there good value in that stock market trash can at the moment. Stop wasting time and have a hunt around to find a coupla bargains.

You make a good point though that i have been making for a while (which is why it’s such a good point).

The new kids could tighten the labor market right at the exact wrong time.

But I would add a litle more about the Fed. Bernanke seems frozen and the Fed is making a lot of mistakes.

3 weeks ago Fedsters were telling the market that they were concerned with inflation and indicated that were going to be slower on the easing.

Stock market begins to crumble.

Late last week Bernanke tells the market that he is in agreement with the suppourt package and that they will ease as the economy is clearly weakening. So he’s telegraphed an easing bias yet he’s done nothing about it and seems to prefer to wait until the next fed meeting rather than ease immediately. Moreover he’s changed his view over the space of a few weeks…. 180 degrees!

Stock market goes down again.

In other words the guy is behaving like a total clown.

I’m less concerned than I have been for the US. The large banks that needed recapitalization did so and a good part of the writedowns have been made.

So the Fed needs to act quickly to ensure contagion doesn’t spread to the rest of the credit market. They need to ease quickly.

The thing they don’t want is the next most important asset class after real estate (the stock market) doesn’t tank.

The problem in the US is firstly the liquidity premuim and secondly and related to fear of recession pushing up corporate spreads.

The Fed should cur rates drastically so Banks will lend to the corporate sector. At present the 2 year swap is lower than the 3 month libor rate!

then they have to find a solution to the counterparty risk problem.

One deals with monetary policy the other is associated with it.

I see no reason for the US budget to further deteroriate now.

The Fed has been very slow at the wheel. It needs to act

Tom

Fred,

I found your recent posts interesting and tend to agree with your general argument, but wish to draw your attention (again) to what seems to me to be lazy thinking (or at least simplified drafting) in relation to equity issues. Specifically, I would ask you to reflect on your statement that:

Ideally the stimulus “trigger” should … (b) help those hardest hit by the slow down (both on equity grounds and …

What, I challenge you, is inequitable about the fact that a slowdown hits some folks harder than others? Presumably, many of the hardest hit from the slowdown also benefitted disproportionately from the preceding expansion, or at least hoped to. Consider, for instance, a low-medium income family that purchased a home, partly in the hope of pocketing capital gains consequent upon house price inflation. In a slowdown, they might face the prospect of losing their home (and at least some of the investment they made in it). But why are their losses particularly inequitable, remembering that there would be others in society on similar incomes who did not take the risk of purchasing their own home?

Even if you focus purely on the unemployment effects of a slowdown, it is not clear to me that there are strong reasons as to why a slowdown – and the consequent increase in unemployment associated with it – means that any particular unemployed person warrants more consideration from the public purse on equity grounds than an equivalent person did before the slowdown. Presumably, we already set unemployent benefits and other support measures at some level to reflect our equity judgments. Do you really believe that the equitableness of such measures depends in any significant way on the number of people receiving them?

Tom

But accepting the gist of your argument, where should it lead governments if they were looking for a quick fiscal stimulus? Answer: direct government spending e.g. on low-gestation social investment or on higher unemployment benefits. If the logistics could be sorted out, that would suit me fine.

So encouraging business investment is good. Spending on new housing is good. Spending on infrastructure is good and even better if it is renewable energy infrastructure. Delaying spending by putting more into health insurance or more into superannuation is good. Spending on education and training is good.

Generating money to spend on the stock market is bad, leveraged buyouts are bad, buying harbourside mansions with loans is bad. In other words generating money to spend on non productive assets is best reduced.

If the above is true then isn’t this what we should be doing all the time? That is, we have policies that encourage money creation for future wealth creation investments rather than money creation for investments based on returns from asset value inflation.

1: that episode of Futurama where President Nixon’s Head does the same.
2: I’m glad I have Apple shares. The iPhone is going to sell even more crazily.

This suggests such measures as temporary tax credits or rebates, a temporary increase in unemployment benefits or a temporary investment tax credit (withdrawn when unemployment falls back to a desired level).

Temporary measures don’t work, if these guys are correct, Fred.

One dissenter was economist Milton Friedman. His research had led him to conclude that consumer spending was less a function of liquidity than something he called “permanent income.” Friedman observed that when workers lost their jobs, they didn’t immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn’t immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.

Thus Friedman predicted that the $100 to $200 checks disbursed by the Treasury Department in the spring of 1975 would have a minimal impact on spending, because they did not alter peoples’ permanent income. Most likely, people would save the money or pay down debt, which is the same thing. Very little of the rebate would cause consumers to buy things they wouldn’t otherwise have bought in the near term.

Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Friedman’s prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut — which would change peoples’ concept of their permanent income — of similar magnitude.

http://online.wsj.com/article/SB120070786488902199.html?mod=opinion_main_commentaries

Also, I’d go a bit sotto voce on the equity angle. Always nice to get more money to those at the bottom of the heap – especially temporarily where it has least impact on incentives where we have a problem with EMTRs etc. And I guess those at the bottom of the labour market are harder hit in a downturn. This is illustrated in the greater variability of those on low incomes at the bottom in the graph I posted a while back.

But then those with the lowest income are already on benefits so their income doesn’t fall during recession. But they’d be good candidates for a temporary boost in income as they’d spend most of it. And there’s another group doing it tough in a recession – all those poor suckers in the top 1% who take a substantial proportion of their substantial income from profits in the market either directly as capital owners or indirectly in their bonuses. I don’t guess you want to hand them any cash.