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Bank reserves swelling and commodity prices surging — that’s the situation that the U.S. economy is now confronting. But it also was the case back in 1937. And that’s what worries Ethan Harris, North American economist at Bank of America Merrill Lynch.
He fears, now like then, that tightening of monetary and fiscal policy could cause a recession, so much so that he thinks a temporary default on U.S. Treasury obligations may be preferable to overly swift spending cuts.
His view stands at odds with the rest of Wall Street, which has frequently communicated to congressional Republicans as well as the White House their desire to see the $14.3 trillion debt ceiling increased.
They fear a temporary default could disrupt the $4 trillion Treasury financing market, could spark a run on money-market funds and increase mortgage rates.
It’s also at odds from the broader public: 70% say a default would be bad for the economy, and 56% say failure to cut spending is worse, according to a telephone survey from Rasmussen Reports of likely U.S. voters.
But Harris is concerned about the parallels from the “recession within a Great Depression” of the late 1930s. Back then, the Federal Reserve increased reserve requirements, and a federal government “exhausted” by deficit spending hiked tax rates and slowed spending on the Works Progress Administration, Harris said. The rhetoric of newly elected President Franklin D. Roosevelt also scared businesses.
Harris said the current Fed, and in particular Chairman Ben Bernanke, has learned that expansion of reserves is only inflationary if it prompts a boom in bank lending. And the more business-friendly tone of late from the Obama administration has shown the president “has recognized how negative rhetoric can damage business confidence and hiring.” But he’s worried about fiscal tightening.
“Today, as in the mid-1930s, fiscal fatigue has set in. The debate has shifted from keeping the recovery going to removing fiscal support,” Harris said.
He points out that even if Congress takes no action, programs comprising more than a percentage point of gross domestic product are due to expire next year, and that the debate about austerity can hurt even before the cuts kick in.
“The risk of a bad outcome is high,” he said. “We are not sure whether it is worse to do nothing, and temporarily default on the debt, or to do too much and enact big front-loaded deficit cuts.”
Harris said the best policy outcome would be modest upfront spending cuts with a commitment to deal with long-run structural deficit concerns after the 2012 presidential election.
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Another idea that is a bit more controversial. Force municipal govt’s to double (triple?) property tax on any unoccupied homes. This should push more liquidations of homes, accelerate foreclosures and sales, create rapid decline in house prices to market clearing values, pushes every home into the rental pool, drops housing costs for all looking for home, stimulates economy massively by (i) increasing household formation and related spending, (2) lowering costs for workers who would accept lower wages (very stimulative for corporations to add workers), (3) creates value out of assets that are unused/underutilized, (4) frees up huge amounts of spending dollars for household budgets that can now be spent on consumption, (5) reduces blight in cities and costs of policing. The only costs are (1) it pushes some banks into bankruptcy – but lets face it, these banks are already there and (2) would also delay the much-needed cost-cutting of municipal wages.
Solution is simple. Increase revenue by (1) alt min tax for corporations at 25% – increases tax and makes it fairer for all taxpayers, (2) end both wars – bring home troops, (3) tax dividends at ordinary income rates, (4) end ethanol subsidy, (5) cut all programs that most ppl agree has no ROI. Of all revenue generated above – save half (apply to deficit) and spend the other half (primarily on unemployment insurance, other for poor – this guarantees the money gets spent for 100% stimulus effect). This keeps consumption going for at least 2 years.
You could say the same for Greece–that putting in any austerity is bad for the economy and that the socialist programs of retiring in their 40s and jobs for life are stimulus efforts that must not be stopped. Unlike the 1930s we are not on the verge of some demographic potential energy surge and public debt does matter in the end. Assumptions of growth to paper over the bad leadership and financial cover ups will not work this time. The only thing that does seem to be working is not talking about the issues in context and avoiding truth and reconciliation on social benefit costs.
56% say failure to cut spending is worse because the only alternative is an increase in revenue; because working will not care about a depression unless it hits them. Tax and build like it is WWII will work, but the working will get hit with taxes and a much suppressed inflation explosion. Many will rather see the depression. Others want to see 20 years of nothing. That's the reasons why many disagree will Ethan.
You write: —– His view stands at odds with the rest of Wall Street, which has frequently communicated to congressional Republicans as well as the White House their desire to see the $14.3 trillion debt ceiling increased. —– However, I don’t interpret these positions to be at odds at all. In fact, it sounds like raising the debt ceiling would be his “first best choice”, but if that doesn’t occur Mr. Harris is contending that we would have 2 options: (1) either default or (2) drastic cuts to avoid default given the current debt ceiling. His point seems to be that if we don’t raise the ceiling, default is better than drastic cuts. I don’t see how this is at odds with the view that raising the debt ceiling would be even better.
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Digg
Bank reserves swelling and commodity prices surging — that’s the situation that the U.S. economy is now confronting. But it also was the case back in 1937. And that’s what worries Ethan Harris, North American economist at Bank of America Merrill Lynch.
He fears, now like then, that tightening of monetary and fiscal policy could cause a recession, so much so that he thinks a temporary default on U.S. Treasury obligations may be preferable to overly swift spending cuts.
His view stands at odds with the rest of Wall Street, which has frequently communicated to congressional Republicans as well as the White House their desire to see the $14.3 trillion debt ceiling increased.
They fear a temporary default could disrupt the $4 trillion Treasury financing market, could spark a run on money-market funds and increase mortgage rates.
It’s also at odds from the broader public: 70% say a default would be bad for the economy, and 56% say failure to cut spending is worse, according to a telephone survey from Rasmussen Reports of likely U.S. voters.
But Harris is concerned about the parallels from the “recession within a Great Depression” of the late 1930s. Back then, the Federal Reserve increased reserve requirements, and a federal government “exhausted” by deficit spending hiked tax rates and slowed spending on the Works Progress Administration, Harris said. The rhetoric of newly elected President Franklin D. Roosevelt also scared businesses.
Harris said the current Fed, and in particular Chairman Ben Bernanke, has learned that expansion of reserves is only inflationary if it prompts a boom in bank lending. And the more business-friendly tone of late from the Obama administration has shown the president “has recognized how negative rhetoric can damage business confidence and hiring.” But he’s worried about fiscal tightening.
“Today, as in the mid-1930s, fiscal fatigue has set in. The debate has shifted from keeping the recovery going to removing fiscal support,” Harris said.
He points out that even if Congress takes no action, programs comprising more than a percentage point of gross domestic product are due to expire next year, and that the debate about austerity can hurt even before the cuts kick in.
“The risk of a bad outcome is high,” he said. “We are not sure whether it is worse to do nothing, and temporarily default on the debt, or to do too much and enact big front-loaded deficit cuts.”
Harris said the best policy outcome would be modest upfront spending cuts with a commitment to deal with long-run structural deficit concerns after the 2012 presidential election.
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