James Pethokoukis

Politics and policy from inside Washington

Washington’s Ponzi scheme is getting worse. Thanks, Bernanke!

Oct 27, 2010 16:15 UTC

PIMCO’s Bill Gross puts out a particularly good market letter this month. A few key obervations:

1. He is dubious about QEII.

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009 … The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

2. No, he is really dubious.

We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

3. Fiscal policy is what’s called for.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

4. The whole deal raises inflationary risks.

Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme.

5. The Fed is enabling Washington’s profligacy.

Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves.

I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

Obama’s premature economic celebration

Oct 27, 2010 15:44 UTC

New York Times economics columnist David Leonhardt has been a dependable communicator of the White House take on domestic policy. And by those standards, today’s column was worth noting.  In his own gentle way, Leonhardt takes the Obama administration to task for a bit of premature economic celebration:

On the evening of Dec. 3 last year, the Bureau of Labor Statistics sent an advance copy of the next morning’s jobs report to the White House. … It showed that job losses had all but stopped in November, after nearly two years of big declines. White House aides exulted. Christina Romer, a top economist, brought a copy of the numbers to the Oval Office, and President Obama embraced her.  … Today, that brief period of optimism looks like one of the worst things that could have happened to the White House, other Democrats and, above all, the economy. The nascent recovery removed the urgency that the Obama administration and Democratic senators felt in early 2009. They still favored more action, like aid to states and tax cuts, but it was no longer their top priority. They assumed a recovery was under way.

Even through the spring, Team Obama  was upbeat, never buying the whole “New Normal” interpretation of the aftermath of the Great Recession.  This is a point Leonhardt fails to recognize.

But I keep coming back to the fact that this administration is full of people who knew that financial crises tended to produce weak recoveries — and that the typical policy mistake was being too timid. “We’re just not going to make that mistake,” Timothy Geithner, the incoming Treasury secretary, told me, as Mr. Obama was preparing to take office. “We’re not going to do that. We’ll keep at it until it’s done, whatever it takes.”

What? I don’t know what Leonhardt is talking about. I have found the WH to be dismissive of talk about “lost decades” and the long-term economic impact of financial crises.  And they are still skeptical of the work of Kenneth Rogoff and Carmen Reinhardt that shows high-debt countries suffer slower economic growth, at least at anything close to current U.S debt levels. Bottom line: Team Obama thought the economy would be doing a lot better by now, which would help ensure continued Democratic control of Congress. As I wrote in The Weekly Standard in August:

Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.”

Consumer czar Warren not worried about GOP ‘enemies’

Oct 27, 2010 13:33 UTC

White House consumer czar Elizabeth Warren gave an interesting interview to the LA Times. Among the highlights:

1.  She says the only banks that new consumer rules will hurt are those whose profits are based on “tricks and traps.”  (That’s a phrase she used repeatedly in the chat.)

2.  She thinks she has plenty of power in her current role even if the exact limits are murky.

3. It kind of sounds like she would still like to head the new agency.

4. The consumer agency would have prevented the massive housing bubble and resulting financial crisis.

5.  I will let this bit speak for itself:

Are you concerned about what Republicans might do should they take majority control of the House or the Senate?

This agency has enemies, political and economic. That won’t change what I do. I’ll keep working every single minute to build a strong, independent agency to represent American families.