http://www.nytimes.com/2009/12/11/opinion/11krugman.html?emc=eta1
When we referenced Galbraith at UT in our "Thinking Big" post on 12/9, we mentioned his back of the envelope perspective that we'd need 250,000 new jobs per month for 60 consecutive months to make up for the 7 (or8) million jobs lost (and the 15 million currently unemployed) since the recession began. Krugman raises the ante in his post today about what the Fed could or should be doing: "I don't think many people grasp just how much job creation we need to climb out of the hole we're in. You can't just look at 8 million jobs that America has lost since the recession began, because the nation needs to keep adding jobs - more than 100,000 a month - to keep up with a growing population. And that means that we need really big job gains, month after month, if we want to see America return to anything that feels like full employment."
Krugman continues: "How big? My back of the envelope calculation says we need to add around 18 million jobs over the next 5 years, or 300,000 jobs a month. This puts last week's employment report, which showed job losses of 'only' 11,000 in November, in perspective."
Krugman has said all along (with Warren Buffet) that the stimulus package was too small to begin with. He sees the measures proposed by President Obama earlier this week as definite "job creators" but far short of what the economy needs. That leaves the Fed. If Bernanke "believes", then his own forecasts should lead him there: the Fed's forecasts predict that unemployment will remain punishingly high for the next THREE years.
Krugman adds that a study done at the Petersen Institute, based on the prior work of Bernanke himself, strongly suggests that the Fed should expand credit by buying a further 2 trillion in assets. Do we think Bernanke knows that?
In the strongest words I've seen Krugman use, "But there's also, I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn't seem equally concerned about the prospect of wrecked lives."
Aside from the fact that we join more people in the world reading Krugman's blog than any other (Thomas L. Friedman is #2) just because we are interested, his "posts" can cause the entire world of finance to take note (this would include Bernanke).
So, Krugman's last words from today's post urge the Fed to lose its complacency and start lending a hand to job creation. There is no question he was "heard" - now lets see what happens.
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So... why did the Fed not guarantee to cover all losses in the beginning?
ReplyDeleteAnyways, this might be politically inviable in light of Fed criticism. Congress will have to reject this if it is identified by the masses as a spending increase with a different name. However, the Fed might not even do it if they perceive Congress will have to reject it to give the illusion that the Fed is politically unmotivated.
Back to the initial point, the Fed not expanding credit before the recession to cover all losses. The Fed could track losses to provide evidence for who should go bankrupt. Bankrupt companies could restructure and pay for losses with assets to the the Fed. The Fed could then auction the assets off to companies with money. Companies that cannot repay all their losses will just have remaining losses consolidated into one big fund that could be paid for through inflation or China buying a bond that will mature in thirty years.
Why does this not work?
Josh: Your question is a thoughtful one and certainly makes sense on the face of it. The problem is that sensible solutions are not always what make sense politically. China will be a little bit more discriminating about what bonds it buys now. And, your description of bankruptcy, while accurate, does not encompass how it works on the ground - you may recall our discussions in class of how United Airlines has been bankrupt twice and never missed a day of flying. So, where is the market efficiency there? There's no shrinking of the total # of market players so that prices can go up, no auctioning off of assets to the most efficient players, etc. Ergo, we have "Zombie Economics"!
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