as far as government economic policy goes - they are a pro-cyclical policy tool.

      I would prefer to see a government "equity like" security that is counter-cyclical - high potential rate of return during low growth periods (like today), low potential rate of return during high growth periods.

    15. Frank there would be two sides to the market for Trills, just like the S&P 500 futures market I posted about the other day. Government could either buy them or sell them according to a rule. The way to argue for either position is by simulating the effects using a formal model. That's one way that John Taylor advocated for the Taylor rule - by using simulations to show that his rule would have a stabilizing effect. Currently central banks are doing a real-life experiment by buying S&P 500 futures, which I think is the opposite of the counter-cyclical policy you advocate.

      For me, the important reason to have Trills is not Shiller's reason. Rather, I just want to make them available for the banking system. In the Euro-zone, banking based on Euros has been a disaster, with numerous failures in poorly-performing countries. The unit of account for banks should reflect the performance of loans made locally.

    16. Anwer,

      "Government could either buy them or sell them according to a rule."

      Under Shiller's proposal, a Trill is a liability of the federal government. When a government sells Trills, it increases the quantity, when a government buys Trills, it reduces the quantity. It was my impression that there would always and forever be 1 trillion Trills - government never buys (reduces quantity) or sells (increases quantity) after the first trillion Trills are sold.

      "In the Euro-zone, banking based on Euros has been a disaster, with numerous failures in poorly-performing countries."

      Krugman addresses this - the reason that Euro Zone banking has been a disaster is that trying to do unified monetary policy under a credit monetary system without unified fiscal policy is difficult at best. Ultimately, a recession in any one country will leave that country with three fiscal choices:

      1. Tax increases / spending cuts to maintain a balanced budget (aka expansionary austerity or pro-cyclical fiscal policy)
      2. Debt financed counter cyclical fiscal policy
      3. Equity financed counter cyclical fiscal policy

      With debt financing, an individual government is at the mercy of the shared central bank / foreign creditors. With the right type of equity financing, an individual government controls it's own destiny.

    17. Krugman dwells on policy responses to macroeconomic problems. But here on this blog there is plenty of criticism of discretionary policy, and the focus is more on reforms that will produce a resilient financial system that is less prone to crises, and better able to carry out its function in the economy. Tyler Cowen wrote a piece titled "Euro vs. Invasion of the Zombie Banks" for the New York Times, that explains why the unit of account matters:

      "the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries."

      It is natural to draw on Shiller's work when contemplating the unit of account for banks, because he has written on both macro markets and monetary innovation. Kevin Sheedy tells us that we need monetary policy because there are missing markets, and Shiller suggests that we should attack the problem of missing markets directly.

    18. Anwer,

      The article you are referring to is this:

      Tyler starts off with this leading question:

      "Is a Euro held in an Irish bank in Dublin, or in a Portuguese bank in Lisbon, as sound and secure as a euro in a German bank in Berlin?"

      I would answer that question this way, a Euro, Pound, Dollar, or Peso sitting in any bank has no value. It is only when that currency is used to pay for goods / services or is used to fulfill a legal obligation that the currency gets its value.

      Transferring a Euro from a bank in Dublin to a bank in Berlin has no effect on the Euro itself.

      Tyler tries to backdoor in the possibility of the Irish government suspending deposit redemption and forcing depositors to accept a new currency to replace existing Euro accounts. What Tyler doesn't explain is what happens to the Euros that were previously in those accounts if such a situation arises - they don't just disappear into thin air. More than likely they would become the property of the Irish government and be used to pay back holders of Euro denominated bonds issued by Ireland.

      Suppose instead that the Irish government levied a tax on deposits. Would that mean that Euros held in Irish banks were worth less than Euros in German banks?

    19. I think you guys are making a basic mistake here. "A Euro held in an Irish bank..." Banks do not hold euros, in some sort of big uncle scrooge vault. They lend them right back out again. If you have a bank account with an irish bank, you hold a promise by that bank to pay you a euro -- to look around, find some asset to sell, raise a euro, and give one back to you. That's the central secret of banking, and why banks get in to trouble.

    20. What I gained from Cowen's article was some understanding of why bank runs were inevitable in the European Union. The value of the Euro reflects the performance of the entire region, while the assets owned by any bank rise or fall in value according to local conditions. The banks in poorly-performing countries become insolvent and people try to exchange Euros deposited with them for notes, or deposits with a bank in another country.

      There is addressed by Anat Admati's proposal for higher capital requirements, which does have a certain logic to it. But I don't see how Europe could have adopted the Chicago plan, advocated in your work on a run-free financial system, while maintaining a currency union.

    21. John,

      Not my mistake, the phraseology comes directly from Tyler's article.

      The only thing I was trying to illustrate was the fuzzy logic of a "sound and secure" Irish Euro.

      The Euro does not obtain value by having a bank lend it out. If a bank lent out Euros and they sat in someone's mattress it would be no different. It is only because borrowed Euros are used as a medium of exchange and used to satisfy legal requirements (debt maintenance, taxes, etc.) that they have value.

  13. The entire point of social security spending is to decrease precautionary savings. Any insurance policy is just an Arrow-Debreu security that insulates households from negative shocks, and hence reduces their need for precautionary savings . If social security reduces precautionary savings for those at risk of losing their job, it is in effect acting as a insurance mechanism, and offering an Arrow-Debreu security that apparently did not exist before (otherwise precautionary savings would not respond). This is good for the economy, since it reduces the amount of idle resources within the economy. Basically, government is stepping in to correct for a missing market. So if John's hypothesis is true, social security is actually doing a great job.

    Now where this column really messes up is in explaining who reduces precautionary savings. Those are obviously not the poorest, since they are already on social security. If anything they will increase their level of savings as a result of social security through the income effect. The savings should reduce in particular for those not at social security, but at risk of getting into social security. Not sure how you missed this point.

  14. Keynesians actually say that the quickest way to get out of demand-induced crisis is to spend, saving only prolongs the crisis. Once the crisis is over, they are for (reasonable) saving. As some of them say, in current (zero-bound, demand-induced) crisis, virtue (saving) becomes a sin. And it is aimed at the government and those who hold capital, as well as citizens who have disposable income.
    As for so many people without even minimal savings, large part of the problem comes from the current economic and value system. Current Western system requires constant growth, meaning that people have to constantly spend on new things, to keep the economy running. We are not used to be satisfied with having enough, we need to have everything. So, people of all income classes will spend what they have and what they don't have and will get into debt for things they could go without. Actually, only those very poor won't waste money, because they don't have money to waste (or save).
    As for those who say that it's someone's own decisions that determine if they become rich or poor, that is only partially true. USA is the hardest or one of the hardest countries among the developed ones to move from the status of your parents (if they are rich, you will be rich, if they are poor, you will be poor). Note that change is possible, but lower than for the European and other developed countries, which should indicate that there are structural barriers, that ability is not the only deciding factor. Couple that come to mind, health and education availability and cost. One study I read recently said that stress from struggling to put food on the table every day reduces intelligence up to 13 points. Similar effect can be achieved by having around 1.5 points of alcohol in your blood.

  15. John, look upthe Community Reinvestment Act.


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