Now raising intellectual capital

from Rolfe Winkler:

Lunchtime Links 1-8

Bank regulators issue interest rate advisory (FFIEC) This may sound boring, but it's rather important. The FFIEC -- a collection of bank regulators including FDIC, OCC, the Fed, OTS and NCUA -- hasn't issued such a warning since 1996. It wants banks to make sure they can handle rising interest rates....which seems to me a HUGE disincentive to lend. 5% mortgages originated today will lose mucho value as rates go back up. This is a huge reason banks "aren't lending," because up is the only direction for rates to go!

Employers unexpectedly cut jobs in December (Mutikani, Reuters) The jobs report is an important catalyst for the dollar and gold. If the employment situation improves, it will be easier for the Fed to tighten (good for dollar, bad for gold). If unemployment stays high, the Fed will keep rates low indefinitely and likely keep printing money to buy assets (bad for dollar, good for gold).

U.S. now renter's market (Timiraos, WSJ) Hooray for deflation! As I'm fond of reminding folks, rents midtown west neighborhood of Manhattan crashed over 20% last year. That's oodles of spending power freed up to pay for other things. Yes, it's probablematic for landlords and the banks to which they owe money. But it's good for the economy overall. Letting house prices fall will have a similar stimulative impact.

Why does it feel worse than reported? (EconomPic Data) Comparing Gross Domestic Product with Gross Domestic Purchases demonstrates how we lived beyond our means for so long and why getting back to equilibrium feels so painful.

from Rolfe Winkler:

Mosler’s 11 steps to fix the economy

by Warren Mosler

1.  A full 'payroll tax holiday' where the US Treasury makes all FICA payments for us (15.3%).  This will restore 'spending power' and, by allowing households to make their mortgage payments, will fix banks from the bottom up.  It may also keep prices down as competitive pressures may lead businesses to cut prices, passing on their tax savings to consumers even as sales increase.

2.  A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes.  This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP would be restored.

from Rolfe Winkler:

Keynesianism, Monetarism and Complexity

by James G. Rickards

The debate between Keynesianism and Monetarism is over; they both won. Obama's approach to the crisis is breathtakingly simple - print money and spend it fast. For Keynesians, stimulus substitutes for private demand until the latter is jump started and stimulus can be reversed.  For Monetarists, the logic is equally simple - increase the monetary base to expand GDP.  Don't worry about inflation until you see the whites of its eyes. Then withdraw the money after the job is done.  Easy.

But what if Keynesianism and Monetarism are both fatally flawed? The evidence for a Keynesian multiplier is that there isn't one.  At best it's fractional, maybe 60 cents for each dollar spent.  Intuitively its hard to see how taking a dollar from the private sector and washing it through government creates any growth at all; experience says that part of the dollar is wasted; evidence bears that out.  For Monetarists, the relationships among money, prices and GDP break down once velocity is considered.  Targeting money against potential 3% real GDP growth is child's play if velocity is constant.  When velocity drops in hard to measure ways, central banks are driving blind.

from Rolfe Winkler:

Morning Links 1-7

Tim Geithner covered up AIG's payments to counterparties (DealBook) Timmy G. knew it looked bad for AIG to pay out 100¢ on the dollar to counterparties like Goldman. So he told AIG to shut up.

Obama buget will raise "carried interest" tax (Comstock, Business Insider) Awesome proposal from the Prez. Recall that hedge-funders and PE guys can treat their partnership income as capital gains. As a result they're only taxed at 15% instead of normal income tax rates of 35%. Last time this came up, Chuck Schumer killed it. This time it's likely to happen.

from Rolfe Winkler:

Mosler vs. Rickards on fixing the economy

I have a treat to share with readers. Warren Mosler and Jim Rickards have agreed to an op-ed debate here on my blog. Over the course of a couple weeks, they'll engage in intellectual fisticuffs about how to fix the economy.

Who are these two and why do you care what they have to say?

First, they're both very smart and well-informed.

Mosler, who moved to St. Croix in 2003 to run for Congress in'04, ran a fixed-income arbitrage fund for 15 years without, he claims, a single losing trade. He turned it over to his partners in 1998 with over $3 billion of capital. He's the progenitor of some of the derivative products traded today and even has his own ultra-cool car company.

from Rolfe Winkler:

Is the output gap smaller than we think?

Economist Kevin Kliesen at the St. Louis Fed asks that question in an article he published today.

In its 2009 Annual Report, the Bank for International Settlements discussed these "bubble-induced distortions" to current estimates of trend output growth and, hence, potential real GDP. Thus, it is conceivable that estimates of potential real GDP at the start of the recession were too large and that ... structural adjustments ... may have subsequently reduced potential real GDP from its artificially high level.While it is probably unlikely that the fall in actual real GDP during the recession has been matched by the fall in potential real GDP, the size of the output gap might be smaller than conventional wisdom might believe. If so, those who foresee little risk to the near-term inflation outlook because of a large, persistent output gap may be too optimistic.

from Rolfe Winkler:

Lunchtime Links 1-6

Let them eat lobster! (Yves, Naked Capitalism)

The weather according to economists: sunny! (Kedrosky) Group think...

How to combat the natural tendency to procrastinate (Economist)

Let's get fisical (Bill Gross, PIMCO) In his latest investor letter, Bill Gross paradoxically laments the influence of special interests. Of course he was one of the chief special interests -- representing the investor class -- lobbying for government to support asset prices. He also questions how the market will perform when our government "sugar daddy" disappears, especially in light of the disappearance of foreign buyers of Treasuries.

Snowed-in Brits boost adultery website (Casciato, Reuters)

Create your own solar system ( Click "Run Now" and then play with the variables bottom left.

from Rolfe Winkler:

Dodd to quit

The big news today comes out of Washington where Senator Chris Dodd, Chairman of the Senate Banking Committee, is expected to announce he won't seek re-election in November. (Ferraro, Reuters)

The news, coupled with another Democrat's retirement announcement [Byron Dorgan of North Dakota], underscored the fragility of the Democrats' Senate majority, which is just enough to push President Barack Obama's agenda past Republican procedural obstacles.

from Rolfe Winkler:

Ugly CRE charts

From the Mortgage Bankers Association's Quarterly Data Book:

Screen shot 2010-01-05 at 11.12.41 PM

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from Rolfe Winkler:

Afternoon Links 1-5

Must Read--Global bear rally will deflate as Japan leads sovereign bond crisis (Evans-Pritchard, Telegraph) Points to Ambrose for making lots of predictions in a single column! (ht Yves)

How Visa, using card fees, dominates a market (Martin, NYT) A good, detailed article. Merchant processing fees aren't the terrible thing merchants claim them to be. The trade-off, at least with credit cards, is that the merchant doesn't carry a receivable on his balance sheet. There's no credit risk that customers won't pay. This article is about debit cards, however. There the issue appears to be much more complicated...