Monetary Aggregates, Unemployment Measures And The Business Cycle

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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12h GS Elevator Gossip ‏@GSElevator
#1: FYI… Every time one of you says ‘epic’, all I hear is ‘fucking stupid’
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12h Transformations ‏@c_tamirisa
@GSElevator Epics. A ha! The Great Moderation. And The Great Recession. Antitheses of Iliad and Odyssey. Stupid, eh!
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11:49 PM – 23 Aug 12 via Twitter for iPhone · Details

Lloyd Blankfein, the CEO of Goldman Sachs, is a good man. He believes in doing God’s work [here on earth as our own]. And he thinks he is, in fact, doing that out of his headquarters at 200 West Street, New York, New York. He testified saying just that to the Congress sometime ago after this financial crisis began.

I was, therefore, a bit surprised when he responded to my letter to him saying that investing in sustainability was not a current consideration of his firm, despite GS Sustain and Massachusetts Institute of Technology (MIT) Poverty Lab of Abhijit Banerjee, of course, notwithstanding MIT’s gross inadequacy of perspective about the subject. Mr Blankfein has other options to MIT on global sustainability, which is why I had written to him.

The Forsythe Saga is also an epic. Blankfein’s predecessor Henry M Paulson, an English literature major from Dartmouth, was on the right track with the housing derivatives mess as Secretary of the Treasury. He had paid attention to Paul Samuelson’s advise in the Op-Ed pages of the Wall Street Journal just before his death that the sub-prime mortgages must be quarantined to prevent the spread of the contagion to prime mortgages and other forms of debt.

That Ellis Island precaution had not come about in deference to the Troubled Asset Relief Program (TARP) and Milton Friedmanism at the Fed. Bernanke vowed not to cause another depression after 1929 in another speech at an occasion celebrating Milton Friedman and Anna Schwarz’s legacy, and so he opened the firehoses by the Bull on Wall Street and took on the Fed’s primary dealers’ bad housing debts onto the Fed’s books instead of taking them off the balance sheets of the banks early in the crisis, never mind that the crisis came about because the Fed steadily raised interest rates without fully understanding the consequences of its contractionary monetary policy from 2003 to 2007 in the new world of unregulated financial innovation since Public Law 97-320, GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT OF October 15, 1982.

The Fed had not understood the Savings and Loan (S&L) Crisis either. Government ignorance continued for the next 20 years, fraying the Clinton bridge to the 21st century ballyhooed and defended by Democrats until the economy’s death did them apart ultimately in the crisis of 2007-2008 and J P Morgan a few later, a century after Wall Street financier J P Morgan’s role in the quick and successful resolution of the crisis of 1907, without government intervention, about 6 years before there ever was a Federal Reserve.

The Panic of 1884 during the presidency of Republican Chester Arthur had established an important national institution, the Bureau of Labor Statistics (BLS) to measure wages and prices, and thereby, price changes or inflation and levels of unemployment to which Federal Reserve policymakers in the run up to and during the Great Depression after October 1929 clearly had access – shedding more light on the political battle for the US economy between the Democrats of FDR and the Republicans since Democrat Woodrow Wilson from 1913 to 1921 during which period United States entered World War I in 1917.

The Wilson Fed had come 4 years after the Panic of 1907 in 1913, the first year President Woodrow Wilson was in office, followed by the Great Depression in 1929, besides, of course, the Franklin Delano Roosevelt (FDR) Democrat Joseph P Kennedy’s family riches by insider trading before the onset of the stock market collapse in October 1929 and before there were the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC). The Democrats had literally ‘shorted’ the Republican mining Engineer-turned-politician President Herbert Hoover out of office between 1929 and 1933, holding the economy hostage, after the roaring ’20s to elect FDR in 1932 and re-elect him thrice after, in 1936, 1940 and 1944, only to enter another World War in 1941.

If the Yankee Lincoln-Republican northern industrialists during the Industrial Revolution fought the bloodiest of American battles – the Civil War from 1861 to 1865 – on the home front, the southern Democrats, all those south of the Mason-Dixon line in Maryland, who had lost that war while grossly mismanaging their economy in the process, as unintuitive as it may seem because both Wilson and FDR were northern New Englanders, had taken the country into a Depression and two world wars in the 20th century.

FDR had wanted a GDP measure after the Great Depression. That innovation had won a Nobel in Economic Science for Simon Kuznets and established an institution – the Bureau of Economic Analysis (BEA).

The Federal Reserve has always been a political instrument of the Democrat Party, the federalism of Hamilton, Madison and Jay inaccurately and politically opportunistically interpreted by the Democrats as more government control of the economy in contrast to Jeffersonian Republicanism.

If the contemporary code phrase for not being formally affiliated with the Republicans is the Tea Party, the code inside the Federal Reserve for its independence from the rest of Washington, no matter which party is in elective office, is being a Democrat or at least left-leaning since Marriner Eccles and FDR and McChesney Martin and Harry Truman and the Treasury-Fed pact of 1951, two Fed marble buildings having been symbolically named after its two most influential Chairmen on either side of C Street in Northwest Washington, D.C and across 21st Street from the Franklin-Jefferson United States Department of State now itself trying to be Trumanesque.

BLS does an excellent job of reporting the pulse of the US economy in numbers together with the BEA, both of which, of course, must be carefully watched for their integrity and distance from the political class and for explicit caveats regarding revisions lest America turn into Brezhnev’s Soviet Union which had imploded the Union of Soviet Socialist Republics (USSR) by 1989.

The key distinction between S&L in the 1980s and the 1990s and the crisis of 2007-2008 is that people’s savings were lent toward risky real estate projects in S&L while people’s homes where they saved their finances were risked in the financial innovation boom. In the former the depositors were somewhat made whole by the government, in the latter the financiers were made completely whole by the government, literally dollar for dollar. In the former, there was no financial innovation besides perhaps the newly enacted alternative mortgage instruments, while in the latter the 1980s alternative mortgages dominated the financial market activities in layers up to the Credit Default Swaps (CDS), invented by J P Morgan, and contracted between Goldman Sachs and AIG, both of which were saved by the Federal Reserve by ad hoc monetary easing. The 1980s S&L depositors have now lost their homes.

From the view point of the central bank, the Reagan-Bush 1980s was about managing the monetary base in alignment with healthy market incentives, the old fashioned way: US senators, including John McCain, were sincerely brought to the carpet by the Congress for possible ethics violations and bankers such as Michael Milken who had invented high yielding junk bonds were sent to jail. In sharp contrast, the crisis of 2007-2008 was about saving the wrong-doers and unsavory actors, knowing all along that there was a crisis brewing since at least as early as 2006 if not earlier when Paul O’ Neill and John Snow were Secretaries of the Treasury early in the Bush 43 administration.

New monetary aggregates appeared as a result, not only M0, M1 and M2 but M3 to M5, yet not including the entire gamut of debt-based financial instruments still being concocted as a matter of daily practice by Wall Street bankers. Clinton Secretary of the Treasury Robert Rubin had once remarked he did not really know what the Citigroup traders were up to after Gramm-Leach-Bliley (GLB) was passed under his watch in 1999. Rubin protege Tim Geithner’s Dodd-Frank financial regulatory reform in 2010 has not changed anything significantly either. A failed experiment on the real lives of people is suddenly invoking nostalgia for the jettisoned past in financial regulation – a gratuitous return to Glass-Steagall and smaller banks in an ever larger global economy.

Bernanke at the Federal Reserve is flying blind in the monetary snow storm because he does not want to measure M3 to M5. His entourage of nearly 200 third-rate PHD economists from the best economics programs (adapting Joseph Stiglitz’s characterization of IMF economists after the Asian Crisis of 1997-1998 to the source of this endemic problem in national economic institutions) at a tax-payer financed annual budget of about $60 million, who see ever higher Fed incomes during crises transferred to the US Treasury for the incestuous government accounting purposes of the Monthly Treasury Statement (MTS), are far too bright according to Greenspan and Bernanke to get by advising the Federal Open Market Committee (FOMC) without those measures, only to keep on sailing QE II after QE I and now QE III, so as not to disappoint the financial markets who are expecting to be paid handsomely to learn after every hiccup, without regard to the incomes of those whose homes are still being foreclosed.

This disconnection of money from the market place is not not unpremeditated.

Epics matter in pairs: The Illiad and The Odyssey, Beowulf and The Lord of the Rings. The statistical correlation between the variable set M0 to M5 and the variable set U-1 to U-6 is really about the Great Moderation from 1984 to 2007 and the ongoing Great Recession which really feels like a depression for the QE mired in an unsustainable monetary and fiscal liquidity trap, risking perhaps civilization since its beginnings, producing endless afternoons of The Forsythe Saga to relieve men of ennui and anxiety about their skill depletion while their wives are hard at work in the office as primary bread winners of their families.

The six (6) monetary aggregates – M0 to M5 – given their step-motherly treatment inside the Fed which maintains them in a sloppy and arrogant manner and the 6 levels of unemployment U-1 to U-6 maintained extraordinarily well by the BLS reveal a lot about the current economic condition of the United States.

If real monetary and regulatory policy innovations leading to real changes in how we manage the US economy – as was the case until October 1929 from 1789 (during that period regulation was largely through litigation, and such market practices, in fact, continued through FDR, Truman and the tobacco law suits) – are not put into place, full employment of about 4% unemployment can only be realized at or after 2022.

More competent economic management by time consistent monetary and fiscal stabilization policies and financial markets supervision and regulation is necessary, not social stabilization by technology or litigation.

As to the positive analysis of the business cycle, the longer the stability of GDP through money supply, as in the 1990s and the first decade of the 21st century, the deeper and longer the ensuing downturn, unless the state is socialist similar to the Franco-German states since Francois Mitterand or the communist China now.

The natural cycle of Jeffersonian politics and economics, when all is said and done, is indeed where the rest of the world is converging to.


About Chandrashekar (Chandra) Tamirisa
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One Response to Monetary Aggregates, Unemployment Measures And The Business Cycle

  1. Sara Eisen ‏@saraeisenFX
    (Bloomberg TV. Foreign exchange)
    Most talked-about paper in Jackson hole (and proof economists have a sense of humor)
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    2h 1776 @1_776
    @saraeisenFX O-rings in chilled water. Goddamned bureaucracies.
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    2h 1776 @1_776
    @saraeisenFX Frisbees, wobbles, strippers, Nobel. What do you care what other people think? Simplicity is the breakdown of complexity. QED.
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    2:40 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX … He is correct, yet it always happens. The hermeneutic behind the heuristic is instinctive for the expert.
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    2:18 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX Here it is again, on the question of gravity. … One reference for the math: Feynman. The rest is mine.
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    2:45 PM – 1 Sep 12 · Details

    2h Paul Krugman ‏@NYTimeskrugman
    (Nobel Memorial Prize in Economic Science, 2008)
    Monetary Versus Fiscal Policy, Revisited
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    2h 1776 @1_776
    @NYTimeskrugman October could be interesting. 6500 points to go, down I mean, not up @aei.
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    2:35 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX My unpublished paper in 2009. Idiots nearly fired me for this, destroyed my family. I am glad BoE likes it
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    2:21 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX BTW U. Chicago thought I could be Nobelled for … I was booted out of my home, work and life.
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    2:25 PM – 1 Sep 12 · Details

    1h Sara Eisen ‏@saraeisenFX
    David Lipton IMF
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    1h 1776 @1_776
    @saraeisenFX Old Clinton boys from the 1990s are back again I suppose. The Committee That Saved The World.
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    3:20 PM – 1 Sep 12 · Details

    2h Ezra Klein ‏@ezraklein
    (Blogger/columnist for Washington Post, columnist for Bloomberg View, contributor to MSNBC.)
    WSJ: “Over his first term, Mr. Obama, 51 years old, has fundamentally shifted his view of modern presidential power”
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    1h 1776 @1_776
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    3:30 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @ezraklein Because the coming crisis of US debt and dollar is intended.
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    3:07 PM – 1 Sep 12 · Details

    1h 1776 @1_776
    @saraeisenFX When @federalreserve cries wolf, the sheep is sacrificed. It’s called Depression Economics as instrument of disruptive change.
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    3:27 PM – 1 Sep 12 · Details

    1h 1776 @1_776
    @saraeisenFX Forecast targeting is the technical term for it. Hear ye, hear ye, depression cometh says the usher, and it comes.
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    3:31 PM – 1 Sep 12 · Details

    1h 1776 @1_776
    @saraeisenFX A way for New Keynesians to tame Schumpeter. Creative destruction is now on Wall Street. It will get to Main St when it can.
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    3:28 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX He [Andrew Haldane] is [also] against border taxation on China. The imminent crisis is either itself a deterrent or it is not.
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    2:24 PM – 1 Sep 12 · Details

    2h 1776 @1_776
    @saraeisenFX Still, border tax can work at WTO, provided there is commitment in US for reforming Dodd-Frank.
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    57m Dan Mitchell ‏@danieljmitchell
    (Senior fellow with the Cato Institute fighting for more freedom and less government)
    Time to Start the Countdown for France’s Fiscal Crisis
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    53m 1776 @1_776
    @danieljmitchell Shut down the central banks. And go back to 1789.
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    4:26 PM – 1 Sep 12 · Details

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